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Ontario Finance Minister Dwight DuncanMark Blinch

The Ontario government has threatened Canada's mutual fund industry with a PR offensive against management fees charged to investors, unless fund executives mute their objections to proposed sales tax changes.

Industry executives have complained that the government's plans to harmonize the provincial sales tax with the federal goods and services tax will siphon money out of the retirement nest eggs of Canadians. But after an article published in The Globe and Mail this week, officials in Finance Minister Dwight Duncan's office said they are prepared to release a document on the negative impact of management fees for investors if executives continue to complain in public, industry sources said.

The move has left industry executives reeling.

"Everyone was in shock," said the president of a fund company who asked not to be named.

Mr. Duncan said he is not aware whether his officials have compiled information that would help investors better understand the cost of owning funds. But he said he fully supports any measures that would enhance transparency for investors.

"I believe the clearer and the more transparent these things are, the better," Mr. Duncan said in an interview yesterday. "If we learned anything a year ago with the closing of Lehman Brothers, when issues of this nature aren't clear and transparent, problems happen."

Industry executives say investors will pay another $500-million a year in fees once the proposed harmonized tax takes effect next July 1 in both Ontario and British Columbia. There is currently no provincial tax on mutual funds in any province, while the 5-per-cent GST is already applied and included in fees. A move to include funds in a harmonized tax would mean an extra 8 per cent on management fees in Ontario and 7 per cent in British Columbia.

It was the industry's drawing attention to these additional costs that led to an exchange this week between Mr. Duncan's office and the sector. The message was delivered by Darcy McNeill, director of communications for Mr. Duncan, to an official at a fund company, who in turn circulated it widely throughout the industry, sources said.

"They are formulating a plan of defence and if need be, attack, to counter future negative articles on the HST," says an e-mail summary of the conversation obtained by The Globe.

"Basically what happened, was they voiced their displeasure with us," said the president of another mutual fund company who also asked not to be named.

Mr. McNeill denied delivering the message.

"I certainly never said anything like that," he said yesterday.

Harmonization is aimed at making businesses more competitive. But the Ontario and B.C. governments are under siege for hitting consumers with a tax on everything from haircuts to new home purchases over $500,000. The premiers of both provinces have moved to douse a firestorm of criticism over the harmonized tax by exempting a number of basic goods, including children's clothing and diapers.

"It's the wrong signal to send in tough economic times," said Lisa MacLeod, revenue critic for the Ontario Progressive Conservatives. "They're nickel and diming people who are saving for their retirement."

Industry executives said they were not prepared to speak for attribution about the threat from Mr. Duncan's office, because they are hoping they can persuade the Ontario, B.C. and federal governments to tax funds fairly.

But the executives were also taken aback at the comparison between Canadian fund companies and Lehman, the Wall Street investment bank that collapsed last year, and at least one was prepared to go on the record.

"This type of response to a significant industry in Ontario is very unproductive," said Bill Holland, chief executive officer of CI Financial. "To compare the mutual fund industry to Lehman Brothers borders on the absurd."