Funds lose fight for tax exemption

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The Ontario government's refusal to exempt the mutual fund industry from proposed tax changes is "disappointing," but both sides are still talking about other ways to help investors from bearing the brunt of an extra levy on savings, says the head of the Investment Funds Institute of Canada.

"We are still talking, and we are still hoping that there will be some relief," IFIC's chief executive officer Joanne De Laurentiis said Thursday after Ontario announced exemptions on certain items when Ontario harmonizes its sales tax with the GST.

"In order not to have investors in our province pay tax [on their mutual funds] they could provide a rebate."

Ontario could still opt to provide some kind of rebate to the fund companies, Ms. De Laurentiis said in an interview. "We have put that on the table … The discussions haven't ended."

There are currently no provincial taxes on mutual funds in Ontario and also British Columbia, which also plans to harmonize sales taxes with the GST. The industry has said harmonization would mean an extra 8 per cent on management fees in Ontario and 7 per cent in British Columbia.

The Canadian fund industry has been lobbying both provincial governments extensively, saying mutual funds are already been unfairly taxed at four or five times the rates of other savings vehicles, such as term deposits, guaranteed investment certificates and stocks.

Coffee, snack foods under $4 and newspapers are being exempted from the Ontario government's proposed harmonized sales tax.

Finance Minister Dwight Duncan made the announcement at a Tim Horton's in Toronto Thursday. "For many of us, a trip to the local coffee shop is more than a case of getting our double-double," he told reporters. "It's a gathering place."

Mr. Duncan said he is simply extending a tax exemption on these goods that has been in existence since 1961. The exemption will cost the provincial treasury $325-million a year in lost revenues, including $65-million for newspapers purchased on newsstands and through subscriptions.

However, Mr. Duncan made it clear that there will be no further exemptions for other groups that have lobbied the government for relief, including the mutual fund sector.

The mutual fund sector should not take this announcement as a signal, Mr. Duncan said. "This is really more about maintaining an existing exemption."

But Progressive Conservative MPP peter Shurman told reporters he expects further exemptions because this announcement reveals that Mr. Duncan responds to pressure.

"If he caved on this he will cave on other things," Mr. Shurman said.

The McGuinty government plans to introduce the harmonized tax legislation next Monday.

The government has been under siege by opposition members over its proposal to combine the 8 per cent provincial tax and the 5 per cent federal goods and services tax into a new value-added tax of 13 per cent tax - an initiative made possible with $4.3-billion in federal funding over two years.

Harmonization, which will take effect on July 1, 2010, is aimed at making businesses more competitive. But the government is facing criticism for hitting consumers with a tax increase on items ranging from newspapers to home heating fuels when they can least afford it.

Progressive Conservative Leader Tim Hudak and New Democrat Leader Andrea Horwath have both said harmonization is little more than a tax grab aimed at benefiting businesses at the expense of consumers.

This is the second time the government has unveiled revisions to the proposed tax since it was introduced in the provincial budget last March. In June, the government said Ontario residents buying a new home for less than $400,000 next year would experience a little less sticker shock. The government announced an enhanced rebate that would see the harmonized tax charged only on the amount of the purchase price over $400,000 instead of on the entire price.

British Columbia also plans to harmonize its sales taxes next July 1. A report by economists at Toronto-Dominion Bank said consumers will bear the brunt of proposed tax changes in Ontario and British Columbia while businesses will reap windfall savings of $6.9-billion.