Advisors may not realize that trailer fees and sales commissions are generally tax exempt, but asset management services such as portfolio management and financial planning are not.
“Just because you’re a financial advisor doesn’t mean everything you’re doing is [GST/HST] exempt,” said Mario Seyer, a partner and national indirect tax leader with PwC Canada in Montreal. “Any type of fee you’re getting, any type of commission, you have to review the underlying agreement, and review the exact nature of the services.”
Under the Excise Tax Act, “financial services” are exempt from GST/HST, which includes arranging for the sale of a financial instrument, such as units of a mutual fund.
However, “asset management services” are not GST/HST exempt. These may include managing or administering investment assets and liabilities, and providing research or analysis about assets and liabilities.
Advisors who earn referral income should also be aware that the associated fees are typically not GST/HST exempt, Seyer said: “When you provide a referral service, you’re not significantly involved in the actual financial transaction,” meaning it typically isn’t considered an exempt financial service.
“You need to review the exact nature of the services you’re providing to make sure they qualify as a financial service,” Seyer said.
In a GST/HST interpretation published earlier this year, the Canada Revenue Agency (CRA) confirmed that trailer fees and sales commissions are exempt from GST/HST. While this had long been the CRA’s position, a taxpayer had nevertheless asked the CRA to clarify its view.
In determining whether a “supply” (a product or service) qualifies as a financial service, it’s first necessary to determine its “predominant element” or “essential character,” Seyer said. Answering that question can be highly fact dependent — and often the subject of court debate — but it generally boils down to identifying the main purpose of the service being provided from the recipient’s point of view.
If there is more than one payment, or payments made over years (e.g., trailer fees), you must then determine if there is a “single supply” composed of several components, or “multiple supplies.” If there’s a single supply, then the GST/HST status is determined by the predominant element. If there are multiple supplies, the GST/HST status of each supply is analyzed separately, some of which could be taxable, some of which could be exempt.
In its interpretation, the CRA said that, generally, trailer fees paid by the fund manager to the dealer, and then shared with an advisor, are part of a single supply consisting of the distribution of the fund’s shares or units. “This would be the service that the manager is essentially paying for,” the interpretation said. “Any other services provided would be ancillary to this purpose.”
However, in certain exceptional circumstances, the trailer fee would not be considered GST/HST exempt. These include when the dealer receiving the trailer had not been entitled to the payment when the original sale of the units of the fund was facilitated, or where the dealer had not facilitated the original sale of the fund units but had acquired the business afterward, such as when a book of business is purchased.
The CRA’s clarification on the GST/HST status of trailer fees in the context of a book sale is not a change in the CRA’s position. Thus, advisors should plan “very carefully” when buying a book of business, said Carol Bezaire, vice-president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto.
Advisors should work with the dealer “to ensure that any ongoing trailer fees that might be paid are classified as exempt,” Bezaire said. She added that the issue is typically addressed as part of the appraisal process in order to ensure “there is a good marriage between the seller and the buyer, because at the end of the day you want to protect your investors.”
Advisors should also be aware of provincial sales taxes. In general, the provincial place of supply is determined by the purchaser’s, or recipient’s, province of residency.
In Quebec, where the provincial sales tax is largely harmonized with the GST, the QST applies to asset management services. In contrast, the provincial sales tax in British Columbia, Saskatchewan and Manitoba generally does not apply to these services. Alberta and the three territories do not have a provincial sales tax, while Ontario and the four Atlantic provinces have the HST.
While many advisors are aware that investment counselling and financial planning services are not GST/HST exempt, Bezaire said they may “trip up” over the fact that while investment counselling fees are tax deductible to the client, financial planning fees are not.
“Investment counsel fees are deductible because under the Income Tax Act you are hiring a professional to help you pick the investments that you are using to, at the end of the day, generate more tax revenue to the government than if you [chose investments] yourself,” Bezaire said.