GST causes clients to pick unsuitable products

By Melissa Shin | September 14, 2012 | Last updated on December 5, 2023
2 min read

A report out of the University of Calgary says the way financial services are taxed could cause clients to pick unsuitable products.

In a release, the authors, Ken McKenzie (School of Public Policy) and Michael Firth (PwC) say there are “serious flaws” with how financial services are taxed.

“Consumers should choose among various financial services – investing in GICs versus mutual funds, term versus whole life insurance, etc. – on the basis of their relevant merits, not because of differences in effective tax rates due to differential treatment under the GST,” they write.

Read: Indirect taxes directly affect income

Since consumers don’t pay GST on exempt transactions (which include some, but not all, financial services and products), a financial institution cannot recover the GST on inputs used to provide the good or service.

That means “the GST will be embedded in the price charged for those financial services,” says the report. “This will be true for both consumer and business purchases of financial services.”

Further adding to the confusion is the patchwork of legislation governing taxation of financial services products. For instance, insurance agent services were GST-exempt prior to 2009. CRA reversed that in February 2010, but flip-flopped again a few months later. The services remain GST-exempt for now.

Read: CRA pressured to reduce payment errors

McKenzie and Firth recommend retaining the exemption-based approach, but offer several ways to improve it:

1. Zero-rating business-to-business transactions by allowing businesses to recover GST paid on inputs related to providing financial services.

2. Creating a new system for determining GST recovery, including rules around attributable costs. A system for taxing imported supplies will also be needed.

Read: Keep tax planning at the forefront

3. Taxing all financial services at the same effective rate so that consumers face a “level playing field between different types of financial services.”

Read the full report here.

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Melissa Shin

Melissa is the editorial director of and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at You may also call or text 416-847-8038 to provide a confidential tip.