In a new notice, the Canada Revenue Agency (CRA) says GST/HST on mutual fund trailing commissions will be enforced beginning in July, but dealers should apply the tax “as soon as possible.”
In a notice posted on Tuesday, the agency confirmed its administrative position regarding sales tax on trailers and the basis for it.
“Most services provided by mutual fund dealers in exchange for mutual fund trailing commissions no longer meet the definition of ‘financial service’ and are now considered to be taxable supplies that are subject to the GST/HST,” the notice states. “The CRA will enforce the application of the GST/HST to supplies made by dealers on or after July 1, 2026, in exchange for trailing commissions.”
Regardless of this transition date, the notice urges dealers to apply the tax treatment “as soon as possible,” adding: “Note there are circumstances where trailing commissions were already taxable, and the tax status for those supplies has not changed.”
In an email, Tariq Nasir, EY Canada’s indirect tax partner in Toronto, said that the CRA “appears to be sticking” to July 1, notwithstanding industry concerns that it’s an “unreasonable implementation date,” given the required changes in processes and systems.
Industry has recharacterized its services, CRA says
The notice says that regulatory and operational changes in the mutual fund industry indicate that dealers generally provide ongoing services in exchange for trailers, as opposed to arranging for the sale of mutual fund units.
Specifically, the notice cites the prohibition on the payment of trailers to discount brokers, effective June 2022. In accordance with that regulation, “dealers are required to provide ongoing support and advice to an investor to earn a trailing commission,” it says. “Conversely, dealers that broker purchases to an investor’s self-directed investment account are generally not eligible for trailing commissions because they do not provide ongoing support or advice.”
The CRA also found that industry member websites “generally explain” that dealers are paid trailers for ongoing support, servicing and advice, it says.
The guidance also describes asset-based accounts, saying that dealers appropriately apply GST/HST to their asset-based fees, which are earned for “advice and/or asset management,” and that dealers exclude mutual fund holdings from their fee base so they aren’t paid twice for the same service. “In other words, dealers perform the same service in exchange for trailing commissions as for the asset-based fees they earn, that being advice and/or an asset management service,” the notice says.
The CRA’s notice follows the tax interpretation that the agency provided to the Securities and Investment Management Association (SIMA) in December.
Nasir, who was involved in communications with the CRA on behalf of SIMA regarding the tax interpretation, said in his email he was “extremely surprised to see limited reference” in Tuesday’s notice to any agreements between fund managers and dealers or to how the parties describe what trailers are paid for.
As explained by legal counsel, one factor in determining whether a supply is tax-exempt is the written agreement between a dealer and a manager and how the agreement describes the services provided.
The CRA’s administrative position means most mutual fund 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, as well as track input tax credits. The administrative burden is expected to be significant, given that most mutual fund dealers and advisors aren’t currently registered for GST/HST. Dealers and advisors will also face GST audit risk.
The CRA previously told this publication that fund managers will generally be able to recover the GST/HST charged on trailers by using input tax credits. But Borden Ladner Gervais LLP has suggested that managers should assume that tax on trailing commissions will impact fund economics, either through unrecoverable tax or increased compliance cost and audit risk.
Complicating the matter for managers and dealers is that the GST/HST tax administration comes at the same time as the industry prepares for total cost reporting. SIMA previously said it is concerned about the timeline.