This a guest column by Patrick Farmer, a founding partner of EdgePoint Investment Group Inc. and CEO of EdgePoint Wealth Management.
The proposed harmonized sales tax (HST) in Ontario contains a massive tax on your investments. The McGuinty government is proposing the harmonization of Ontario's provincial sales tax (PST) with the federal goods and sales tax (GST). The decision to jam an additional 8 per cent tax on the management expense ratios (MER) of your investment products is shockingly unwise and dangerous.
The vast majority of Canadian families appreciate the importance of saving for their retirement. In the face of this, the Ontario government has decided to levy an incremental tax on people who decide to invest a portion of their hard-earned savings to secure a better future for themselves and their families. To be clear, this tax will impact everything from your RESP's to your RSP's and RRIF's.
Is this logical? Is this responsible? Won't this add a disincentive for people to save at a time when fiscal prudence is of paramount importance? Hasn't the government been trying to promote savings?
Most of us have seen ill-advised public policy implemented during our lifetimes. Often, we just shake our heads and drive on. However, before you do so, let's look at how it will affect you.
Let's assume you are 45 years old, you invest $20,000 in a mutual fund inside your RSP, and this investment grows at 10 per cent per annum. We'll also assume that your mutual fund MER is 2.75 per cent so the harmonized sales tax (HST) would add approximately 0.22 per cent to the MER.
By the end of year one, your $20,000 would have been worth $22,000 before the tax grab. But, with the tax, you have only $21,956. A seemingly tiny $44 difference, thus increasing the likelihood the government slides in this tax without much of a fuss.
Interestingly, by the end of year two, you now only have $24,103 versus $24,200 (without the tax grab). That's a bigger difference of $97. Why isn't the difference $44 + $44 = $88? Because your investments are growing and the government is taking the same 8 per cent from your expanding pie.
By year 10, you are 55 years old. Luckily, the $20,000 you put in that mutual fund 10 years ago has grown to $50,847. You're content, but unaware that without the tax, you would have had $51,875......$1,028 more! The magic of compounding interest is starting to take hold. The $1,028 is now 5.1per cent of your initial $20,000 investment.
By year 20, you are 65 years old. Your initial investment has grown to a value of $129,269. Without the tax harmonization, you would have had $134,550.....$5,281 more or 26.4 per cent of your initial $20,000 investment!
Einstein once wrote that the 8th wonder of the world is compound interest. We have trouble debating him on that issue, especially if we consider the next 20 years.
By year 40, you are 85 years old. Your $20,000 has grown to $835,524. Without the new tax, you would have had $905,185..... a difference of $69,661 or 3.5 times your initial investment! The government has collected $69,661 from your initial $20,000 investment for a 350 per cent tax rate. What could you have done with that extra $69,661? Could that have made a difference in your life?
The reality is that this tax affects you much more than it affects mutual fund companies. It is charged to investors and passed along to the government, without even touching the bottom line of mutual fund companies. It is simply an additional cost to investors resulting in less money available for retirement.
Sometimes public policy has unintended consequences. We would hope that the government would not want to take 350% of your initial investment if they truly understood the consequence of this tax.
Because this affects you, we encourage you to take the time to help the government understand the consequences of this unintended tax grab by writing or calling your Member of the Legislative Assembly (MLA) today.
Written by Patrick Farmer and the team at EdgePoint Wealth Management. This opinion piece is based on the original letter published by EdgePoint Wealth Management Inc. on April 3rd, 2009.