Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
[Client Address]
Case Number: 246664
Dear [Client]:
Subject: GST/HST interpretation - Tax status of trailing commissions
Thank you for your correspondence of [dd/mm/yyyy] […], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to dealer trailing commissions earned in certain cases where the dealer receiving the commission did not facilitate the originating investment. We apologize for the delay in this response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
BACKGROUND
You have written regarding our previously expressed views on the application of the GST/HST to commissions and trailing commissions in the mutual fund industry. We had commented on a variety of situations involving the payment of commissions by managers of mutual funds (Manager(s)) to licensed mutual fund dealers, as well as commissions paid to mutual fund salespersons/agents of these dealers (Agents). We stated our view that commissions (including trailing commissions) paid by Managers are generally consideration for the exempt financial service of transferring ownership of mutual fund units and shares (collectively referred to as Units). However, there are exceptions, for example where the dealer receiving the trailing commission from the Manager is not the same person that facilitated the initial sale of Units of the mutual fund. In that case, it was our view that the payments may be consideration for a separate supply and may therefore have a different GST/HST treatment.
You contend that in this exceptional situation (i.e., where the dealer is not the same person that facilitated the initial sale of Units), the trailing commissions paid by the Manager are, notwithstanding, always consideration for an exempt supply of a financial service. […], you have provided the following additional information in respect of situations where the Manager is obligated to pay trailing commissions for Series A Units:
1. The Manager is obligated to pay a trailing commission with respect to every outstanding Series A Unit for as long as those Units remain outstanding, as a result of the dealer (Original Dealer) having arranged the sale and issuance of the Units.
2. It is the dealer of record that is entitled to receive the trailing commission in respect of the Units, pursuant to the relevant Prospectus. However, for a variety of reasons, the dealer of record may change from being the Original Dealer to a different dealer (New Dealer). Even where this is the case, it is possible that the Agent may have remained the same.
3. The Manager’s obligation to pay the trailing commission is not contingent on the services provided to the client by the Original Dealer or New Dealer (collectively, Dealers).
We understand that Series A Units are typically sold to retail clients (individuals investing their own money), as there are typically minimal requirements for the client to meet and the client receives the advice of an Agent or Dealer.
You have written that jurisprudence has established that a supply should be characterized from the point of view of the recipient and by the “end result of the service” from the recipient’s point of view. In particular, you cited Applewood Holdings Inc. v. The Queen [2018 TCC 231] in support of this position. You are in agreement with our statements made in earlier GST/HST rulings that where the Manager pays trailing commissions to the Original Dealer, such commissions are paid as consideration for distribution services performed by the Original Dealer. You contend that this is supported by the fact that the Manager is not receiving any other supply from the Original Dealer. As such, you have concluded that the Manager’s obligation to pay the trailing commissions is tied solely and directly to the distribution of the Units to the client.
You further contend that, from the Manager’s perspective, the payment of trailing commissions represents ongoing consideration for the initial financial service of arranging for the issuance of the unit(s) supplied by the Original Dealer to the Manager. You have likened this to the circumstances in Zomaron Inc. v. the Queen [2020 TCC 35]. In this way, you have suggested that the Original Dealer’s right to receive the commission has simply been transferred to the New Dealer. You consider the transfer of this right to be paid money, to be the supply of a financial service that, in your view, should not be considered a contingent right. You state that the sole reason the New Dealer receives the trailing commission is that it acquired a right to be paid money that the Original Dealer previously owned. In this respect, a new supply has not been created by the change in dealer receiving the trailing commission.
You have […] stat[ed] that the commitment to pay a trailing commission between the parties is evidenced by certain disclosure documents. The simplified prospectus was cited as an example of such a document. You supplied a few sample prospectus excerpts that you believe document the commitment to pay a trailing commission to the dealer of record:
“We pay a trailing commission to your Dealer either monthly or quarterly on your Series A, … shares or units of the Funds. For Corporate Series and Select Series units of Canadian Dollar Cash Management Fund, we may pay your Dealer an ongoing trailing commission or, if we do not pay a trailing commission to your Dealer, we may pay an ongoing referral fee to a non-Dealer intermediary that refers you to us when you buy Corporate Series or Select Series units. We may also pay a referral fee to persons who refer institutional clients to us. This referral fee will be disclosed to the institutional client prior to their purchase of shares or units of a Fund.”
“When you purchase certain Mutual Fund Series units of the Funds, we pay your dealer an annual trailing commission. A Mutual Fund Series unit that pays a trailing commission is referred to as a "Trailer-Paying Series” unit. The trailing commission is calculated as a percentage of the average daily value of each Mutual Fund Series unit of each Fund held by your dealer’s clients, and is paid either monthly or quarterly, at the election of the dealer. We may change or cancel the terms and/or payment frequency of the trailing commissions at any time.”
“Commission-Based Series
In respect of the Commission-Based Series units that you hold with a dealer, we pay your dealer a trailing commission on a monthly or quarterly basis. The trailing commission that we pay to each dealer each month is based on the average daily net asset value of Commission-Based Series units of the Funds held by a dealer’s clients during that month.”
