In response to a recent tax interpretation determining that mutual fund trailing commissions will be subject to sales tax later this year, professional services firms are warning of increased compliance costs, audit risk and other challenges.
In a tax interpretation provided to the Securities and Investment Management Association in December, the Canada Revenue Agency (CRA) said mutual fund trailing commissions paid by fund managers to both original dealers and new dealers will generally be subject to GST/HST, effective July 1, 2026. That means most dealers and advisors who exceed the $30,000 taxable supply threshold will be required to register for GST/HST and charge, collect and remit the tax on trailers received.
The CRA’s new stance shouldn’t result in additional GST/HST costs for dealers and advisors, says an article from PricewaterhouseCoopers LLP (PwC) posted earlier this month. Rather, the result should be “less unrecoverable GST/HST being paid,” because dealers and advisors can claim input tax credits to recover that tax paid on expenses incurred to earn the trailers.
While dealers may benefit from such lower tax costs, “they face challenges in applying the new [CRA] position to their specific facts and adjusting all of their systems and processes,” says an article from KPMG LLP posted on Thursday.
The PwC article, and an article from Borden Ladner Gervais LLP (BLG) written by counsel Owen Clarke in Calgary and posted on Wednesday, describe operational measures that dealers can take to comply with the CRA’s new stance — measures likely to add to dealers’ costs.
KPMG suggested that dealers also review such things as their financial institution status, input tax credit eligibility and allocation, and any specific selected listed financial institution (SLFI) rules.
“Due to the various technical and practical issues related to this upcoming change, mutual fund dealers may want to consider postponing significant capital property purchases until after July 1, 2026, if it makes business sense,” the KPMG article says.
For managers, GST/HST paid on input costs including taxable trailers “may be fully or partially unrecoverable due to the exempt nature of financial instruments which they supply” (i.e., mutual fund units), the BLG article says.
Although managers’ input tax credit entitlement is “highly fact specific,” managers should assume GST/HST paid on trailers will “impact fund economics, either through unrecoverable tax or increased compliance cost and audit risk,” it says.
The change could also indirectly affect investors, if managers adjust fee structures, potentially affecting overall fund costs, the BLG article says.
The CRA’s new position on trailers also introduces additional compliance risks for dealers and advisors.
“Dealers and advisors must ensure that they correctly classify all revenue streams, distinguish between exempt and taxable services, and maintain adequate documentation to support GST/HST filings,” the BLG article says. “Any failure to collect and remit GST/HST could result in assessments, penalties and interest.”
Earlier this month, a blog post from Rosen and Associates Tax Law in Toronto identified GST/HST reporting and input tax credit errors as among the top causes of tax disputes.
“GST/HST controversies are increasingly common among Canadian businesses,” write associates Bhavika Chadha and Elias Zafiridis. “The CRA frequently audits GST/HST filings to ensure tax has been properly collected, remitted and reported.”
Disputes often arise from, for example, failure to remit collected GST/HST on taxable supplies and incorrectly claiming input tax credits without proper invoices.
“Even minor GST/HST mistakes can lead to significant reassessments, as the CRA applies interest on unremitted tax from the date it was due,” Chadha and Zafiridis write. “Because GST/HST operates under a self-reporting system, businesses must maintain clear, complete records for at least six years to substantiate their filings.”