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mutual funds

The mutual fund industry is pressing the Ontario, B.C. and federal governments to tax funds fairly when they harmonize provincial sales taxes with the GST, warning them against siphoning off retirement savings from consumers.

Several meetings have already been held, and are expected to continue, in the runup to next summer's harmonization. It's the latest skirmish over taxes in the two provinces, with huge stakes for the industry, which manages more than $600-billion in assets now that mutual funds have become the investment choice for many Canadians.

Canadians outside Ontario and British Columbia could also end up paying sales taxes charged by those provinces because it may be difficult for firms to avoid charging the taxes on funds that are marketed across the country, industry executives said. Like the GST, fund companies would apply the new taxes across the board. Only those funds marketed exclusively to Alberta residents would avoid the provincial taxes.

One of Canada's biggest fund companies, CI Financial Corp., says it is examining the possibility of creating new funds for Alberta, where residents could save on lower costs because there is no provincial sales tax. Another major player, Mackenzie Financial Corp., isn't ruling out a similar move, but does not want to go that route.

There is currently no provincial tax on mutual funds in Ontario and B.C., while the GST is already applied and included in fees. A move to include funds in a harmonized tax, the industry says, would mean an extra 8 per cent on management fees in Ontario and 7 per cent in B.C.

According to calculations done by Mackenzie Financial, an individual with $100,000 invested in a mutual fund earning a return of 8 per cent a year will pay $194 in additional taxes in the first year alone. Over 10 years, the tally could climb to $2,460.

"If the Ontario government announced they were skimming one-quarter of a percentage point a year out of everyone's savings, chequing and GIC accounts, the outcry would be unbelievable," said Stephen MacPhail, president of CI Financial. "But because it can be hidden with mutual funds, the government appears to believe no one will notice."

Plans to harmonize Ontario and B.C. provincial sales taxes with the federal goods and services tax will discriminate against mutual fund investors, Joanne De Laurentiis, chief executive officer of the Investment Funds Institute of Canada (IFIC), warned in a letter to federal Finance Minister Jim Flaherty and his counterparts in the two provinces.

Mutual funds are already taxed at four to five times the rates of other savings vehicles, such as term deposits, guaranteed investment certificates and stocks, Ms. De Laurentiis wrote in the Sept. 2 letter.

IFIC, the industry's trade group, wants Ottawa and the provinces to impose a single, national sales tax on mutual funds equivalent to taxes on other investment products such as GICs and stocks and bonds.

Charles Sims, CEO of Mackenzie Financial Corp. and head of an IFIC committee on tax harmonization, said government officials are beginning to understand that inequities exist in the way the reforms are currently structured. Mr. Sims said that Mackenzie could sell lower-fee funds geared to Albertans easily since his firm already has operations in Calgary, but it is not keen to do so because it would add administrative headaches and additional costs. "Even if you set up products by province, who is to say that investors in the province don't move after they have invested in the fund?"

Ontario Finance Minister Dwight Duncan said he plans to keep meeting with executives from the industry. "We're a long way from implementation," he said. "We will continue to work with them."

Harmonization does not take effect until next July 1 in the two provinces. But it is shaping up to be a major political headache for Ontario Premier Dalton McGuinty and B.C. Premier Gordon Campbell. The Ontario government announced in March it plans to combine the 8-per-cent provincial sales tax and the 5-per-cent GST into a new valued-added tax of 13 per cent. B.C., looking to close a looming tax gap with Ontario, announced plans in July to create a harmonized sales tax of 12 per cent.