CRA Mandates GST Collection on Trailing Commissions by Independent Advisors

Independent financial advisors in Canada will now need to collect GST/HST on trailing commissions from mutual funds, as confirmed by the Canada Revenue Agency (CRA). This announcement, made on Tuesday, marks a significant shift in policy after a 35-year-old stance was reversed late last year.

Key Changes to GST/HST Collection

The CRA clarified its new position regarding trailing commissions in its notice, stating that most services provided by mutual fund dealers in exchange for these fees do not qualify as financial services. This change means that:

• Independent advisors must collect GST/HST on trailing commissions.
• Employees of dealer firms are exempt from this requirement.

According to the CRA’s notice, the definitions applied to financial services are being updated. Services that include advice and asset management are now excluded from this category.

Impact on Independent Financial Advisors

This policy shift seems to disproportionately affect mutual-fund-licensed independent advisors. Mark Kent, CEO of Portfolio Strategies Corp., noted that most advisors in this position operate as principal agents rather than employees, making them subject to the tax.

Tariq Nasir, a partner with EY Canada, mentioned that independent contractors whose taxable revenue exceeds $30,000, including trailing commissions, will need to register for GST/HST and remit sales tax accordingly.

Concerns Over Implementation

Industry leaders express concern about the administrative burden this change will impose on dealers. Nelson Cheng, CEO of Sterling Mutuals Inc., stated that while his company is registered for GST/HST, many advisors are not, complicating the compliance landscape further.

The implementation of this tax change is expected to incur significant costs for fund managers, dealers, and advisors, without necessarily increasing government revenue since they are eligible for input tax credits.

Effective Date and Industry Response

The CRA reiterated that this new policy will take effect on July 1. Stakeholders have expressed worries about the feasibility of meeting this deadline, citing that the transition may be challenging.

Overall, the CRA’s mandate requiring GST/HST collection on trailing commissions represents a pivotal change within the financial advisory landscape in Canada, raising numerous questions and challenges for independent professionals.