Harmonized sales tax would be a massive hidden tax on savings

By Stephen MacPhail

In recent months, a number of articles have been written on how Ontario Premier Dalton McGuinty has been considering harmonizing the provincial sales tax with the federal goods and services tax. Support for this proposal has come from a number of high-profile institutions, including the Institute for Competitiveness and Prosperity in its annual report released on November 25, 2008, and from the Ontario Chamber of Commerce in its report released on January 22, 2009. The press release issued by the Chamber quotes President Len Crispino as saying, “Harmonization of Ontario’s sales tax with the GST will lead to a stronger economy with higher real wages, a higher standard of living, higher productivity, lower business costs and increased investment.” If all this sounds too good to be true, it is because the prospect of a massive windfall tax on peoples’ savings is being ignored.

While the term “harmonized” sounds benign, such a move would in fact be a serious error that would magnify one of the most unfair and pernicious effects of the federal GST. A harmonized sales tax (HST) would result in additional taxes being applied to investment management services, including mutual funds, segregated funds and other managed investment accounts, which are part of many registered savings plans, registered income funds and locked-in retirement accounts. Investors – from young couples struggling to make their annual RSP contributions to the thousands of retirees living off their savings – would end up paying the tax, as it will be taken directly from their funds. Even worse, the tax would be hidden because the Ontario Securities Commission requires fund managers to report a single management expense ratio, a figure that includes the management fee and other costs, such as taxes. No other business is required to hide the tax from consumers in this way.

The taxes generated by investment management services would be a significant windfall for the province. Already, the GST is costing CI Financial’s Ontario clients about $28 million a year, and we calculate that they would pay another $44 million annually under the HST, assuming the provincial portion of the tax is set at 8%. That means for every $20,000 invested, you will pay $52 a year in HST. For the industry as whole, we estimate that the GST is draining over $300 million annually from the savings of Ontario residents, and that an HST would take another $500 million – a detail missing from pro-harmonization studies.

This money would be deducted automatically from the savings accounts and retirement funds of ordinary people. A large portion of these accounts consists of RRSPs – which are supposed to be tax-free savings vehicles. (We note, however, that registered pension plans – many of them government-sponsored – provide the same type of service but are not subject to GST.)

While Ontario’s manufacturers would likely benefit the most from an HST by claiming credits for taxes paid on the inputs used to make their products, there is no similar offset for investment managers. For investors, it would be a tax grab, pure and simple.

The harmonized tax would further compound the inequity of the GST that has existed since its inception. In 1990, the GST was introduced as a consumption tax and savings were to be exempt. Despite this, the GST was quietly applied to mutual and segregated funds, while other investment vehicles are not taxed. The result is that the primary investment vehicle of millions of Canadians is singled out for taxation. As public policy, it completely contradicts the goal of encouraging people to save.

Should the HST be implemented, CI Financial and other financial services firms will be obligated to investigate ways to reduce the impact on their clients. One option would be to move parts of our operation to a province without an HST, such as Alberta. If it means saving our investors millions of dollars each year, we will have to find a way to do it. CI Financial employs over 1,300 people in Ontario and moving just our administrative operations would cause hundreds of good jobs to leave the province. The loss to the provincial economy would be even greater, given that much of CI’s spending on goods and services – including millions spent on legal and accounting services – would shift to another province. It’s possible that other investment firms, including the fund operations of the big banks, would take similar action in order to reduce these costs for their investors.

Financial services, which have always been a significant contributor to the Ontario economy, would inevitably shed many jobs under an HST. That just doesn’t make sense, especially today. On behalf of all investors in Ontario, we ask that the provincial government carefully consider all implications of an HST. It is never a good time to be imposing new taxes on savings.

Stephen MacPhail is President of CI Financial Corp., a diversified wealth management firm that manages or administers approximately $75 billion in assets on behalf of two million Canadian investors.