FidelityNow: Trailer fees and GST: Understanding the CRA’s reversal

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Hello, I'm Peter Bowen, VP of Tax and Retirement Research at Fidelity

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Investments. CRA has announced that as of July 1,

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mutual fund trailing commissions will be subject to GST.

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This has significant ramifications for the industry, although I should note

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that there's a lobbying going on to try to defer the implementation

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date. To understand this, let's start by understanding

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where we're at right now. GST

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was introduced in 1991 as a value-added tax.

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That means businesses that charge GST have to pay that GST

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to CRA, but also that they get to recover GST that they

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themselves paid, meaning that only the net amount is paid to CRA.

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A few years later, some provinces essentially joined the GST system

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and the Harmonised Sales Tax, or HST, was introduced.

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HST is an element of the change coming but for purposes of this discussion,

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I'll ignore it.

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Now, GST is complex. For instance, there have always been a number of

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exceptions. Example, groceries, and importantly, financial

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services. Trailer fees have historically been considered financial services

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and not subject to GST.

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Currently, mutual fund management fees and administration fees are

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subject to GST. This is the case for both series F fees,

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fee-based structure,

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and fully embedded series such as A or B.

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But trailer fees, which are a payment from fund companies to dealers, are not.

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As of July 1, that's what's changing.

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These trailer fees will be subject to GST.

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So what does this mean?

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First, it's important to note that this does not change things for the end

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investor. The management and admin fees are already

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subject to the GST, although there have been some media reports

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suggesting investor costs might go up, this should not be case.

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Although trailer fees will now be increased by the GST, because

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it's between businesses, and as I mentioned, it's a value-added tax,

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it doesn't substantially change the economics.

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Fund managers such as Fidelity will pay more out as trailer fees,

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but recover the GST component of that so nothing really changes for

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them. Dealers, well, they'll receive more, but

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they'll have to remit that GST to CRA.

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So really, again, In a similar manner, nothing changes.

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That said, they might be able to recover some of the GST paid

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that they previously couldn't.

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So in fact, dealers could be better off.

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And let's think about advisors that are independent agents rather

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than employees.

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Well, they will have to register and charge GST.

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As with dealers, such advisors may now be able recover GST

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that they had paid, have been paying, and will continue to pay and

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could be better off.

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That said, there are still some uncertainties in how this will proceed,

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and the cost of administration shouldn't be minimized.

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Getting ready for the change is a lot of effort and some additional work will

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have to be done on an ongoing basis.

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Fund companies and dealers are trying to figure all of this out.

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Advisors, at least independent advisors,

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should be thinking about the transition, how to get ready for the change,

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which will include potentially registering for GST.

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They should be paying attention to what their dealer is telling them and

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talking to their own tax advisors in preparation for July 1.

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It is possible that the industry lobbying effort might delay all of this,

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but we can't count on this.

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So stay tuned.