Fund industry rallies against Ontario tax proposal

By Mark Noble | March 16, 2009 | Last updated on March 16, 2009
4 min read

Canada’s mutual fund industry is concerned a proposal to harmonize the province’s sales tax with the federal GST would unfairly punish the industry and investors who use its products.

The Ontario Liberal government has openly mused about harmonizating its 8% PST with the 5% GST, which would allow the ailing manufacturing sector and struggling local businesses to claim credits on provincial sales tax.

However, it could have a negative impact on the Canadian mutual fund industry, predominantly based in Ontario, which is not currently subject to the PST. There is concern that the fund industry would have to start charging provincial sales taxes along with the GST, which is already embedded in the management expense ratio (MER). The GST is not applied to other investment vehicles such as individual stocks.

Barbara Amsden, director of strategy and research for the Investment Funds Institute of Canada (IFIC), says that it would likely be a small charge for each investor — at the most, the current 8% PST — added to the fund’s MER, but it’s an added cost on the retirement savings of investors during a period in which their portfolios are already down significantly and the economy is struggling.

“If they duplicated the provincial sales tax exactly with the GST, it would bring the tax rate on mutual funds up from 5% to 13%. For any individual person, it may not be a huge amount, but it would be an extra tax when a lot of people are worried about their jobs, their homes and retirement,” Amsden says. “A lot of people don’t realize that GST applies to financial services and mutual funds. Possibly the Ontario government isn’t quite aware of how it could affect savers and investors at this time, which is why we’re hoping they’re open to talk to us [the mutual fund industry].”

Amsden points out that adding consumption taxes like the GST already creates a strange set of tax offsets that work at cross-purposes. Often the government employs income tax incentives such as RRSP deductions. Amsden wonders why it would want to have consumption taxes that work as a barrier to investing.

“As you can also appreciate, it is a sales tax — so it’s supposed to be on the work associated with providing mutual funds. It is kind of unusual to take income tax off through RRSP credits and so on and then add it back on through sales taxes,” she says. “We would like to see mutual funds and other financial services excluded from harmonization.”

In addition, the industry could face increased scrutiny in the fees it charges. Amsden says sales tax has to be buried in the MER and cannot be reported separately. That would add extra basis-points to fees and many investors wouldn’t be able to clearly separate from the management expense.

The result is an even greater perception of high fees on mutual funds in Canada vis-à-vis the U.S, which does not embed tax charges in the MER.

So far, the most vocal opponent in the industry is CI Financial. The company’s president, Stephen A. MacPhail, believes the sales tax would see $500 million annually drained from the retirement coffers of Canadians.

CI Financial estimates the GST is costing its Ontario clients about $28 million a year, and the company estimates its clients nationally pay more than $300 million a year. CI calculates Ontario clients would pay another $44 million annually through the HST, assuming the provincial portion of the tax is set at 8%. For every $20,000 invested in a mutual fund, an investor would pay $52 each year in HST.

“This tax grab is the opposite of sensible public policy,” MacPhail says. “Government should be encouraging people to save for their retirement and giving people incentives to invest in shares of Canadian companies to help them grow. People are reluctant to invest today, which starves businesses of capital and hurts the economy and employment. We need to be reducing taxes on capital gains and dividends, not increasing taxes and making a difficult time even worse for businesses and investors.”

Having a disproportionate tax policy in Ontario could also create considerable inequality for Canadian mutual fund investors. All investors are required to pay GST. Amsden isn’t sure how fund companies, 70% of which are based in Ontario, would apply the Ontario sales tax. Would they include it on MERs nationally? Or would out-of-province investors be charged separately?

“If you have a pooled investment offered nationally, it makes it very difficult to say, John here in Alberta, we’re not going to charge you that sales tax, and Mary in Ontario, we are going to charge you. It’s not [certain whether this is something that] can be applied on a per person basis,” she says. “

MacPhail suggests there could be a drop-off in the volume of financial services business originated from Ontario.

“A harmonized tax that targeted savings would only compound the inequity of the GST and discourage the growth of Ontario’s financial services industry, which is a significant contributor to the provincial economy,” MacPhail says.


Mark Noble