Thirty-Five Years of Exemption: CRA Changes Course on Trailing Commissions

Introduction

In February 2026, the Canada Revenue Agency (CRA) published GST/HST Notice No. 344, Application of the GST/HST to Mutual Fund Trailing Commissions (Notice 344). In essence, the CRA announced that, beginning July 1, 2026, it would consider that “most services provided by mutual fund dealers in exchange for mutual fund trailing commissions no longer meet the definition of a ‘financial service’.”

Historical position and background

The CRA’s historical position, under which these services qualified as financial services, was initially established in Policy Statement P-119, published on February 22, 1994 and effective January 1, 1991. It was reiterated in each subsequent CRA update through June 2022, in Excise and GST/HST News No. 111 (the 2022 GST/HST News).

From the introduction of the GST, the CRA considered supplies made by dealers in exchange for trailing commissions under standard mutual fund industry agreements to be single supplies whose predominant element was a financial service described in paragraph (l) of the definition in subsection 123(1) of the Excise Tax Act (ETA), namely “arranging for” the sale of a fund unit.

In 2009, legislative amendments were enacted to clarify the exclusion of asset management services from the definition of “financial service” under paragraph 123(1)(q.1) of the ETA. In February 2011, the CRA issued GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service (Bulletin B-105), dealing with the 2009 legislative changes. The CRA considered it useful to include examples “to illustrate how the amendments apply in respect of the provision of certain services and property in the context of the definition of financial service.”

Example 4 of Bulletin B-105 addresses the interaction between paragraph (q.1) of the definition of “financial service” in subsection 123(1) of the ETA and the services supplied by a mutual fund dealer that receives trailing commissions. The CRA lists the advisory or management services generally provided in accordance with customary business practices:

• regularly meeting with or contacting the client to review the status of the account and the appropriateness of the units held in the account in light of the investor’s financial needs and investment objectives;
• ensuring that the client fully understands the nature of the units held in the account and all of the implications of holding the units;
• answering any questions that the client may have regarding the account, or the units held in the account;
• recommending any appropriate change in the account or in respect of the units held in the account; and
• assisting a client in exercising any right or privilege in respect of the account or the units held in the account.

The tax authorities’ conclusion remained the same. In other words, these ongoing advisory and administrative services, which would otherwise be taxable if considered separately, were treated as incidental elements of a single financial-service supply made by the dealer, the predominant element of which was arranging for the sale of a fund unit.

This position was confirmed one last time in the 2022 GST/HST News:

“Typically, [...] the dealer is engaged by the manager to distribute shares or units of mutual funds to investors. [...] Where a dealer receives a trailing commission, there is usually an obligation by the dealer to provide a degree of ongoing investment support to the investor including the provision of investment advice, account statements and newsletters.”

A few months earlier, in GST/HST Interpretation Letter No. 187184, which was written and published before the latest industry reforms and addressed the application of the GST/HST to mutual fund trailing commissions, the CRA had summarized its position as follows: “The essential character of the supply made to the manager under the dealer agreement would be the distribution of shares or units of the fund.” In that respect, the CRA had identified certain exceptions to this GST/HST treatment where there were clearly multiple supplies—for example, where the person receiving the trailing commission was not the person that facilitated the sale of the fund units, or where the trailing commissions were governed by a service agreement separate from the agreement relating to the facilitation of the sale of the fund units.

In summary, the CRA’s historical position, based on standard industry practices, generally supported the conclusion that the services supplied by a mutual fund dealer receiving trailing commissions constituted a single supply whose predominant element was an exempt financial service, as that term is defined in subsection 123(1) of the ETA.

Regulatory and operational changes

Several regulatory and operational changes proposed and brought into force between 2020 and 2022 influenced the tax authorities’ new position. In Notice 344, the CRA refers to reforms introduced by the Canadian Securities Administrators (CSA) and adopted by each provincial securities regulator. Several elements appear to have been decisive in this change of course.

The first is the prohibition, in certain circumstances, against paying trailing commissions to “order execution only dealers” under National Instrument 81-105, Mutual Fund Sales Practices. Generally, this means that a dealer must provide investors with ongoing support and advice to earn a trailing commission.

The CSA also introduced significant enhancements to the obligations governing dealer conduct (the “Client Focused Reforms”), including through amendments to National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations. Among other things, the Client Focused Reforms enhance the support and advisory services that mutual fund dealers must provide to investors with respect to know-your-client, know-your-product and suitability determination requirements.

As a result, dealers must now provide ongoing support and advice to earn trailing commissions and are subject to higher standards in providing that support and advice to investors.

