Beware the HST grab

The tax grab arises from Ontario 's plan to combine its provincial sales tax with the federal GST to create a harmonized sales tax (HST). The move was announced in the March provincial budget and is scheduled to take effect one year from now, on July 1, 2010. One of the results will be a big increase in the tax on mutual fund fees.

Three Atlantic provinces (New Brunswick , Nova Scotia , Newfoundland and Labrador) moved to an HST several years ago but this issue did not arise at that time because no major fund companies are based there. Ontario is an entirely different story. Although its HST will theoretically apply only in Ontario , it could end up hitting investors across Canada unless some kind of allocation system can be worked out.

Most people don't realize it, but Ottawa already takes a small piece of their returns from mutual funds. That's because the 5 per cent GST is applied to certain financial services, including mutual fund management fees. As a result, investors currently pay an additional 0.1 per cent on a 2 per cent management charge.

This has resulted in a tax bonanza for the federal government. The size of the mutual fund industry has increased 20 times since the GST was first introduced. According to estimates prepared by the Investment Funds Institute of Canada (IFIC) the industry now has about $632.7 billion in assets under management (including IFIC members and non-member companies such as CI Funds). Using an average MER of 1.9 per cent (not including GST), this means about $12 billion is subject to the tax which works out to about $600 million a year for Ottawa 's coffers. And this does not include revenue derived from exchange-traded funds (ETFs), segregated funds (insurance companies), and pension plan funds.

(It's worth remembering that the GST is collected even if your fund loses money. You may be out of pocket but the government never is!)