And not just for investors in Ontario. Because of the way mutual funds are sold and fees gathered, the new, higher tax proposals would affect all mutual fund investors in Canada.
But recently, Ontario premier Dalton McGuinty said there might be some modifications to the Ontario government’s plan to levy the new 13% harmonized sales tax on mutual fund fees. As it stands currently, individual investors pay a 5% GST (general sales tax) on mutual fund fees, but since the HST combines the federal with the provincial taxes, the proposed new cost would be an additional 8% in taxes on the purchase and sale of mutual funds. And the tax would be levied on individual investors, of course – not the mutual fund companies themselves.
A 13% HST tax Would Be Another Nail in the Coffin for the Mutual Fund Industry
As if Canadian mutual fund fees weren’t already bad enough by themselves. Canada has some of the highest mutual fund management fees in the world. So much so that ETF provider Barclay’s ran an extensive ad campaign helping to alert Canadians to this fact (and, of course, to spark interest in their alternative line of low-cost ETFs).
So in addition to the fact that mutual funds aren’t the investing panacea they were once advertised as (anyone who has taught themselves the difference and nature of ETFs and index investing knows these facts), Canadian investors pay obscene amounts in management expense ratios (MERs). An additional 8% tax would just add insult to injury, and probably accelerate the broad-based move away from these dinosaurs of personal finance.
True, there are some relatively low-cost mutual funds which, in the wake of ETF market success, attempt to track the indexes as well – in many cases, the same index as the ETF correlate. And if you hold these in an RRSP or TFSA, (as I do), then indeed, you don’t have as much to worry about when it comes down to a case-by-case comparison with the sister ETF product. But you need to check to see how your mutual fund is managed and how actively it is managed in order to make a true comparison. The best ETFs, from a passive index-investing point of view – and the reason ETFs originated in the first place – are ETFs which aren’t managed at all – they just track their underlying index.
And true, ETFs require you to pay commissions for their purchase and sale – which you might not have to do at all if you hold the sister mutual fund in your RRSP or TFSA. But overall, ETFs are cheaper and leaner investment vehicles.
HST Headaches Begin July, 2010
The implementation of the harmonized sales tax is by no means a signed and sealed issue. So far it is scheduled to come into effect on July 1, 2010 (great way to celebrate Canada Day!). But there will no doubt continue to be revisions to the code before then in response to opposition parties and industry leaders’ protests, such as those from Joanne De Laurentiis, CEO of the Investment Funds Institute of Canada.
De Laurentiis brings up the great point that mutual funds are generally just bought by individual investors and that 70% of them are sitting in retirement funds, in other words, mostly RRSP accounts and pensions. The thought of adding taxes here seems to negate the general thrust of the tax-deferred investment theory. Worse, it would effectively mean that even Albertans might end up paying some of Ontario’s sales tax. Some have speculated that it might be enough cause for fund companies to relocate from Toronto to Calgary, where there is no retail sales tax.♣ [source: Financial Post]
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