Finally, the conflict-of-interest reforms prevent dealers from charging both asset-based management fees and trailing commissions for the same investment because the industry considers this to constitute double payment for the same work. The CRA views this as an implicit acknowledgment that services charged as a percentage of assets under management are of the same nature as those supplied in exchange for trailing commissions.

Dealers apply the GST/HST and QST to these management fees because the service supplied is an advisory or asset management service excluded from the definition of “financial service” in subsection 123(1) of the ETA.

New position of the tax authorities

In light of these changes, the CRA changed its administrative position on the nature of the supplies made by mutual fund dealers. Beginning July 1, 2026, the tax authorities would generally consider a mutual fund dealer receiving trailing commissions to be making two separate supplies, as described in Notice 344.

First, the dealer supplies a “service of facilitating the issuance of units in a mutual fund” for a one-time trading fee. This remains an exempt financial service under paragraph (l) of the definition in subsection 123(1) of the ETA. Second, the dealer supplies “ongoing services in exchange for trailing commissions.” This is a taxable supply of advisory or asset management services.

The CRA goes so far as to state that:

“In rarer cases where a dealer earns only trailing commissions in exchange for both brokering the unit issuance and for providing ongoing services to the investor, the combined supply is viewed to be predominantly advice and/or asset management.”

This represents a complete reversal of the administrative presumption that applied through June 30, 2026 regarding the predominant element of the supply.

Industry response

Industry participants responded rather negatively. We understand that, as of the date of writing, representations were being made to the tax authorities to reverse, or at least postpone the implementation of, the new policy.

On January 8, 2026, the Canadian Forum for Financial Markets (CFFiM) sent the Department of Finance Canada a letter concerning the new policy. It raised two principal objections.

The first was that the new policy was inconsistent with the relevant jurisprudence governing the test for determining whether a supply constitutes a financial service under the Excise Tax Act. Citing Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 96, CFFiM took the position that the nature of a supply must be examined from the recipient’s perspective.

The argument is not without merit. In practice, the advisory or asset management services are supplied directly to the investor, while the recipient for purposes of the Excise Tax Act is the fund manager, which pays the dealer—according to CFFiM—for the distribution of the fund units.

The second objection concerned the significant increase in administrative burden without a corresponding net tax benefit to the CRA. Many dealers would be required to register and collect tax from the recipient of their services. That recipient—the fund manager—would ordinarily be registered and entitled to an input tax credit (ITC) or an input tax refund (ITR) in respect of the supply. The change could even result in a net loss of tax revenue because dealers collecting the tax would generally become entitled to additional ITCs and ITRs.

Practical implications

The policy was scheduled to take effect on July 1, 2026. Revenu Québec also announced that, given the harmonization of the GST/HST and QST systems, the same treatment would apply under the QST system. The changes would have several direct and indirect consequences, depending in part on the dealer’s registration status when the policy took effect.

Dealers that were not registered before the effective date would of course have to register. All affected dealers would have to begin collecting and remitting tax on trailing commissions, subject to their possible status as small suppliers.

All dealers supplying the affected services should then benefit from increased eligibility for ITCs and ITRs on inputs acquired to make those supplies.

Depending on the circumstances, some persons might also cease to qualify as listed financial institutions under subparagraph 149(1)(a)(iii) of the ETA or as de minimis financial institutions under paragraph 149(1)(b) of the ETA.

Losing financial-institution status would have several compliance consequences for persons that were already registered, including no longer being subject to section 141.02 of the ETA when determining the extent of use of their inputs for ITC and ITR purposes. Without addressing every detail, this would reduce the administrative burden for those persons.

This change in status could also eliminate the obligation to file annual returns for selected listed financial institutions and annual information returns for “reporting institutions” as defined in subsection 273.2(2) of the ETA.

One could also envisage situations in which a dealer remains a financial institution for purposes of the Excise Tax Act but must register for GST/HST and QST. The dealer could then become a “reporting institution” and would be required to file an annual information return.

In short, a dealer earning trailing commissions in respect of mutual funds would be well advised to consult a tax professional about the effects on its GST/HST and QST compliance.

Conclusion

The administrative burden associated with this change is substantial for the industry. Billing systems will have to be modified to include GST/HST and QST at the correct rate and based on the applicable place-of-supply rules. Dealers will have to review their GST/HST and QST compliance obligations and reconsider their status under the definition of “financial institution.”

It remains to be seen whether the industry’s representations to the Department of Finance and the CRA will result in a postponement of the effective date, a narrowing of the new policy, or even a complete reversal. The arguments advanced—particularly the argument that a supply must be analyzed from the recipient’s perspective—raise serious questions about the consistency of the new position with the jurisprudence of the Federal Court of Appeal.