By: Larry MacDonald

The Ontario government is tabling its proposed HST legislation this week (tax to come into effect July 1). B.C. is also moving forward on its HST.

You can calculate how much HST you’ll be paying with this calculator on the National Citizens Coalition website

On Nov. 12, the Ontario Government announced exemptions for prepared food and beverages sold for $4.00 or less and print newspapers

The Premier says the exemptions granted Nov. 12 will be the last.

Over time, the HST on mutual fund annual MERs can add up to a large sum. “… if you invest $10,000 every year for 25 years, assuming a management expense ratio of 2.6% and an annual rate of return of 6%, you will end up paying a total of $9,100 more in [HST] …”

Mutual-fund companies fear investors will switch to ETFs because the HST burden will be much lighter on their substantially lower MERs.

Mutual fund companies not headquartered in a province charging the HST (e.g. Investors Group in Winnipeg and Mawer in Calgary) will escape the HST and thus have a competitive advantage because of the HST.

HST a disincentive to saving for retirement.

A recent report by Jack Mintz projects the HST and other tax cuts in the 2009 provincial budget would create $47 billion in new investment in Ontario and 591,000 jobs over 10 years (the bill will “introduce sweeping corporate tax cuts that will reduce taxes on new investment to 23.7% in 2010 from 33.6% one year earlier. That rate will fall even further, to 18.5 %, by 2018).”

Summing up:

1. Many groups and academics laud the HST as good for the economy. The PST is a bad tax, they say, because it falls on business inputs and cuts into capital investment and jobs. But hasn’t anyone thought of eliminating the PST on business inputs by instead cutting out some of the wasteful and unnecessary spending in the government? According to an international study, 25% of government spending falls into the wasteful category. Wow – lower taxes without a material reduction in public services – wouldn’t that be much more of a boost to the economy?

2. Opposition leaders and various citizen groups have condemned the HST. But where were they before? The HST just makes visible the provincial sales tax that was hidden in the inputs purchased by businesses (and passed onto consumers). Shouldn’t they have been hammering away at the tax before (when it was, to a large extent, hidden)? Yes, but it appears Canadians are so dumb  that they’ll gladly pay taxes as long as they don’t see them (like the goose whose feathers are getting plucked).

3. The HST on mutual funds and ETFs doesn’t seem to make sense given the administrative and compliance problems: i) funds have an inventive to shift headquarters to provinces not charging HST, and ii) charging HST on mutual-fund investors living in non-HST provinces is a challenge.

Appendix:

The Investment Funds Institute of Canada raises more problems with applying the HST to mutual funds.

“Ontario and B.C. will be the first provinces to levy a sales tax on mutual and other types of funds (8% and 7% respectively) as all Canada’s currently harmonized provinces provide rebates or equivalents to funds.”

“Canada is an outlier compared to other jurisdictions: European countries, as well as Australia and New Zealand, treat management and advisory services much more favourably than in Canada, whether through sales tax exemption or credits.”

“Discriminatory level of tax levied on funds: Under the GST and HST, the issue is not that mutual fund services are taxed; it’s that they are taxed at effectively four to five times the rate that guaranteed investment certificates (GICs), equities, bonds, term deposits and other non-fund financial vehicles are.”

“Some pension plans pay no sales tax at all and Canadians who have access to private-sector defined benefit plans also pay less tax than Canadians who save in an individual retirement savings plan. At the end of 2007, Canadians had $739 billion invested in individual retirement savings plans, such as RRSPs and RRIFs, which means that holders of at least 41% of all retirement savings in Canada were at a relative disadvantage to holders of other Canadians saving for and in retirement.”