GST/HST on Trailing Commissions

Historically, the CRA treated trailing commissions as consideration for an exempt financial service, on the basis that they were part of the service of “arranging for” the issuance or distribution of mutual fund units. This position was confirmed as recently as January 13, 2022, in GST/HST Interpretation 187184 – Application of GST/HST to mutual fund trailing commissions in the mutual fund industry, in which the CRA stated that trailing commissions were generally exempt from GST/HST, other than in limited “exceptional circumstances”.

In Notice 344, the CRA indicated that this characterization no longer reflects how the industry operates or presents its services. Based on a review of current regulations, industry practices, and publicly available descriptions of dealer and advisor activities, the CRA now views trailing commissions as compensation for ongoing services such as investment account servicing, support, and advice.

Notice 344 specifically relies on the exclusions in paragraphs (p) (advice) and (q.1) (asset management services) of the definition of “financial service” in subsection 123(1) of the Excise Tax Act. Because advisory and asset management services are excluded from the definition of financial service, they are not exempt and are subject to GST/HST. The CRA considers most services performed by dealers in exchange for trailing commissions to fall within one or both of these exclusions.

Importantly, the CRA has stated that it does not consider this development to represent a change in its interpretation of the law. Rather, it views the revised tax treatment as a consequence of regulatory and operational changes in the mutual fund industry – particularly amendments to National Instrument 81-105, which require dealers to provide ongoing suitability determinations and advice in order to earn trailing commissions.

The GST/HST treatment of brokering the initial issuance of mutual fund units remains unchanged. Arranging for the initial issuance of units continues to be an exempt financial service, and upfront commissions or one-time trading fees remain exempt from GST/HST.

Notice 344 also clarifies that brokering the issuance of units (for which a one-time trading fee may be earned) is considered a separate supply from the ongoing services supplied in exchange for trailing commissions. In rare cases where a dealer earns only trailing commissions in exchange for both brokering and ongoing services, the CRA considers the combined supply to be predominantly advisory and/or asset management in nature and therefore taxable.

_{¹ The term “mutual fund trailing commission” is not defined in the Excise Tax Act. The term (also referred to as a trailer fee or trailer commission) is explained by the CRA to mean an ongoing payment made by a mutual fund manager to an investment dealer, typically calculated on a periodic basis and paid for as long as an investor continues to hold units or shares of a mutual fund. The trailing commission is paid under a dealer agreement and is intended to compensate the dealer for ongoing services provided to the investor, such as investment advice, account servicing, and related investor support. Trailing commissions are separate from, and in addition to, any upfront commissions that may be paid at the time of the initial investment. [Excise and GST/HST News - No. 111]}

The table below summarizes the CRA’s prior administrative position compared to its revised approach effective July 1, 2026.

• Managers will need to ensure GST/HST is properly charged on trailing commissions paid after July 1, 2026. This will likely require system changes, updated invoicing processes, and decisions regarding whether the tax cost is absorbed or passed on. While input tax credits may become available, that benefit will depend on proper documentation and compliance.
  
  
• Dealers, many of whom may not have been required to register solely in respect of trailing commissions, may now be required to register, charge, collect, and remit tax. Registration is generally required once taxable supplies exceed $30,000 in a calendar quarter or over four consecutive quarters. This introduces new compliance obligations, cash-flow considerations, and administrative complexity.
  
  
• Agents and advisors are also expected to be affected. The CRA has indicated that commissions paid by dealers to agents out of trailing commissions will generally be taxable, potentially requiring many advisors to register for GST/HST for the first time.
  
  

While funds and investors are not directly responsible for charging or remitting tax, the change may indirectly influence product pricing, compensation structures, and management expense ratios over time. For example, a 13% HST applied to a $100 annual trailing commission could increase costs for managers or reduce dealer margins if not passed on.

Although the change applies prospectively, advance preparation will be critical. Industry participants should consider:

• Reviewing agreements and disclosures to understand how services tied to trailing commissions are described
• Assessing GST/HST registration and compliance readiness, particularly for dealers and agents new to the tax system
• Modeling the economic impact of GST/HST on trailing commissions to determine who bears the tax cost
• Evaluating alternative structures, such as fee-based arrangements or revised compensation models, that may better align with the new tax treatment