March 13, 2009
Mutual fund investors already stung by the market meltdown will see more savings erode if Ontario proceeds with a move to harmonize federal and provincial sales taxes, an industry group warned yesterday.
“We don’t think mutual fund holders can really afford an additional tax at this moment,” said Barbara Amsden, director of strategy and research at the Investment Funds Institute of Canada (IFIC). “It means a big hike in the cost of a fund.”
The industry is worried that Premier Dalton McGuinty, who has been musing recently about merging Ontario’s 8-per-cent provincial sales tax with the 5-per-cent federal goods and service tax (GST), will do so in his budget slated for March 26.
IFIC is urging Ontario to exclude mutual funds – now charged only the GST – from the additional provincial tax if the province does decide to go ahead with a combined tax rate.
Harmonization is expected to ease the tax burden for businesses, but it will also mean that consumer items sold in Ontario – such as books, heating fuel and children’s clothing – would be subject to a provincial tax.
Because most investment fund companies are based in Ontario, the increased taxes on funds would have an impact on many retail investors across the country.
Many investors are not aware that the 5-per-cent GST is a “hidden tax” included in the management expense ratio (MER) charged to funds, Ms. Amsden said.
On a $10,000 investment in a mutual fund with a 2-per-cent MER, the combined tax rate would jump to $26 a year from $10 on top of the $200 charged for expenses such as portfolio management fees.
The fund industry is unhappy that their products are charged GST, compared with other investments such as stocks, which are not.
Toronto-based CI Financial Corp. has been vocal in lobbying against the GST being charged on mutual funds, and resigned from IFIC in 2006 because the group would not back its stand then.
“Taxing savings is ridiculous,” said CI’s chief executive officer Bill Holland.
Investors are already reluctant to invest because of the hit to their portfolios in the bear market so “adding more taxes is insane,” he said. “It’s inconsistent with any type of stimulus that you want out there to get people investing and taking risks again.”.
CI will consider moving some of its operations out of Ontario – maybe to Alberta, which does not have a combined tax rate – if the province goes ahead with harmonization, he said. “It is our fiduciary responsibility to reduce fees in the mutual funds.”.
The combined tax rate would add about $100-million a year to government coffers from CI alone, he estimated. “It’s a very sneaky tax because nobody will ever know. It just shows up as a higher MER.”.