Recognizing the Independence of Independent Review Committees: A Budget Proposal to the Minister of Finance

Following from by recent blog post making the case that independent corporate overseers are not employers, members of two independent review committees have written to Finance Minister Oliver urging him to include in the forthcoming federal budget a regulatory change that would ensure that members of independent review committees are recognized by the Canada Revenue Agency as self-employed individuals, rather than as employees of the mutual funds family they oversee. The complete text of the letter and names of those who have signed it are below. I encourage readers to comment indicating their willingness to sign the letter.

Dear Mr. Oliver:

Recognizing the Independence of Independent Review Committees: A Budget Proposal

We are writing with a proposal to be included in the 2015 federal government budget, namely recognizing the independence of independent review committees (IRCs) for families of mutual funds. Independent review committees have been established under the Canadian Securities Administrators’ National Instrument 81-107 to review transactions that could involve potential or actual conflicts of interest. This regulatory framework puts great importance on establishing and protecting the independence of IRC members in several ways. IRC members must have no material relationship with the manager of the mutual funds family, the investment fund, or entities related to the manager. The manager cannot unilaterally dismiss an IRC member during his term: that requires a special meeting of the unitholders. IRC members’ fees are paid by the unitholders of the mutual funds rather than by the manager. The independence of IRC members is essential to the integrity of mutual funds as an investment vehicle because unitholders need assurance that their interests are not being sacrificed to those of management, or that unitholders of some funds in a family are not being favoured over unitholders of other funds. Independent review committees were created to hold management accountable in a manner that provides these assurances.

IRC members are in the practice of reporting their income from service on IRCs as business or professional income. Recently, the Canada Revenue Agency has begun to challenge this practice in several cases by ruling that IRC income should be treated as income from employment in service to the manager of the mutual fund. This ruling is based on the contention that membership on an IRC is an “office” as defined in the Canada Pension Plan Act (RSC 1985, c. C-8). This ruling is being appealed within CRA. If the appeal is over-ridden CRA will likely move to require all mutual funds managers to treat payments to IRC members as employment income.

In our view, the CRA is making a fiction of the independence of IRCs. If IRC members are to do their jobs properly they cannot, by definition, be employees because if they are employees they cannot at the same time be independent of their employer, which is the foremost requirement of any IRC member. By treating IRC members as employees, CRA can influence the mindset of both fund managers and IRC members to start acting like employees taking their direction from the manager, rather than professionals exercising independent judgment. For example, as self-employed professionals IRC members can deduct from their IRC fees expenses they think appropriate to performing their job effectively. As employees, they may not necessarily be able to deduct such expenses, so they would ask the fund manager to pay for some or all of those expenses, which would change the dynamic of the relationship.

We urge you to include in the 2015 federal government budget a provision to enhance good corporate governance by recognizing the independence of independent review committees. This could be implemented by having the Canada Revenue Agency issue an interpretation bulletin stating that payments to IRC members for their services are income from business or professional services, rather than employment (T4) income in service to the manager of the mutual funds family.

Thank you for your consideration of this proposal.

[signed]

 

Sandford Borins, Chair,

Independent Review Committee,

Chou Associates Management Inc.

Joe Tortolano, Member,

Independent Review Committee,

Chou Associates Management Inc.

Peter Gregoire, Member,

Independent Review Committee,

Chou Associates Management Inc.

Francis Chou, President and Funds Manager,

Chou Associates Management Inc.

Doug Mills, Chair,

Independent Review Committee,

First Asset Funds

Carl Solomon, Member,

Independent Review Committee,

First Asset Funds

Henry Knowles, Member,

Independent Review Committee,

First Asset Funds

 

1 comment

  1. Dear Mr. Borins,
    I agree completely and would certainly be willing to add my name to this letter. I am a member of the IRC for funds managed by Sentry Investments Inc.
    Thank you for leading this initiative.
    Yours truly,
    Karen McRae

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