Opinion: Industry must rally investors on HST

The mutual fund industry has fomented against the application of the federal Goods and Services Tax since that levy was introduced in 1991, calling it a tax on savings. But now the introduction of a Harmonized Sales Tax in Ontario, where the vast majority of funds are domiciled, represents an even greater threat to Canadian wealth.

While the industry has banded together to fight the HST, efforts so far have focused on direct contact with politicians, rather than a full-court press to raise the ire of the investing public.

And there’s a problem with some of the presentations being made to politicians: they frequently miss the mark.

Joanne DeLaurentiis, president and CEO of the Investment Funds Institute of Canada appeared before the Ontario Standing Committee on Finance and Economic Affairs on Thursday, presenting the industry’s case against the application of the province’s Harmonized Sales Tax to the management fees of mutual funds.

Her first argument against HST on mutual funds is that it would further enforce an existing inequity within the financial services industry in Canada.

Bonds, GICs and individual equity holdings are not subject to GST, while mutual fund investors are saddled with tax costs four to five times higher than these instruments.

She points out all of these products can be purchased with little or no professional advice. Yet the professional management intrinsic to a mutual fund is the very element that the government seeking to tax.

To suggest the absence of management expertise associated with a GIC should be treated on par with service-based instruments diminishes the value of management.

Never mind that passive investment advocates would agree with De Laurentiis that a value added tax on mutual funds is an oxymoron. Asset management is a service, and that is precisely why it has been taxed since the Goods and Services Tax was implemented in 1991.

Her second argument is that the analogue to the GST in other countries is seldom applied to mutual funds. A worthwhile argument, perhaps, but given that Canadian investors are captive to the Canadian market, there is little danger of investment in a fund based in New Zealand.

There is some good news, though. While Ontario finance minister Dwight Duncan has refused to exempt mutual funds from the provincial portion of the HST, he apparently is happy to leave that political decision on the doorstep of his colleagues in Ottawa.

De Laurentiis says Duncan has agreed to support IFIC’s request that the federal government exempt mutual fund management fees from GST, which would have the knock-on effect of eliminating the Ontario HST on funds.

De Laurentiis’s final argument is perhaps the strongest, that GST/HST on mutual funds is a tax on Canadians’ savings. But if the industry is to make any headway with the Conservative government in Ottawa, this argument needs to be tweaked.

There are better arguments to be made against applying the HST to mutual funds.

Prime Minister Stephen Harper holds himself out as Canada’s economist-in-chief, and every first year econ student is familiar with the paradox of thrift. Sure, savings are good for the individual, but they represent stalled capital, with little benefit for the overall economy.

So a stronger argument for the repeal of the GST/HST on mutual funds is that it will represent a tax on investment, a far more important use of capital than saving in the eyes of the macroeconomist.

Individual investors in mutual funds have little influence, but as a group they represent a massive pool of liquidity for Canada’s capital markets. The mutual fund industry is estimated to hold nearly $600 billion in assets under management.

If even 5% of this capital pool rejects mutual funds because of the HST, $30 billion in liquidity could evaporate from our markets, as investors reassess their preferred savings vehicles. Is a $30 billion influx to low-yielding GICs really desirable?

This is, after all, the government that brought Canadians the Tax Free Savings Account, and has sought to distance itself from the Mulroney-era Conservatives who created the GST in the first place.

At a time when Ottawa is looking for shovel-ready projects to spur economic rebound, the end-game should be to get public attention for this issue. Ordinary Canadians are tuning their minds towards larger economic issues, which means fund industry advocates are in a unique position to ask investors to help prevent taxation on the stimulus they’re creating every day.

(12/04/09)