HST Impact on Canadian Investments

So how does the HST impact this industry?

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.

Second, Canada is an outlier, when compared to other countries that have GST or value-added tax regimes. In the European Union, Australia and New Zealand, funds are not treated differently from other financial products – so the inequity that exists in Canada does not exist there. Another issue that is unique to Canada (and only four other countries) is that the sales tax is applied at two levels –federal and provincial.

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.

Background:

When the GST was being studied in the late 1980s, the investment funds industry was very small – around $30 some odd billion dollars in assets, whereas today it is $700 billion dollars in assets. In those early days fund holders tended to be more sophisticated and well-off; today they are average Canadians who use funds as a primary form of savings in their retirement savings plans. Fund holders now include many smaller investors who rely on funds as a way to save small amounts on a regular basis and to affordably diversify risk and to get advice on planning for their future.

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:

KPMG looked at several key leading jurisdictions that Canada usually looks to because they are comparable either in size or political and economic structure.

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.

Fast forward to July 1, 2010, the expected date of the HST implementation in Ontario.  

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.

How fund holders will be impacted by harmonization:

Mutual fund products are primarily owned by middle–class Canadians – 67% of fund holders earn under $100,000 and of the funds held by Canadians are held in retirement savings vehicles. Essentially, the HST impacts the retirement savings of Canadians. An outcome that is quite undesirable given that we have a collective public policy concern about whether we are saving enough for retirement.

In 2008 Canadians paid an estimated $450 million more in GST on their mutual funds investments.

The solution:

The federal government needs to modernize the GST policy to bring it in line with other VAT and GST regimes globally to remove the inequity across products.

An immediate review is needed to adjust the current GST policy to facilitate a level playing field for investors in Canada, to bring Canada in line with other countries, to create a workable implementation solution for businesses operating across the country and to reduce the long-term burden HST will have on retirement savings of Canadians.

 

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Author: Warren Orlans

Welcome to inTAXicating. My name is Warren Orlans and this is my blog. With over 17-years experience in the taxation industry, 11 of them working for the Canada Revenue Agency (CRA), and the rest working in the private sector at large financial institutions responsible for resolving tax issues for corporations and individuals and the Canadian lead for a large US bank on FATCA implementation. My tax career began pretty much out of university at the CRA, in Collections, where I moved up, across, over and up again through their division with stops in Enforcement, Taxpayer Relief (then Fairness), Audit, Directors Liability, Training, Mentoring, GST, GST/HST, Payroll, Corporate Tax, Personal tax, and probably much more. If you have a collections, compliance or audit issue with the CRA, MRQ, IRS or with the CRTC, WSIB or any aspect of those agencies, inTAXicating is the place you need to contact. inTAXicating has entered into a strategic partnership with Goldhar and Associates, to create Goldhar Tax Solutions. This partnership allows my team to include amazing tax lawyers, insolvency practitioners, mortgage brokers, debt counselling experts and much more. When dealing with governments, knowledge is power. We possess strong understanding of government so we know what the next step is before the government does. When you have a collections problem with the CRA, do you hire a graphic artist? No, you get a former collector who trained the staff, and who worked as a resource officer for 5 years. Then you know you are on the right track to resolving your tax problem(s). Others offer suggestions. We offer solutions! tax@goldhar.ca

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