GST/HST And Trailing Commissions: Changes For The Mutual Fund Industry

1. A major shift effective July 1, 2026

The Canada Revenue Agency (CRA) has announced a significant change in the GST/HST treatment of trailing commissions in the mutual fund industry.

According to a GST/HST Interpretation Letter (Document No. 246664) issued on December 22, 2025, confirmed by the GST/HST Notice No. 344 (Notice 344) published in February 2026 by the CRA, these commissions will now, as a general rule, be subject to GST/HST.

It is important to note that the upfront commissions arising from the initial issuance of units remain exempt from GST/HST, as they constitute consideration for an exempt financial service.

This new CRA position represents a clear departure from previous administrative practice. The CRA emphasizes that this is not a change in its interpretation of the legislation, but rather a consequence of regulatory and operational developments in the industry, which have changed the nature of services provided in exchange for trailing commissions.

For industry participants, the practical implications are substantial. Even though the new position takes effect on July 1, 2026, the time available to assess financial impacts, adjust contracts, register for GST/HST if required, update billing systems and review internal processes to comply with the new rules is limited.

It is also important to note that Revenu Québec (RQ) has not yet announced whether it will align its position with that of the CRA. Although the Québec Sales Tax (QST) rules generally mirror those of the CRA and harmonization is anticipated, we must await a public announcement from Revenu Québec for confirmation.

2. Basis of the CRA's new approach

The CRA notes that, since June 2022, the Canadian Securities Administrators (CSA) have prohibited mutual fund managers from paying trailing commissions to dealers who do not provide ongoing support or advice to investors regarding the subscription and holding of units, pursuant to National Instrument 81-105: Mutual Fund Dealers Practices.

As a result, a dealer must provide ongoing support and advice to an investor to earn a trailing commission in respect of the fund units held by the investor.

The CRA further observes that some large dealers charge fees based on a percentage of assets under management rather than per transaction. These fees are subject to GST/HST but exclude the value of funds for which a trailing commission is already received, preventing double compensation. In essence, services funded by trailing commissions, previously exempt, are equivalent to those subject to asset-based fees subject to GST/HST.

Finally, the CRA notes that most industry websites confirm that trailing commissions remunerate ongoing services provided by dealers to investors.

3. CRA's previous position

Historically, the CRA took the position that trailing commissions paid by mutual fund managers represent consideration for a single supply of an exempt financial service, namely the facilitation of the issuance of fund units.

In a GST/HST Interpretation Letter dated January 13, 2022 (Document No. 187184), the CRA identified two exceptions:

1. Where the dealer receiving the commission is not the same person who facilitated the initial issuance of units.
2. Where the dealer receiving the trailing commission was the same person who facilitated the initial issuance of the units, but the right to the commission was not created at the same time and under the same agreement as the initial issuance of the units.

4. Application of the new CRA position

As outlined above, the CRA now considers trailing commissions related to mutual funds to be subject to GST/HST, on the basis that they constitute consideration for ongoing support, advice or asset management services.

To allow industry participants time to adapt their systems and processes, Notice 344 provides that the new treatment will apply to supplies made on or after July 1, 2026. However, the CRA encourages industry participants to adopt this tax treatment as soon as possible.

5. Impacts and practical considerations

GST/HST registration

• Dealers that are not currently registered may be required to register as a result of trailing commissions becoming taxable (generally where annual taxable revenue exceeds CA$30,000)

GST/HST collection and remittance

• Registered dealers will be required to collect and remit GST/HST on trailing commissions received.
• Failure to comply may result in penalties and interest.

Input tax credits (ITCs)

• Dealers will be entitled to claim ITCs for GST/HST paid on expenses directly or indirectly (in part) related to activities generating trailing commissions, provided they have proper documentation (invoices, proof of payment, supplier's name, supplier's valid GST/HST number).
• Since dealers will continue to receive GST/HST-exempt revenue, they must implement a fair and reasonable allocation method to apportion expenses between taxable and exempt activities in order to optimize ITCs recovery.
• Dealers will need to maintain rigorous tracking of taxable expenses to support their ITCs claims.

Contractual agreements and accounting systems

• Funds managers and dealers should review existing agreements to determine whether commissions require adjustment.
• Funds managers and dealers will need to update their accounting systems to ensure the proper application of GST/HST to trailing commissions, including the appropriate GST/HST rate.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.