The Canada Revenue Agency, housed in the Connaught Building in Ottawa, recently changed its position on GST/HST and trailing commissions.Sean Kilpatrick/The Canadian Press
Mutual fund dealers have been working hard behind the scenes to get internal systems ready to charge GST on trailing commissions before the Canada Revenue Agency begins enforcing its new policy on Jan. 1, 2028.
Earlier this year, the CRA said trailing commissions would be subject to GST/HST, reversing its long-standing position. Initially, the agency said the change would take effect on July 1, but later extended the deadline by 18 months.
Tariq Nasir, direct tax partner at EY Canada in Toronto, who’s working with the Securities and Investment Management Association to implement the changes, says there have been weekly meetings between asset managers and dealers looking at the tax requirements.
Asset managers generally pay trailing commissions to dealers and advisors for as long as an investor holds the fund, but determining whether certain fees are subject to GST under the CRA’s new policy and which party is earning what fee can sometimes be challenging.
“It’s taken quite a bit of time, probably more than we had anticipated,” Mr. Nasir says.
Although he believes firms will be ready by the deadline, the industry must keep its foot on the pedal if it doesn’t want to be left scrambling next fall, he says.
Globe Advisor spoke with Mr. Nasir about the industry’s progress and the challenges of meeting the CRA’s deadline.
What are some of the issues the industry is dealing with?
It’s understanding the legal relationship [between fund managers, dealers and advisors]. Who’s earning what? How do you characterize the nature of the fees? Is [a payment] a trailing commission? Who’s going to get to claim input tax credits [ITCs]?
There are multiple parties earning the fee and there needs to be remittance between those different parties.
For example, to be able to claim an ITC, you have to know when you pay a trailing commission from the manager to the dealer. You need to know the total quantum of that payment and the individual party they’re paying it to. That information may not be available today [in the electronic file], so how do we work around it?
There are scenarios in which an advisor is earning a fee, contractually, but they’re having a payment diverted to a private corporation, and it’s the corporation that’s presently registered (or which may become registered). Who should be remitting that tax?
What are the costs of implementing this change?
I’m not sure what the individual [firm] budgets are, but from what I’ve seen, it’s a significant amount of time. And, obviously, retaining law firms and accounting firms – that all costs money. It also requires internal time that could be spent on other activities.
It’s a lot more [costly relative] to the messaging we initially got from the CRA, which was, ‘What’s the big deal? This is an easy fix. You just charge the tax, you remit it, you claim ITCs.’
What’s the next stage in terms of the industry implementing changes?
There’s a lot of work that needs to be done on the [tech] system side to implement this change. Then, there are going to be releases of what this could look like from a system perspective and testing will need to be done.
For the next three or four months, it’s probably going to be a lot about understanding the [tax] requirements, making sure [they’re] properly implemented. Then, probably in the early winter, we’ll be doing a lot of the testing. Eventually, in the summer or fall, there will be a rollout of these system updates.
But for the most part, from an industry perspective, we’re done on the tax function. We have all the rules in a proper format. Now, it’s [about] making sure you can operationalize these tax rules.
Do you think some dealers or advisors will begin charging and remitting GST on trailer fees ahead of the deadline?
There has been chatter about doing it outside the [tech] system. They’ll have to develop a manual process.
Almost everyone’s going to wait, but there will be a few that decide to comply sooner. If they’ve done the analysis and if it works out in [their] favour monetarily, then they might want to expedite [implementation].
Do you mean these firms believe that because they can claim ITCs on GST they pay on expenses, they might benefit financially by complying sooner?
That’s one reason why a party could decide to register early. Furthermore, the CRA has stated publicly that taxpayers are ‘encouraged’ to register as soon as possible.
This interview has been edited and condensed.