The next batch of CRM2 deadlines is only months away. If that seems like coal in your stocking, wait until you see what’s next.
01 CRM2 meets CRA
One of 2015’s requirements is for enhanced quarterly statements detailing position cost, which means either book cost or original cost.
Original cost shows what the client paid for a security, including transaction fees. Book cost takes that amount and adjusts for reinvested distributions, returns of capital and corporate reorganizations.
Position cost is useful because clients can compare it to current market value to get a sense for whether they’re up or down.
But there’s a problem, says Barbara Amsden, managing director of the Investment Industry Association of Canada (IIAC). “Book value for CRA and Revenu Quebec is different from book cost for CRM2 purposes.”
She adds: “For clients, tax authorities trump securities regulation in the sense they’re more afraid of the tax authorities coming after them and charging penalties. Not only do clients fear and revere CRA and Revenu Quebec, but our member firms do as well. So they don’t want to get anything wrong.”
Securities regulators say, in certain cases where dealers don’t have good data for book cost, they can use market value as a substitute. For instance, some firms have had clients for more than 30 years and don’t have original cost in their systems, but the book cost they have on record isn’t strictly consistent with IIROC’s definition.
But CRA Form T5008 (Revenu Quebec Form RL-18) specifically says not to use market value in the field for book cost (Box 20).
“So imagine if CRA or Revenu Quebec was getting something they thought was book cost, but is really market value masquerading as book cost,” says Amsden. “It would show a lesser gain than the client should be declaring.
“We know how weak the data is sometimes, and not because of any bad behaviour on the part of the dealer or advisor. If a client says he relied on the book cost that was provided by the dealer, and then got dinged penalties and interest on his income tax, he could take his case to OBSI. And there has already been one such case.”
For a client who has an account with only one firm, and only buys plain-vanilla stocks, the dealer’s book cost calculation should be adequate. “But if a client has multiple accounts with multiple parties, transfers assets between firms, buys and sells frequently, or buys flow-through shares (one of the most difficult [types of security] to get book value on), they’ll always be wrong.”
Bottom line: when tax time comes, warn clients that if they use the book cost figure that appears on their statements for income tax purposes, they’ll probably be wrong and may have to answer to CRA. Amsden says clients and their accountants need to track ACB, and urges advisors to remind them to do so.
02 Market value
CRM2 also raises concerns regarding market value.
“For something traded on the TSX, it’s pretty straightforward. It’s supposed to be bid or ask, unless last close is a reasonable approximation,” explains Amsden. “For frequently traded securities, last close (what most firms currently use) will still be used, so clients will likely see no change.” But it may get tricky with private placements and thinly traded stocks.
In the past, some firms would use original cost, the cost the securities were bought at, or a bid. Sophisticated clients doing speculative transactions understand how hard it can be to do an up-to-date valuation. So, seeing what they originally paid doesn’t jar them.
Firms already use “Not Available” or “Not Determinable” for
difficult-to-value securities, but new, stricter requirements mean they’ll likely be using them more often. That means account statement totals will drop. “Most clients will understand what’s going on,” says Amsden. “But advisors still have to have the conversation.”
03 Client-name statements
Good news: IIROC has proposed relief for certain dealers from new client-name reporting requirements. But they have to prove they have small holdings and are not trying to build the client-name line of business, or are trying to wind it down.
CRM2 would be especially onerous for RDSPs, for instance. “We have one member firm with 22 clients who have RDSPs. Building the full statement infrastructure for position, fee and performance reporting would be a huge expenditure, and it’s not the dealer’s line of business—it’s trying to accommodate its clients. The last thing it wants to say is, ‘Sorry, we can’t do this for you anymore.’ ”
CSA planned to require full client-name reporting; the relief IIROC has proposed “seems to be a workable middle ground,” says Amsden.
CRA Form T5008
Box 20 – Cost or book value
Enter the cost or book value, in dollars only, of the securities involved.
Cost or book value is the initial outlay or price paid or payable for a particular security or debt investment. The preparer is expected to take reasonable measures in order to ensure that the amount reported in box 20 is correct. Do not enter the market value, or the current price the asset was sold for, in box 20.