Mason is a trustee of Trust X (the trust). Mason manages the trust’s share trading account with the wealth management company (the firm) and makes investment decisions on the trust’s behalf.
In December 2022, the firm sent an email to their clients who held shares in a company, ERH. At the time, the trust had a large ERH holding. The firm recommended that their clients sell their entire ERH holdings before an upcoming dividend distribution occurred. Mason was unsure about the firm’s recommendation, so he decided to only sell 40% of the trust’s ERH holding.
In early January 2023, Mason discovered that the firm had debited $40,000 (equal to a withholding tax rate of 50%) from one of the trust’s trading accounts. Mason emailed the firm to ask about the debit. The firm told Mason that the $40,000 debit was a withholding tax deduction from the ERH distribution. The firm had received tax advice from a third party before they sent out their recommendation to sell ERH. The third party’s advice said that the firm would need to deduct withholding tax from any trusts that received the ERH distribution.
Mason complained to the firm. Mason said that if he had known the firm would deduct $40,000 from the trust’s ERH distribution, he would have sold the trust’s entire ERH holding. The firm considered Mason’s complaint and told him that they did not think they were required to tell him about the withholding tax because their services specifically excluded tax advice.
Mason then complained to FSCL.
Dispute
Mason felt that the firm should have told him that they planned to deduct withholding tax from the ERH distribution. Mason said that if he had known the firm was going to deduct withholding tax at a rate of 50%, he would have sold the trust’s entire ERH holding. Mason wanted the firm to refund the $40,000 withholding tax debit on the trust’s account.
The firm said that the terms and conditions Mason signed on the trust’s behalf clearly said that the firm was not required to provide tax advice. The firm told Mason that he should have sought independent tax advice.
Review
In our view it was reasonable for Mason to expect the firm to tell him about their plan to deduct withholding tax from the ERH distribution.
The firm was not obligated to give Mason tax advice. However, we thought that, as a good client service measure, the firm could have told Mason about their plan to deduct withholding tax without going as far as giving Mason tax advice. For example, the firm could have told Mason that the ERH distribution would be subject to withholding tax of 50%. A statement along these lines would not be tax advice because it did not recommend that Mason take any specific future action.
We did not think it was fair to ask the firm to refund the $40,000 deduction to the trust’s trading account. Withholding tax is tax paid in advance. The firm deducted withholding tax from the trust’s ERH dividend at a rate of 50%. However, it was highly unlikely that the trust’s tax liability for 2023 would be equal to 50%, but there was no way to be certain until the trust’s tax return was filed in March 2024.
We did not have enough information to determine the amount of direct financial loss that the trust experienced, nor did we want to determine, with the benefit of hindsight, what the trust would have done had they known about the 50% withholding tax earlier. We did not consider it appropriate to award compensation for direct financial loss in this case.
However, Mason experienced significant inconvenience and stress because of the firm’s conduct. Mason stopped trading shares on the trust’s accounts for several months because of the withholding tax debit. We recommended that the firm compensate Mason for non-financial loss and suggested a sum of $3,000 was fair.
Resolution
Both parties accepted our decision, though the firm did not agree that they should have told Mason about the withholding tax deduction.
Insights for participants
The firm could have avoided this situation by taking a pragmatic approach. The firm could have told Mason about the withholding tax deduction without giving him advice. Ultimately, the time and resources the firm had to dedicate to addressing Mason’s complaint far outweighed the time and resources it would have taken to tell Mason about the withholding tax deduction.
