Canada faces pressure to reform ETF regulations amid US competition and new product surge

The Canadian ETF Association has urged Ottawa to adopt a package of reforms it says are needed to protect and strengthen Canada’s exchange-traded fund industry as a wave of new U.S.-listed ETFs becomes accessible to Canadian investors.

The association’s proposals include a targeted savings vehicle it calls a Maple Investment TFSA that would give Canadians enhanced contribution incentives for buying Canada-domiciled funds, the removal of GST/HST on ETF management fees, and a review of the Canada Revenue Agency’s allocation-to-redeemers (ATR) tax formula. CETFA is also pressing for tighter coordination among provincial securities regulators so Canada-listed ETFs face the same regulatory conditions as foreign-listed products available through Canadian brokerage accounts.

“There’s a tsunami on the horizon,” said Eli Yufest, executive director of the Canadian ETF Association. “We need to make changes now to make sure that we’re setting ourselves up for success in the future.”

CETFA frames the measures as compensating for structural and tax frictions that make some domestic funds comparatively less attractive. The group highlights that sales tax on management fees can leave Canadian-listed ETFs around 13% more expensive than equivalent U.S. funds when those fees are compared on a like-for-like basis, and it warns that a recent proliferation of U.S. managers seeking ETF share classes could accelerate capital outflows.

The concern follows the expiry of a long-held patent on the ETF share-class structure that previously provided firms such as Vanguard with an exclusive route to convert mutual fund portfolios into ETF share classes. Commentators and industry providers have described that patent lapse as a potential game changer for the fund industry, enabling a large number of mutual fund houses to file for ETF share classes that can deliver tax and cost efficiencies. According to industry coverage, dozens of U.S. issuers have sought to implement the structure and could launch many hundreds of ETF share classes over time, substantially expanding product choice for both U.S. and Canadian investors.

But adoption in the United States has not been without complication. Industry analysis notes that regulatory scrutiny and questions from the U.S. Securities and Exchange Commission have slowed the roll-out of share classes in some cases, leaving uncertainty about the pace and scale of new listings.

CETFA warns that, absent policy changes, Canadian investors will be increasingly tempted to allocate assets to U.S.-listed share classes accessible in Canadian brokerage accounts. Yufest told the association’s case with a calculation that, should dozens of U.S. managers each bring multiple ETFs to market, the number of new investable options available to Canadians could expand dramatically.

Government and regulators have so far declined to endorse CETFA’s wishlist. A Department of Finance spokesperson said it would be inappropriate to speculate on potential reforms. The Canadian Securities Administrators said members will meet with CETFA to discuss concerns and noted many proposals touch on tax policy; as regulators they said they will offer expertise where appropriate while balancing investor protection, regulatory burden and market fairness.

Not all market participants view the U.S. wave as an existential threat. Dan Hallett, vice-president of research at HighView Financial Group, pointed out that U.S. ETFs have long been available through Canadian brokerages and that other deterrents , such as U.S. estate tax exposure and currency-conversion costs , discourage some Canadian investors from shifting south. He also argued that the arrival of new U.S. share classes is more likely to multiply product choice than to displace the domestic industry outright.

Tiffany Zhang, director of ETFs and financial products research at National Bank Capital Markets, said Canada already hosts a deep ETF ecosystem, with more than 1,800 funds tailored to local investor needs. She added that U.S managers benefit from scale and tax structures that can lead to lower costs and tighter liquidity, making “basis points” meaningful to investor decisions. “Policies that help reduce the holding and trading costs of ETFs have an impact on investor decisions and generally lead to better investment outcomes, all else being equal,” she wrote in an emailed comment.

A central technical issue is the ATR rule change enacted in 2022 that limits how much capital gains can be allocated to redeeming unitholders of mutual fund trusts and ETFs. Under the revised formula, any excess redemption-related gains beyond the formulaic cap are typically borne by remaining investors, a distribution mechanism CETFA says can create uneven outcomes across funds because the calculation uses net asset values at fixed time points that may not reflect market movements during the year.

CETFA’s call to eliminate GST/HST on ETF management fees intersects with other tax debates. The Securities and Investment Management Association has separately lobbied to remove sales tax from fund management fees more broadly. But some tax developments complicate CETFA’s pitch: the Canada Revenue Agency’s revised treatment of mutual fund trailing commissions, due to take effect this July, subjects those payments to GST/HST and may make a carve-out for ETF management fees harder to argue politically.

Market participants and regulators will be watching how quickly policy makers respond. Industry groups say any delay risks accelerating the shift of investor dollars to foreign-listed share classes that may be cheaper or more tax-efficient for holders. Regulators, for their part, stress the need to weigh investor protection and market integrity alongside competitiveness.

For now, the debate centers on whether Ottawa will use tax and account design to tilt incentives toward domestic funds, or whether increased competition from U.S. issuers will instead intensify price and product pressure on Canada’s ETF sector while leaving ultimate investor choice determined by fees, tax treatment and the practical frictions of cross-border investing.