Tax Insights: Mutual fund trailing commissions ─ Dealers and advisers need to collect GST/HST effective July 1, 2026

Issue 2026-01

In brief

What happened? 

In a private interpretation letter, the Canada Revenue Agency (CRA) recently announced a significant change in the Goods and Services Tax/Harmonized Sales Tax (GST/HST) treatment of trailing commissions that are paid by the managers of mutual funds to investment dealers.

Why is it relevant?

Effective July 1, 2026, mutual fund dealers and agents will be required to register for GST/HST and commence collecting GST/HST on all trailing commissions. 

Actions to consider

Mutual fund managers who are liable to pay GST/HST to investment dealers after June 30, 2026, should ensure that they have systems in place to satisfy the input tax credit (ITC) information requirements, which require (among other things) the manager to obtain the GST/HST registration number of the dealer (or its intermediary), the amount of trailing commissions paid and the amount of GST/HST payable on these commissions.

In detail

Background

Since the inception of the GST/HST, trailing commissions have generally been treated as exempt from GST/HST on the basis that they represent consideration for a mutual fund dealer’s service of “arranging for” the sale or issuance of a financial instrument by a mutual fund to the investor. This position was confirmed by two separate examples in GST/HST Policy Statement P‑119, which involved commissions paid by the manager to:

• an investment dealer who “arranges for the sale/purchase of units of a mutual fund to an investor”
• a new dealer that was not involved in arranging for the sale of units and who “will continue to provide the necessary advice and administrative activities for the benefit of the investor” 

As a result of legislative changes to the definition of a “financial service” that became effective December 14, 2009, the CRA rescinded GST/HST Policy Statement P‑119. However, in GST/HST Technical Interpretation Bulletin B‑105 (example 4), the CRA confirmed that trailing commissions paid by the manager to a mutual fund dealer who “arranged for” the upfront sale of units would continue to be exempt from GST/HST. 

More recently, in GST/HST Interpretation No. 187184, the CRA commented on various situations involving the payment of trailing commissions by managers to licensed mutual fund dealers, as well as commissions paid to mutual fund salespersons/agents of these dealers. The CRA confirmed that commissions (including trailing commissions) paid by managers are generally considered to be for an exempt financial service of arranging for the transfer of ownership of mutual fund units and shares. However, the CRA also noted that there were “exceptional circumstances” when trailing commissions would be subject to GST/HST – two examples are:

• when the dealer receiving the trailing commission was not the person that facilitated the initial sale of the fund’s shares or units, and
• when the dealer facilitates the initial sale, but is not entitled to receive the trailing commission at the time of sale or pursuant to the relevant distribution agreements

The CRA’s revised position: All trailing commissions paid by fund managers and investment dealers are subject to GST/HST

Based on the CRA’s review of industry practices and regulations (including the Canadian Securities Administrators National Instrument 81‑105: Mutual Fund Sales Practices), the CRA concluded that “mutual fund trailing commissions paid by [m]anagers to both [o]riginal [d]ealers and [n]ew [d]ealers will generally be subject to GST/HST.” The CRA’s reasoning for changing its position and, in particular, concluding that trailing commissions are consideration for a taxable “asset management service” include the following:

• The relevant documentation (e.g. prospectuses and “Fund Facts”) appear to impose “ongoing regulatory and client‑related obligations” on the dealer and the trailing commissions are intended to compensate the dealer for these obligations.
• The June 1, 2022 amendments to National Instrument 81‑105 generally prohibit managers from paying trailing commissions to dealers of record who are not obliged (by industry rules) to make suitability determinations in connection with a client’s purchase and ongoing ownership of units.
• A large number of dealers and agents have changed their billing practices and are now charging “asset based fees” based on a percentage of assets under management and, when calculating their fees, they generally exclude the value of mutual funds that are held, because the trailing commissions are compensating them for providing asset management services (i.e. they do not want to be “paid twice for the same function”).

Implications of the CRA’s revised position

As a result of the CRA’s revised position on the GST/HST status of trailing commissions, mutual fund managers, investment dealers and sales agents need to undertake various administrative actions, including the following:

• Subject to the “small supplier” rules (e.g. situations where the supplier and associated persons earn less than $30,000 annually from making taxable supplies), investment dealers and sales agents should register for GST/HST and implement systems to charge, collect and remit GST/HST on all trailing commissions.
• Mutual fund managers must ensure that they obtain the required supporting information for an ITC claim to recover the GST/HST that they will be liable to pay on all trailing commissions to investment dealers that become payable after June 30, 2026. Supporting information includes:
  • the name and GST registration number of the supplier or its intermediary
  • the invoice date or, if no invoice is issued, the date on which the tax is paid or payable and the total amount paid for the supplies 
  • the GST paid or payable for each supply or all the supplies
  • the recipient’s name, the name in which it carries on business or the name of its agent
  • the payment terms and a description of each supply that is sufficient to identify it
• To safeguard their ITC claims, managers should consider creating an internal system or database to store the requisite ITC information. The Input Tax Credit (GST/HST) Information Regulations (the Regulations) do not set out a general requirement for the supporting documentation to be issued or signed by the supplier (which has been confirmed by jurisprudence and revisions to the CRA’s Audit Examination Manual). Subsection 169(4) of the Excise Tax Act simply provides that the registrant must obtain sufficient information in a form that will allow the ITCs to be determined, including the prescribed information noted in the Regulations; thus, how the ITC claimant obtains the information does not matter.
• To the extent there are any closely related party elections (i.e. elections made in accordance with section 150 of the Excise Tax Act) that deem the trailing commissions between the manager and the dealer to be exempt from GST/HST, the parties should consider revoking the elections (as they may result in unrecoverable GST/HST being payable by the dealer).
• Managers, dealers and agents should review their relevant agreements and consider the following:
  • Are the commissions inclusive of any applicable GST/HST?
  • Who is the “recipient” and what is the recipient’s contracting address (their location generally determines the rate of GST/HST that is to be paid by the recipient)?
  • Does the agreement provide any of the required information to claim ITCs, such as the supplier’s GST/HST number?
  • Does the agreement allow for “reverse invoicing” i.e. for the person that is paying the trailing commissions to issue an invoice?

The takeaway

Although mutual fund managers, investment dealers and agents will undertake additional administrative tasks because of the change in the CRA’s position on the GST/HST treatment of trailing commissions, the good news is that it should not result in any additional GST/HST costs being incurred. Instead, as the investment dealers and agents will be considered to be providing a taxable service (and the recipient of the service should be entitled to recover the GST/HST that they pay on trailing commissions), the change in the CRA’s position should result in less unrecoverable GST/HST being paid, because the dealers and agents that earn trailing commissions can now claim ITCs to recover the GST/HST that they pay on expenses incurred to earn these trailing commissions.