worth having an RSP or doing the good old fashion savings account instead?
http://www.windsorstar.com/business/will+affect+investors+across+Canada/3210867/story.htmlHST will affect investors across Canada By Jonathan Chevreau, Financial Post June 28, 2010 10:02 AM
Even as Ottawa seeks ways to help under-saving Canadians put away more for retirement, the shortfall will only be exacerbated when the harmonized sales tax comes into effect this week in Ontario and British Columbia.
Managed money — professionally managed investment portfolios — is subject to HST. That means mutual funds, wrap accounts, hedge funds, segregated funds, charitable trusts and even passively managed index funds and exchange-traded funds — the basics of most retirement portfolios — will see increased fees.
And the fee hikes won't be felt only in the two provinces ushering in the new HST on July 1. Ontario is the centre of the financial industry and B.C. is also a major player. Clients in other provinces served by financial firms in Ontario or B.C. will also experience tax hikes on their retirement savings as result of harmonization.
The new tax on retirement products, combined with the current government hand-wringing over pension reform (such as policy proposals to hike payroll taxes so that workers can get higher Canada Pension Plan benefits), just don't add up, the financial services industry says.
The Investment Counsel Association of Canada (ICAC) says European nations using value-added tax (VAT) impose it on the consumption of goods and services, but don't consider investment management as consumption.
Kate Walmsley, president of the organization that represents portfolio managers, argues that when Canadians hire pros to manage their money, "they are not consuming but rather preserving their wealth for later in life."
ICAC is urging Ottawa to refrain from imposing the 160 per cent tax hike that will occur when the tax rises from the five per cent GST currently levied, to 12 per cent HST in B.C. and 13 per cent in Ontario.
Pension plans are already suffering from funding difficulties and investment management accounts for 60 per cent of the cost of running pensions, Walmsley points out. This "sales tax policy is in effect running directly counter to the objectives of the Department of Finance in ensuring the strength and adequacy of Canadians' retirement savings."
Because advice is considered a service, it is caught by the HST. Investors who forgo advice and pick their own stocks or bonds through discount brokerages do not get hit by HST.
"Throwing darts (at stock tables) is tax-free," says Dennis Tew, chief financial officer for Franklin Templeton.
Indeed, the policy hits low- and middle-income Canadians' retirement savings harder than sophisticated investors, who tend to buy securities directly.
But even do-it-yourself investors who buy index funds, ETFs or F-class mutual funds, which are sold by fee-only advisers, are affected.
"HST will add to the headwinds investors face in trying to accumulate wealth," says Dan Hallett, a director with HighView Financial Group Inc., an asset management firm in Oakville. "No matter what kind of adviser you use, or their method of compensation, your investment costs will rise."
Most funds are sold through advisers, but requests by the Investment Funds Institute of Canada to exempt advisers from HST fell on deaf ears. IFIC president Joanne De Laurentiis says mutual funds will thus be taxed at four or five times the rate embedded in deposit instruments like guaranteed investment certificates.
Mackenzie Financial Corp. says someone with a $100,000 portfolio in mutual funds will pay an extra $2,500 in HST tax over a period of 10 years. That's assuming a standard management expense ratio (MER) of 2.28 per cent and 8 per cent growth. As investments grow, so does the HST charged.
ETFs have smaller MERs than mutual funds but are still subject to the increased harmonized tax. ETF investors will pay 0.02 per cent or 0.03 per cent more than they do currently, says Stephen Leong, vice-president of iShares Canada.
For the money industry and investors alike, the HST rules are ridiculously complex. The provincial portion of HST levied is calculated based on where investors in a particular fund live. IFIC expects most members to adopt a simplified approach that blends or averages HST across provinces.
Some other retirement products, like life insurance and annuities, are currently exempt from GST and will continue to be for HST, says Dave Schlesinger, indirect tax manager for KPMG. But costs for insurers will still go up because they will now pay tax on services like accounting and rent, that weren't taxed before harmonization. And, as exempt businesses, insurers can't recover HST via input credits.
Employers offering pensions will also face higher costs, both on managed money and on extra costs to comply with the new HST regime.
Costs will also rise for banks and credit card companies, Schlesinger says.
But exemption doesn't always pay. Michael Firth, national leader for PricewaterhouseCooper's indirect tax services, says harmonization will cost banks $400 million a year through "taxation by exemption." They can't recover the extra HST-related costs via throughput credits, nor can they pass it on to consumers paying fixed-price contracts running over many years, such as mortgages.
© The Financial Post
Home 
Register 
Log in 
Mon 28 Jun 2010, 11:26 am
