IIROC Client Relationship Model
(CRM)
Recent changes to the brokerage business:
What is on the horizon and the
effect on tax planning
David Lisbona
BCL, LL.B, MBA
What is IIROC CRM?
Rules focus on 4 key areas:
1.
Relationship Disclosures
2.
Account Suitability
3.
Conflicts of Interest Management & Disclosures
4.
Account Performance Reporting
What is the purpose of this initiative?
CRM is intended to enhance the “client-advisor” relationship by:
Providing greater disclosure requirements
Enhancing the standards for assessing the suitability of investments for clients
Recently implemented changes as of
March 2013
Recently implemented changes
Relationship Disclosures Increases transparency
Increases a client’s understanding of the type of account they are opening and relationships they will be entering into
Major changes include:
New Relationship Disclosure Document – will be included as an appendix to Client Account Agreement
New Account Application Form (“NAAF”) will incorporate KYC information – must be signed by the client prior to the opening of an accountAccount Suitability
Relationship Disclosures
Relationship Disclosure Document (“RDD”)
On or prior to account opening, client must receive a Relationship Disclosure Document (RDD) containing plain language disclosure of:
Nature of the account being opened and the manner in which it will operate
Responsibilities brokerage firm has to the client
Products and services being offered to the clientRelationship Disclosures
IAs must review NAAF and RDD with client, along with other relevant account opening documentation
Clients need to understand how investment suitability is assessed, which includes factors such as:
Financial information
Investment Objective
Risk Tolerance
Investment Knowledge
Time Horizon – NEW
Client signature now required on the NAAF, otherwise the account cannot be opened.
Material changes that will generate a SAG letter
Marital Status -
NEW
Dependants –
NEW
Employment Status –
NEW
Time Horizon –
NEW
Annual Income –
NEW
Financial Information (
Net liquid Assets, Net Fixed Assets, Total Net Worth) –
NEW
Conflicts of Interest Management & Disclosure
New IIROC rule specifically addresses conflicts of interest.
Material conflicts of interest between IA and the client must be either avoided, disclosed or otherwise controlled.
If a material conflict of interest cannot be avoided, it must be disclosed:
•
New client – before opening an account for the client•
Existing – as the conflict of interest occurs or (if it is transaction-related) prior to entering into the transaction with the client.•
New IIROC requirements are already addressed in existing policies & procedures. Refer to Outside Business Activities, the Standards of Conduct Chapter of the IA Manual, and the Code of ConductWhat are the changes to expect?
2014 - 2015
Account Performance and Cost Reporting
New requirements are expected to include:
•
Account cost reports (i.e., all revenues generated from a client account)•
Account performance reports to disclose annual and cumulative realized and unrealized income and capital gains•
Account performance reports to itemize account annualized compound percentage return informationTransfer of Securities
Rule 6.4 of the Universal Market Integrity Rules
•
Trades must be executed on a marketplace unless the they fall within exemptions•
Executed at a price within context of the market•
Not an action to evade tax or securities laws•
No change in “beneficial or economic ownership”• An individual to another account owned by him/her alone
• An individual to his/her RRSP
• An individual to his/her wholly owned corporation
Gift of Securities
A gift of securities to a spouse or a contribution of securities to a spousal RRSP can be completed off-marketplace
A gift of securities to a registered charity may also be completed off-marketplace
Because there is not consideration in either instance, they do not constitute “trades”.
Effect on “Normal” Transactions
Effect of the IIROC Rules on ordinary transactions
•
The devil is often in the details Loss trading transaction
•
Father sells stocks with losses•
Denial of losses if purchased/repurchased by “affiliated person” within 30 days•
Loss permitted if sale to unaffiliated person – child, parent, sibling etc. Will off-market transaction be permitted?
Consider selling to affiliated, wholly-owned corp.
Effect on “Normal” Transactions, cont’d
Gain transactions•
Corporation A is expecting to claim a 50(1) loss by year-end of $1M•
Also owns stock with $1M gain•
Sell stock to “related” corp (Corporation B) to realize gain•
Non-taxable portion of gain increases CDA to $500,000• CDA paid out prior to loss recognition
•
Will gain transaction be respected?•
Corporation B may not fall into limited exceptions Consider transferring to new wholly-owned corporation
Effect on “Normal” Transactions, cont’d
Loan repayment
•
Individual purchases rental property with funds borrowed from family corporation•
15(2) shareholder loan•
Must be repaid by 2nd balance sheet date•
Repayment by transfer of publicly issued bonds•
Permitted?Effect on “Normal” Transactions, cont’d
Estate planning•
164(6) ITA•
Allows capital losses incurred by estate to be carried back to terminal return•
Must occur within first fiscal year of the estate•
Public shares – FMV at death $100,000, ACB of $60,000 – capital gain of $40,000•
FMV drops to $80,000 post-mortem prior to 1st year-end deadline•
Sell shares to corporation controlled by beneficiaries to realize losses•
Assume non-affiliatedConcerns re: New Regulations
Does lack of regulatory approval signal denial of the transactions?
•
Will taxation authorities respect private agreement not accepted by regulatory authorities?•
Use of trusts for estate freeze will complicate stock transfers Time-sensitive transactions
•
Must provide for time for regulatory approval•
Will taxation authorities respect date of private agreement even if “physical” movement occurs later If the approval is required
•
Will affect timing of loan repayments, 164(6) transactions Is the answer to pay more broker commissions to ensure validity of tax planning?
Transfer of Securities
In fact, a transfer of securities between an individual and a corporation not wholly owned by him was addressed in CRA Views 2012-0451291C6
•
Because of regulatory limitations, intended direct transfer to private corporation instead will occur as a sale by transferor on the public markets and a purchase by the private corp on the markets•
CRA said that because the transfers needed to take place on amarketplace, the parties failed the test of having been disposed of to a taxable Canadian corporation and as such Section 85(1) could not apply.
