Agreed that a single federal-provincial harmonized sales tax is better for Canada. It eliminates paying tax on top of tax; helps make Canadian businesses more competitive; and frees many businesses from the costs of having to manage two separate tax systems.
However, there are some concerns, around three themes:
First, the inequity that exists within the financial services industry in Canada. The GST and therefore a harmonized sales tax (the HST) – on services provided to funds is four to five times the sales tax on services of equal value that are provided to non-fund investments, such as a GIC, a bond, or buying individual securities.
Because funds are pooled products sold across the country, regional differences in the HST adds significant complexity and cost from an administration point of view, both for the industry and tax officials – but delivers no value to the end buyer.
Third, the GST, and therefore the HST based on the GST – is a tax on savings – and more specifically a tax on retirement savings.
In 1991 when the GST was introduced, Canada chose to treat funds differently than it treated other financial products – and that was the beginning of the inequity that we have today with funds. 100% of the labour involved in providing mutual funds under the HST will be taxed at 13% along with the computers, telecommunications and stationery that all financial firms pay tax on and use to supply their offerings.
With respect to a GIC, which has no advice and a lower return in most cases, 0% of labour is taxed and it is only the tax on computers, telecommunications and stationery that is passed to the client. As three-quarters to four-fifths of fund costs is labour, mutual fund-holders are taxed at effectively 4 to 5 times the rate that GICs, equities and other non-fund financial vehicles are. This is where we get the inequity where fund holders pay 4 to 5 times more tax for a fund product than another financial product.
So while mutual fund services are taxed, they are taxed at a disproportionally higher level than non-fund financial products, making them more expensive proportionately for Canadians, even though Canadians have come to regard funds as another financial product they can choose to build a portfolio.
How does Canada compare to other jurisdictions:
Their findings showed investment funds in the European Union, Australia and New Zealand are taxed on an equivalent basis to non-fund financial products – whether through sales tax exemption or credits – and thus they do not have the inequities in their jurisdictions that we have.
International GST models have gone more and more towards exemption for financial products – including funds. We have suggested to the federal government that it’s time for Canada to modernize its GST regime to align with these other jurisdictions.
With that harmonization announcement by B.C. and Ontario fund holders face a significant increase in tax. The four already harmonized provinces – Quebec, Nova Scotia, New Brunswick and Newfoundland – have not applied the higher harmonized level of tax to funds. All funds and to keep the businesses in their provinces competitive with those based in other jurisdictions.
In 2008 Canadians paid an estimated $450 million more in GST on their mutual funds investments.