Ontario hints at HST exemption for funds

Premier Dalton McGuinty says his government is talking to the mutual fund industry about a possible exemption to the harmonized sales tax.

He says there’s no agreement right now, but the Ministry of Finance is in discussions with mutual fund companies and other groups to make sure his government “gets it right” on tax harmonization.

McGuinty wouldn’t say whether he was sympathetic to the industry’s complaints about merging the 8% Ontario sales tax with the federal GST, which would hike the cost of many items currently exempt from the provincial levy.

His comments appear to put him at odds with Finance Minister Dwight Duncan, who had reportedly taken a hard line against the mutual fund industry’s complaints about the HST.

NDP Leader Andrea Horwath says taxpayers should be outraged that the governing Liberals are bowing to big business instead of trying to find more exemptions to ordinary families for everyday items like home heating oil.

Conservative Peter Shurman says there are a lot of groups that have a case against the HST and the tax needs to be stopped now before it’s implemented next July.

The impending implementation of the HST has been a lightning rod for criticism in the investments industry, as it would substantially raise the cost of mutual funds for retail investors.

“It’s a direct tax on savings,” said Joanne De Laurentiis, president and CEO of the Investment Funds Institute of Canada, speaking at the IFIC Dealer Advisor Forum on Sept. 22.

“The issue is that funds are not treated the same as other financial products and are taxed at a higher level,” she said. “This is all due to the fact that in 1991, when the GST was introduced, funds were not as big a part of the landscape.”

Ontario is not the first province to harmonize its provincial sales tax with the GST, but the impact will reach far beyond its own borders, imposing the tax on any mutual fund domiciled in Ontario. That would, of course, capture the vast majority of funds.

“When the Atlantic provinces moved to harmonize and Quebec mirrored the GST regime, they did not tax,” De Laurentiis said. “In the case of the Maritimes they rebated it, in the case of Quebec they zero-rated it.”

She pointed out in other countries that have a GST or value added tax, mutual funds are typically not subject to the GST/VAT regime.

“We’ve taken a close look at France, the UK, Australia and New Zealand, and they don’t treat funds the same,” she said. “We ask the federal government in particular that policy be revised so that we have a level playing field.”

De Laurentiis is diplomatic compared to others in the industry.

When the HST was first unveiled, Bill Holland, chief executive of CI Financial, suggested he could save investors millions by moving his company to Alberta, which has no provincial sales tax, let alone an HST.

On the distribution side, outgoing Assante CEO Joe Canavan blasted the HST in a recent interview with Advisor.ca.

“I don’t like this new HST, I think that’s a crime. It’s just an assault on Main Street Canada,” Canavan says. “That’s just a money grab — a half a billion dollars a year. The government has been encouraging people to invest for themselves all these years, and now they’re trying to take it all back.”

He estimates the HST will equate to a 10% increase in managements, adding 20 basis points to the average 2.00% MER.

“If you add the GST and PST together to get the HST, the total aggregate amount is more than we pay for portfolio management and operating expenses,” he says. “They’ll get paid a lot more than Gerry Coleman, Danny Bubis or Peter Cundill.”

Related Articles On …

• Advisor.ca » Ontario offers tax cuts, sales tax harmonization
• Advisor.ca » Fund industry rallies against Ontario tax proposal
• Advisor.ca » Tax harmonization not just Ontario’s problem

(09/30/09)