Broker fights for right to incorporate

By Geoff Kirbyson | August 31, 2004 | Last updated on August 31, 2004
4 min read

(August 31, 2004) Doctors do it. Lawyers and insurance agents do it. Even mutual fund advisors can do it, at least for the time being. Nick Grady can’t figure out for the life of him is why investment advisors can’t do it.

“It” is incorporating one’s practice, a move that has significant income tax implications for professionals and their businesses. As employees of a firm, advisors pay personal income taxes on all their earnings. But if they were allowed to incorporate, they could effectively split earnings, paying some personal income tax on salaries and a lower rate of corporate income tax for profits attributable to the corporation.

What’s particularly irksome for Grady, a financial advisor at Assante Capital Management in Dartmouth, N.S., is that mutual fund advisors and insurance agents, his brethren in the financial services industry, can legally incorporate.

“Their competitive advantage is way more efficient cash flow. Every dollar that comes through the door is 80 cents versus 50 cents on the broker’s side,” he says.

Still, mutual fund advisors face a few hurdles on the incorporation side. Under MFDA rules, payment of mutual fund commissions to personal corporations is not permitted. But the rule has never actually been in force and the MFDA has agreed to allow such payments until at least the end of 2006 to give the industry a chance to further study the issue and come up with a solution.

The biggest problem for the pro-incorporation crowd on the brokerage side is the IDA, the SRO for the industry, which currently prohibits incorporation of a practice. Connie Craddock, the IDA’s vice-president of public affairs, says the issue is under review but advisors would be well advised not to hold their breath.

“We’re doing some committee work on it, it’s on our agenda but it’s pretty preliminary. It’s certainly an issue that people are looking at but we we’re not at a stage where we’re ready to give specific responses,” she says.

“Our policy people are looking at it to see if we were to go to incorporation of brokers, what kinds of structures would be needed to satisfy regulatory concerns.”

Both Grady and David Harris, a tax advisor at Harris Beattie MacLennan in Halifax, agree that arguably the biggest stumbling block to incorporation — liability — should no longer be an issue. They say a precedent has been set because most provinces have determined that limited liability from incorporation doesn’t apply in cases of malpractice.

“Those professions said it’s the individual holding the knife that is responsible — they can’t hide behind the corporate veil. I’d like to see the same thing on the advisor side. If a surgeon can be held liable after an operation, why not an investment broker?” Grady asks.

Before all brokers go incorporation crazy, Grady notes if it is allowed at some point, it would likely only make sense for those making about $300,000 in income after expenses.

Harris, who says he has advised many people in other professions on how to incorporate, says brokers are merely aiming to level the taxation playing field.

But he says an even bigger issue could develop — the employment status of advisors. One needs to be self-employed in order to incorporate and he doesn’t think the bank-owned brokerages are prepared for a world of independent contractors working for them.

“That entails much more control for the individual and that raises a huge number of compliance issues for the brokerages,” he says.

For example, Harris says making sure the relationships between advisors and their clients is compliant, including ensuring clients are advised of risk and have periodic reviews of their portfolios, becomes increasingly difficult when dealing with independent contractors.

“The brokerages feel a need to have some control over what their employee brokers are doing. I’m not sure they’d have the same success with independent brokers,” he says.

Harris notes if the Nova Scotia Securities Commission ruled the industry, incorporation would be allowed. He says the NSSC has created the “legislative pathway” for such status but the brokerages are all regulated by the Toronto Stock Exchange and the Ontario Securities Commission, neither of which have created such a pathway.

“A stock broker in Nova Scotia could incorporate if they weren’t TSX regulated. Of course, there’s nobody who fits that category,” Harris says.

Advocis has also come out in favour of incorporation for investment advisors. In a pre-budget submission sent to the Ontario government earlier this year, the advisor association recommended that the province give “immediate priority” to amending the securities act to allow incorporated securities salespersons.

“There is an urgent need for action to move the solution forward,” Advocis said. “The result of this technical anomaly in the securities act is that with increasing frequency, financial advisors are being subjected to unnecessary financial harm, legal and accounting costs, disruption of service, uncertainty and waste of economic and legal capital.”

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  • Grady says that as the primary income earner for his family, incorporating would be beneficial for him because he could pay his wife a dividend income as a joint shareholder of his corporation, thereby splitting the business’s income among two taxpayers.

    “The money would go into the same bank account, it would be spent the same way, but the difference is Ottawa would get a chunk less money. There would be more money in my pocket to put into my practice or to take an additional vacation,” he says.

    “I could set up a class of shares so she could earn dividends higher than mine. That could mean up to $25,000 tax-free as a dividend. That’s a lot of money.”

    Geoff Kirbyson is a Winnipeg-based financial writer


    Geoff Kirbyson