Ontario’s Proposed HST May Impact All Canadians

by Tax Guy - Burlington Accountant on March 26, 2009 Print This Post Print This Post

Every Canadian who owns mutual funds, needs to pay attention to Ontario’s provincial budget and its proposed harmonized sales tax (HST).

Ontario Premier Dalton McGuinty has announced that his government intends to harmonize the Ontario PST with the federal GST.  Normally, this would only be of interest to Ontario residents but harmonization may mean that certain services that previously were not subject to Ontario’s PST will now be subject to the new HST.  Most notably, certain financial service fees charged to mutual funds.

A mutual fund is a basket of stocks and/or bonds owned by a group of investors.  The mutual fund company manages the money and the investment returns are passed along to the unit holders like you and I.  The mutual fund companies charge a “management fee” which is currently subject to the federal GST but currently not PST in Ontario.

Higher Tax = Higher MER

If the new Ontario HST passes and financial services are subject to this new HST any mutual fund company resident in Ontario would need to increase the sales tax charged on its management fee from 5% to 13%.  This means that the mutual funds management expense ratios or MERs will increase.

The MER charged to the mutual fund actually reduces the overall return of the fund which is why it’s important to pay attention to MERs on mutual funds.  So when MERs increase the net investment return to investors goes down.

An Example

Here is an example.  A particular mutual fund has an MER of 2% which includes the current 5% GST and has a gross investment return of 9%.  The return on the investment the investor will see is 7%.  If the HST is applied, the MER increases to 2.15% and the net return to the investor goes down to 6.85%.

Quantifying The Impact

So the MER went up, what does this mean in real dollar terms?  If you invested $5,000 per year in this mutual fund inside a registered account (RRSP, RRIF, TFSA etc.), after 10 years your investments would be worth $625 less.  After 25 years $8,000 less and after 35 years, $25,000.


Beware that this is proposed legislation and we won’t know all of the details until tomorrow.  I’m keeping my fingers crossed that Ontario’s government will exclude mutual fund MERs from their HST.

Stay tuned as I follow this story.

Your Thoughts?

Tell me what you think bout this.  Post a comment to this article.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Durham Reporter March 26, 2009 at 10:46 am

That’s an excellent point. I hadn’t thought of the impact of financial services outside of the province. I guess this will only speed up the exodus of head offices out of Toronto for Calgary. The only comfort in all this is that people deserve the government they elect.

Sarah March 26, 2009 at 7:27 pm

Is there any chance that the HST will not go through come July 2010?

Tax Guy March 26, 2009 at 8:44 pm

@ Sarah
I suspect it will pass. The Liberals have a majority and this probably will not be an election issue.

Potzie March 30, 2009 at 2:22 pm

That calculation is a stroke of genius. Why hasn’t the media picked this up and made more of an issue of it?

Potzie March 30, 2009 at 2:25 pm

What’s in it for the Mutual Fund companies if they relocate? They don’t pay the tax the unitholders do, but the costs of relocation are paid by the company (ulitmately paid by shareholders and the unit-holders through even higher MERs). The talent that runs these companies and their funds are not likely going to want to move to Calgary just to provide tax savings for the unit holders even if it is best for us.

Tax Guy March 30, 2009 at 4:40 pm

@ Potzie,

I can’t take credit for the calculation. A genius I work with did it is couple of minutes.

In theory, a MF company could move its management to a low sales tax province to boost returns to unit holders. This may attract additional investors to the fund.

max March 31, 2009 at 11:25 pm

This will have a huge impact on an already crippled renovation and building industry. Adding this new mandatory tax on home purchases, construction and renovations will just drive these sectors into the ground. This article explains how most of us feel http://www.handycanadian.com/articles-ontario-hst-attacks-renovators.asp

T.F. Savings April 15, 2009 at 2:59 am

This is mixed signals for sure. First the Government gives us the Tax Free Savings Account (TFSA), telling us its the best thing since RRSP’s, and now they want to hit us with the HST. Some people already are saying that if this happens it certainly won’t alter their investment strategies but most surely it will affect some annual returns!

Pat Drummond April 29, 2009 at 10:16 pm

Solid economics – but very poor politics. Wait until Canada returns to normal.

Graham B August 9, 2009 at 2:07 pm

Good article – I live in BC, and our provincial government has said they are going to implement the HST because Ontario is going to.
I do not know how the good people of Ontario feel about this tax,
but I can tell you that there is a firestorm of protest against the HST happening in BC, and it is growing. A recent Global TV poll stated that 85% of British Columbians are against it. It will be interesting to see what happens in BC if Ontario backs down from this evil tax.

Tax Guy August 10, 2009 at 8:36 am

@ Graham B

For most taxpayers on Ontario and B.C., the HST should be a non-event because the rate of sales tax you pay would not be different.

For businesses, the implementation of HST involves cost to update software and cash registers as well as understand and train staff to manage the new program. However, these are one-time costs.

The real benefit is that the provincial government will no longer manage the program shift that work to the federal government. Provincially there are significant cost savings as they no longer manage the program.

The biggest issue in Ontario was the fact that some items that were previously non-taxable would now be taxable under the HST regime. In addition, there was the issue of certain financial services fees charged by financial institutions that may affect all Canadians. It appears this is the same issue in B.C.

From my perspective, the move to HST is very positive, although Ontario and B.C. provincial governments must ensure they are clear their intent is to add more services to the tax base or make provisions to ensure previously PST free items remain that way.

dumb guy September 23, 2009 at 1:23 pm

wrong calculations?
the new hst replaces the gst so you wont be charged an EXTRA 15% on top of the GST?

wouldnt it effectively only add 10%?

not that thats good it sux … just want to get the numbers right

Tax Guy September 23, 2009 at 2:01 pm

The GST is currently 5% and the Ontario PST is currently 8%. Combined they are 13%.

GST is currently charged on the mutual fund fees.

If the fund earns 9% before the 2% MER (including GST) is charged, then it has a net return of 7%.

If the HST replaces the GST, the MER increases by the amount of PST included in the HST or 8%.

The new MER increases from 2% to 2.15% (2 / 1.05 x 1.13).

Sivakumar October 15, 2009 at 5:37 pm

Let us not forget the fact that Mr. McGUILTY will get his pension indexed with cost of living and living on the interest amazed on so many “health premiums” + eHealth of 1B dollars, he does not give a rat ass about any common man or women who works on double or more jobs to make ends meet.

Mr. McGuilty: how do you sleep at night?

Tax Guy October 15, 2009 at 7:07 pm

I’m not sure I see a connection between a politician’s pay and the HST.

Dude where's my money? December 10, 2009 at 8:34 am

If your calculation is correct, this is much better news than I thought. I thought it would mean an 8% take of the total amount. So if I were to withdraw my fund at that point I would take an 8% hit. I was ready to pull my funds right away.

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