Investors outside Ontario and B.C. will feel the pinch of the harmonized sales tax (HST) as mutual fund companies decide to pass it onto them. The additional cost will particularly hurt those saving for retirement.
The Investment Counsel Association of Canada (ICAC) is concerned about the impact of HST on Canadians’ ability to save for retirement, says Katie Walmsley, president of the organization.
“Whether their savings are in mutual funds, pooled funds, defined contribution pension plan or defined benefit pension plan, HST has added the costs of saving for retirement,” says Walmsley. “We continue to advocate this concern to the Federal government and are hopeful as part of their cross Canada retirement savings adequacy consultation process, they will see fit at some point in the future to exempt management of retirement savings from HST.”
Special rules for mutual funds implemented by federal government became effective on July 1, 2010. The new rules will require a mutual fund, regardless of where the fund or its manager is located, to pay HST on its management fees, administration fees and certain other fund costs — collectively referred to as “taxable fees” — based on where a fund’s investors reside.
” If 40% of a fund’s assets are held by Ontario investors, the fund will have to pay HST at the Ontario HST rate on 40% of the taxable fees; if 15% of the fund’s assets are held by B.C. investors, the fund will pay HST at the B.C. rate on 15% of the taxable fees, and so on,” says Walmsley.
Seeing that the die is cast, fund companies, IFIC and industry stakeholders are making a concerted effort to minimize the impact of HST to investors.
With these tax changes coming into effect, the management expense ratios of the funds will be affected says Doug Coulter, president of RBC Asset Management Inc.
“The impact would be the additional costs related to the HST,” says Coulter. Currently mutual fund MERs already includes the federal GST of 5%. “We’ve estimated that the addition of the HST will result in an approximate increase of 0.02% to 0.12% in the MERs of our funds, depending on the type of fund.”
Fund companies with nationwide operations are devising ways to remain competitive in both HST and non-HST provinces.
Joanne De Laurentiis, president and CEO of IFIC, says that most firms are going to come out with blended rate. The blended rate is arrived at by taking 50% of the difference between HST and GST and adding it to GST. The rate is then applied directly to the fund thus creating a level playing field.
“Every unit holder then — regardless of whether they are in a harmonized or non-harmonized province — are going to end up paying then same amount,” says Laurentiis.
Brandes Investment Partners & Co. has taken a different approach altogether. In their response to the implementation of HST they have ensured that unit holders in non-HST provinces are not burdened by any additional costs. They have done so by launching two new fund classes for investors residing in provinces that do not participate in the HST.
These new classes — named Class AN and Class FN — are available to eligible investors and will be subject only to the GST. Eligible investors may purchase these new classes now or may switch their existing Class A or F units of the funds for the Class AN and Class FN units respectively.
De Laurentiis is urging investors to not get bogged down by HST and continue to take funds for what they really are.
“Our message to investors is that we believe funds are still a really good solution,” she says. “They should look at the merit of the solution for their particular circumstance rather than just the tax side.”
That said, IFIC will continue its efforts to alleviate the impact of HST on investors.
“(We will) seek a policy review that would have funds treated on an equivalent basis to other financial services,” says De Laurentiis. “That would put fund investors on an equal footing with holders of other financial products.”
(07/09/2010)