Industry speaks out against federal tax plan

The federal government’s plan to amend the Excise Tax Act, including the definition of “financial services,” is causing a stir within the industry. The proposed changes could see GST charged on broker commissions and the continued inclusion of discretionary management services.

Discretionary investment management fees have been subject to GST since 1991, while broker commissions and sales of financial products by non-commissioned employees have been GST exempt.

The Investment Counsel Association of Canada (ICAC) is urging the government to reverse its plan, saying that the modification would impose a “burden of paying more tax for professional investment management services,” on Canadians at a time most cannot afford it.

“Canadian investors and pension plans have been striving to regain lost capital since the recent economic downturn,” said Katie Walmsley, ICAC president, pointing out that Ontario and B.C. are already poised to impose HST on mutual funds.

“We believe there needs to be a moratorium and a period of consultation to ensure the resulting tax treatment is fair and clear and to allow Canadians and their investment managers time to plan accordingly.”

The ICAC would prefer to see no additional HST on discretionary investment fees.

The ICAC provides an example of the impact investors face:

For the purposes of illustration, assume a 45-year-old Ontario-based couple – with $200,000 in RRSPs – pays 1.25% (of assets managed) per year for discretionary management of their portfolio. This equates to $2,500 plus $125 of GST. After HST comes into effect in Ontario, in 20 years, the couple will pay an additional 8% or $200 of tax each year, or an extra $4,000 over the 20-year period.

“These are complex issues with financial products and services being offered across Canada in different provinces with different tax rates; we recognize the challenge faced by Ottawa in providing clarity and fairness, however, we ultimately believe now is not the time to introduce an additional tax on Canadian’s pensions and retirement saving,” says ICAC chairman, Bob Hill of Coleford Investment Management.

The Minister of Finance Jim Flaherty insisted on Friday that the government was not imposing any new tax, he, however, noted: “The proposed changes contained in the Notice of Ways and Means Motion tabled in the House of Commons on March 22, 2010 are designed to confirm our long-standing policy intent to restore the situation that existed prior to the court decisions. We are not imposing new taxes.”

(03/29/10)