CRA Changes Its Policy On GST/HST Treatment Of Mutual Fund Trailing Commissions

Overview of the CRA's Policy Change

The Canada Revenue Agency (the "CRA") recently issued a GST/HST Interpretation Letter that introduces a significant policy change to the GST/HST treatment of trailing commissions (the "Proposed Policy Change").¹ Effective from July 1, 2026, the CRA will treat trailing commissions paid by an investment fund manager to both original dealers that placed an investor with a fund ("Original Dealers"), and successor dealers whose clients have remained investors in the fund ("New Dealers"), as being subject to GST/HST. This change departs from the CRA's longstanding position that trailing commissions paid to Original Dealers are exempt financial services. This change will have a material impact on many investment funds, investment fund managers, and dealers.

This bulletin examines the implications of the Proposed Policy Change for dealers, agents, funds, and investors, including institutional investors.

Typical Scenario

For illustrative purposes, consider a typical investment scenario within Canada, involving XYZ Securities (XYZ):

• An investment dealer, XYZ, sells units of a particular mutual fund (the "Fund") to a client.
• XYZ receives trailing commissions directly from the Fund's manager (or possibly from the Fund with the manager acting as disbursing agent).

The CRA's Existing Administrative Policy

Difference Between the GST/HST Status of Trailing Commissions Paid to Original Dealers vs. New Dealers

Under the CRA's existing administrative policy, trailing commissions paid to Original Dealers in respect of the placement of units if a mutual fund are exempt from GST/HST. The CRA has characterized such activities as "arranging for" the sale of units of the mutual fund and, as such, fall within paragraph (l) of the definition of "financial service" in subsection 123(1) of the Excise Tax Act (the "ETA"). Such "financial services" are generally "exempt supplies" for GST/HST purposes.

However, under the CRA's existing policy, if trailing commissions are paid to a New Dealer who acquired the Original Dealer's interest in the trailing commissions, the payment of such commissions would become subject to GST/HST.

The CRA's Proposed Policy Change (Effective July 1, 2026)

Starting July 1, 2026, the CRA will no longer treat trailing commissions paid to Original Dealers as exempt from GST/HST. Instead, they will be considered taxable fees for investment management or advisory services and subject to GST/HST.

The CRA appears to have reached this decision by characterizing the trailing commissions as ongoing investment account support servicing, akin to asset management services or advisory services, rather than as compensation paid to dealers for arranging for the sale and distribution of financial instruments.

Key Implications of the Proposed Policy Change

Dealers and sales representatives who may never have previously had to register for GST/HST purposes could be required to become registered and charge and collect GST/HST on their trailing commissions if they exceed the "small supplier" threshold of $30,000 annually. Fund Managers who pay trailing commissions to registered dealers will have to ensure that they obtain GST/HST registration numbers and calculate and pay GST/HST on trailing commissions.

As registrants, affected dealers (XYZ in our example), and their sales agents will have to set up their accounting and other systems to comply with their new GST/HST obligations. While GST/HST will be collectible on trailing commissions paid by registered fund managers to registered dealers, the managers should generally be entitled to claim input tax credit ("ITC") to recover the GST/HST payable.

The extra GST/HST administrative compliance burden resulting from the Proposed Policy Change may require dealers to self-generate reverse invoices or debit notes to obtain the required ITC documentary information for the GST/HST collected or paid in respect of the trailing commissions.

Under the CRA's existing administrative policy, where a manager pays the trailing commissions without GST/HST as agent on the fund's behalf, the fund saves the costs of paying GST/HST on trailing commissions. Under the CRA's Proposed Policy Change, the fund's costs would increase by paying the GST/HST on the trailing commissions.

In certain respects, the unified taxable treatment of trailing commissions paid to Original Dealers and New Dealers could simplify and streamline GST/HST compliance by eliminating the need to separately track the payment of trailing commissions to determine whether they are exempt or taxable, although this uniform treatment may offer limited comfort to industry participants adversely affected by the Proposed Policy Change.

Analytical Framework

Under the GST/HST jurisprudence, a supply should be characterized from the perspective of the recipient of the supply. In Canadian Imperial Bank of Commerce v. Canada (2021 FCA 96), the Federal Court of Appeal ("FCA") reaffirmed the analytical framework developed through prior jurisprudence for determining whether a supply falls within the "financial service" definition.

The critical question is: what did the supplier (e.g., XYZ, the Original Dealer) provide to the recipient (e.g., the fund manager or fund) to earn the amounts payable by the recipient? The applicable legal test requires one to determine if there is/are any predominant element(s) for which the recipient paid for the supply, whether the various elements together constitute a compound supply with their predominant element(s) determining the characterization of the supply, and whether any such supply fits within the definition of a "financial service". In other words, what did the purchaser expect to obtain by paying the trailing commissions?

InApplewood Holding Inc. v. The Queen(2018 TCC 231), the Tax Court found that the predominant element of a supply should be determined based on the end result of the service from the recipient's perspective. In that case, Applewood Holding, a car dealership, sold insurance policies on behalf of an insurer relating to its vehicles sold or leased. The insurance covered vehicle lease or finance payments where the customer could not meet its obligations due to certain risks occurring, such as loss of employment or illness. Applewood Holding received a portion of the premiums paid by customers for its services and the CRA assessed GST/HST on this compensation. The Tax Court found that:

"the predominant element of the Appellant's service was the arranging for the sale of insurance which falls within the definition of a "financial service", notwithstanding that some of the ancillary services provided by the Appellant could be considered promotional or administrative; particularly after the sale of Insurance Products was completed, thus the compensation received by the Appellant is exempt from GST/HST."[2]

Could the CRA's Proposed Policy Change be Challenged and Overturned?

The most likely candidate to challenge the CRA's Proposed Policy Change would be a fund that pays trailing commissions directly to dealers.[3]

In this scenario, to comply with the CRA's Proposed Policy Change and not risk a GST/HST assessment, the dealers would charge and collect GST/HST from the funds as of July 1, 2026.

The fund could then apply to the CRA for "protective" rebates of GST/HST paid in error pursuant to section 261 of the ETA. The fund would take a position consistent with the CRA's prior policy with respect to the exempt status of trailing commissions paid to Original Dealers.

These rebate applications would need to be submitted to the CRA within two years of paying the GST/HST "in error" on the trailing commissions. On the understanding that the CRA processing centre would abide by the CRA's Proposed Policy Change and deny the applications on the basis that the dealers earned the trailing commissions for taxable "asset management" or "advisory" services, the CRA would issue assessments to deny the GST/HST rebate applications.

The fund could then object to the assessments within 90 days of the date of the assessments. Assuming that the CRA Appeals Division, like the CRA processing centre, follows the CRA's Proposed Policy Change, the CRA Appeals Division would confirm the assessments and deny the GST/HST rebate applications.

The next step for recourse would be an appeal to the Tax Court of Canada. As the courts have repeatedly stated, the CRA may provide interpretive guidance, but the CRA's administrative interpretations are not binding law. Ultimately, the nature and tax status of the supplies of services acquired by the fund for the trailing commissions would be determined on the appeal.

Footnotes

1. CRA, GST/HST Interpretation Letter, Document No. 246664 (22 December 2025).

2. At paragraph 34 of theApplewood HoldingTax Court decision.
3. With the fund manager acting as disbursing agent.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2025