Mutual Fund Trailing Commissions: Change in the Application of GST/HST

Background

Trailing commissions are periodic payments (monthly or quarterly) made by mutual fund managers to dealers for as long as an investor holds units of a fund. They are intended to compensate the dealer for the ongoing support and advice provided to the investor.

In September 2020, the Canadian Securities Administrators (CSA) adopted significant regulatory amendments, which came into force in June 2022. Under these rules, a dealer may only receive trailing commissions if it continuously assesses the suitability of the investment for the client. This effectively clarified the nature of the services rendered in exchange for these commissions: they are essentially advisory or asset management services, rather than mere facilitation of the issuance of units.

Previous Treatment: Commissions Generally Exempt

Prior to these changes, trailing commissions were generally considered to be the consideration for a financial service within the meaning of the Excise Tax Act (ETA). Since financial services are exempt from GST/HST, dealers were generally not required to collect tax on these commissions.

New Treatment: Commissions Now Taxable

The definition of “financial service” in the ETA expressly excludes advisory services and asset management services. Since the regulatory changes in the industry confirmed that dealers are primarily providing these types of services in exchange for trailing commissions, such commissions are now considered taxable supplies subject to GST/HST.

It is important to note, however, that the treatment of certain services remains unchanged, particularly those consisting exclusively of facilitating the issuance of units in a mutual fund in exchange for a one-time fee. Such services continue to be considered exempt financial services and are not affected by this change.

The CRA has clarified that it has not changed its interpretation of the definition of “financial service”: it is the industry itself that, as a result of the regulatory changes, has transformed the nature of the services provided. The tax treatment simply reflects that reality.

Who Is Affected?

This change applies to all mutual fund dealers, who are now required to be registered for GST/HST purposes. It also applies to independent advisors who are not employees of a dealer, to the extent that they receive trailing commissions directly. It should be noted that this notice applies exclusively to trailing commissions related to mutual funds; the tax treatment of other types of trailing commissions will be determined on a case-by-case basis.

Steps to Ensure Compliance

Affected dealers and advisors must ensure that GST/HST is applied, collected and remitted on supplies of services made in exchange for trailing commissions as of July 1, 2026. The CRA encourages early compliance. Primarily, this means verifying whether your business is registered for GST/HST purposes, or is required to be, in light of the new taxable supplies, and updating your billing systems to collect the applicable GST/HST on trailing commissions.

QST Harmonization: An Open Question

To date, the Québec government has not announced its intention to harmonize the QST regime with the changes introduced by the CRA with respect to GST/HST. We will monitor developments and keep you informed of any announcement by Revenu Québec in this regard.

Contact Information

For further information regarding the changes described in this tax update, or to discuss your particular situation, please contact Catherine Bouchard, Jordan Laforest-Claveau or your Forvis Mazars advisor directly.