In addition to the information supplied by you, we also reviewed:
* various public prospectuses and Fund Facts available on the SEDAR+ website;
* National Instrument 81-105 Mutual Fund Sales Practices, as released by the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators; and
* CSA Notice of Amendments to National Instrument 81-105, dated September 17, 2020 (CSA Notice of Amendments).
* Various explanations provided on websites of members of the mutual fund industry (including the CSA) summarizing what mutual fund trailing commissions are paid for.
INTERPRETATION REQUESTED
You have asked us to reconsider our position concerning the tax status of trailing commissions paid by mutual fund Managers to New Dealers. Specifically, you would like our confirmation that these trailing commissions paid to New Dealers constitute consideration for an exempt supply of a financial service.
INTERPRETATION GIVEN
Based on our review of the industry’s current regulations and practices, our position has changed. Effective July 1, 2026, mutual fund trailing commissions paid by Managers to both Original Dealers and New Dealers will generally be subject to GST/HST. The following provides a brief summary of the rationale for this change in position.
Firstly, the public disclosure documents evidencing the commission arrangement between Managers and Dealers do not suffice as evidence of the agreed terms existing between Managers and Dealers.
Based on our review of some sample Fund Facts and the CSA Notice of Amendments, it appears that Dealers do have certain ongoing regulatory and client-related obligations, for which the trailing commission is intended to compensate them. For example, […][a fund fact document for Series A units], contained the following statement concerning trailing commissions:
“[…] The trailing commission is an ongoing commission. It is paid as long as you own the fund. It is for the services and/or advice that your representative and/or their firm provide to you. […][fund manager] pays the trailing commission to your representative’s firm. It is paid from the fund’s management fee and is based on the value of your investment. The rate depends on the sales charge option you choose.”
We found similar wording concerning trailing commissions in other Fund Facts documents and it is our understanding that this type of wording is fairly common in Fund Facts for Series A Units.
Further, as a result of the CSA amendments to National Instrument 81-105 (effective June 1, 2022) we understand that Managers are generally now prohibited 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 the particular Units.
Further, an emerging industry trend has come to our attention that shows how the industry itself characterizes the services supplied in exchange for trailing commissions. A number of larger Dealers and Agents that supply ongoing investment account services to small- or medium-sized personal investors have begun to compute their account fees based on a percentage of assets under management (“asset-based fees”), instead of charging investors on a per-trade basis. Dealers are appropriately applying GST/HST to their asset-based fees, on the basis that the service supplied to the investor constitutes asset management. However we understand that in these cases, the value of assets under management (upon which the asset-based fee is computed) excludes the value of mutual funds for which the Dealer earns a trailing commission. We understand Dealers exclude these fund holdings from their fee base because they feel they should not be paid twice for performing the same function. This suggests that Dealers themselves view the service supplied in exchange for trailing commissions to be one of asset management, as it is considered the same as the service for which the asset-based fee is earned.
These factors suggest that Dealers do generally provide ongoing services to their clients in exchange for the trailing commissions they receive. This is further supported by online explanations summarizing what trailing commissions are paid for. For example, websites of the CSA as well as other industry members generally explain that dealers are paid ongoing trailing commissions to enable investors’ access to the ongoing support, servicing and advice supplied by their dealers.
The collective provision of investment account support, servicing and advice in this context generally constitutes an asset management service for GST/HST purposes, as defined in subsection 123(1). Asset management services are specifically excluded from the definition of financial service, pursuant to paragraph (q.1) of the financial service definition in subsection 123(1). Further, the provision of advice in any manner is excluded from the definition of financial service, pursuant to paragraph (p) of that definition. Accordingly, advice and asset management services are subject to GST/HST.
As noted in Excise and GST/HST News #111 issued in June 2022, CRA’s previous position had been that where a Dealer was not the same person that facilitated the initial sale of shares or units in the fund (i.e., a New Dealer) but received a trailing commission in respect of those shares or units, the trailing commission was consideration for a separate supply from the supply of arranging for the initial sale of shares or units. Unless the service provided by the New Dealer in these circumstances fell within the financial services definition, the trailing commissions would attract GST/HST. Where the Dealer received the trailing commission for the servicing of an investor's account, this was not a supply of a financial service as defined in the ETA.
The CRA’s change in position correctly interprets the legislation, provides clarity and simplifies tax administration. Managers will no longer be required to track the transfer of units to New Dealers (i.e. distinguish between payments to Original Dealers versus New Dealers) in order to apply GST/HST correctly to the trailing commissions paid. Note that arranging for the initial issuance of units remains an exempt supply, so any up-front trading fees earned by Dealers are not subject to GST/HST.
The CRA will apply this position to supplies made on or after July 1, 2026, to allow industry participants time to adjust their systems and procedures for this change.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, you can reach me on 236-330-8100.
Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287 or by fax to 1-418-566-0319.
Sincerely,
Frankie Fenton
Industry Sector Specialist
Financial Services Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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