The Investment Funds Institute of Canada. Death and Taxes. Presentation on Federal/Ontario Sales Tax Harmonization

Transcription

1 The Investment Funds Institute of Canada Death and Taxes Presentation on Federal/Ontario Sales Tax Harmonization April 21, 2009

2 Thanks to

3 Agenda Why harmonize? Finn Poschman, Conference Board of Canada Harmonization and financial services Mike Firth, PriceWaterhouseCoopers Fund industry concerns and action Barb Amsden, IFIC Questions

4 Why harmonize? Finn Poschmann

5 METRs on capital investment 2007, 2008, 2012, Harmonized Effective Tax Rate (%) Nfld & Lab Prince Edw ard Island Nova Scotia New Brunsw ick Quebec Ontario Manitoba Saskatchew an Alberta British Columbia Canada United States Harmonized METR: Marginal effective tax rates

6 Harmonization and financial services Michael P. Firth

7 Sales taxes in Canada In the beginning.., 1 January 1991 Federal GST replaced outmoded FST Ultimate objective was harmonized fed. prov. taxes across Canada Rewards included: Elimination of taxes from exported goods and services Massive compliance + efficiency savings for government and industry

8 GST liability A supply can be: Taxable at 13%, 5% or 0% or Exempt Financial services Exempt from GST Result is supplier cannot recover GST on costs of making an exempt supply Management fees charged to mutual funds are taxable

9 Progress so far 1992 Quebec implements provincial QST harmonized Provincial statute Province collects, administers GST AND QST Notable differences to GST Zero-rating of financial instruments and services Quebec mutual fund registers for QST and recovers all QST borne For FIs, compensatory salary and capital taxes (but not on mutual funds) Equal to QST previously borne by FIs

10 Progress so far (cont d.) 1997 Nova Scotia, New Brunswick and Newfoundland harmonized Single, federal tax, HST is a new chapter of the federal Excise Tax Act 7% (then) GST + 8% HST = 15% combined rate Federal statute Financial services Exempt for HST purposes Cost disparity between FIs in harmonized zone and those outside How to equalize this?

11 HST/GST cost disparity for FIs Example: Toronto LifeCo. Costs + 7% GST Halifax LifeCo. Costs + 15% GST/HST Disparity is equalized by the Selected Listed Financial Institutions formula Non-recoverable GST x 8/7 x % of income allocated to HST provinces HST actually paid = HST Payable Toronto LifeCo Modest payment Same net HST cost to Halifax LifeCo Large refund sell policy in HST zone Note: HST cost for both is modest, as HST provinces are a small part of Canada s financial market Compliance is currently patchy

12 Current HST rebates For a fund based in the HST zone, there is a current provision for a rebate of HST to the extent that unitholders reside outside the HST zone

13 The next chapter Ontario To harmonize 1 July 2010 Why the 15-month delay? Financial services exempt No relief for FIs Very rigid structure No room for any further concessions by Ontario? Quebec Now making harmonization noises Will financial services become exempt for QST purposes?

14 What is the incremental cost in the fund sector? Fund Manager Fund Sector Fund (Investor) Dealer/Advisor

15 What is the incremental cost in the fund sector (cont d.)? Fund Manager Gains PST savings, no incremental HST cost Fund GST/HST 5% 13% Dealer Advisor Minimal GST recovery levels, incremental HST cost Gains PST savings, no incremental HST cost

16 Current situation Manager Management Services (Taxable) Fund Intermediation (Exempt) Advisor/Intermediary

17 Alternative Manager Advice (Taxable) Fund Advisor/Intermediary Advice (Taxable) Investor Intermediary fully recovers GST/HST costs

18 Any relief for funds will be considered in conjunction with: Pension funds Segregated funds Note

19 Also relevant to GST and investment management Decisions rendered 16 th and 17 th April in Canadian Medical Protective Association General Motors of Canada Limited Confirms exemption of some investment management services Recovery by some employers of ITCs on pension management costs

20 All s fair? Barb Amsden The Investment Funds Institute of Canada

21 Outline Review: A few misconceptions History of the GST; why it s an issue now Industry concerns costs and more Strategic business implications What are IFIC and other associations doing what you can do

22 A few myth-takes Investment advice to mutual funds is NOT a financial service it s taxable, not exempt Exempt does NOT mean no GST no GST charged directly, but FI pays GST on third-party purchases and rolls it into service price

23 Why so big a problem now? In 1988/89, goal the broadest base and lowest rate didn t happen Major GST impact on our industry due to other factors at the same time IFIC a small player Falling rates, growing returns, more tax deductibility, reduced foreign investing restrictions 17-fold increase in funds GST a growing and now huge issue

24 Industry concerns: tax cost Before Ontario harmonization, playing field already unlevel between different investment products, investors Retirement savings sector very lop-sided: OMERS doesn t pay GST; private-sector pensions, RRSPs do Harmonization only increases disparities

25 Industry concerns: admin cost Current rebate structure presents challenges Options: Different series of units? Different funds? (within/without zone)

26 Other industry concerns Tax-advantaged RRSP, other savings plans designed to encourage saving Paradox to save tax by saving and lose savings by sales tax

27 Industry objectives Level playing field between investors, products No impediments to saving for retirement Following the lead of other countries, lower sales tax on investment management Simple to administer

28 Likely Ontario concerns Capital mobile; fund managers can move to Alberta (no sales tax) to avoid HST If businesses move, so do sales, corporate income, personal income tax Multiplier depressing effect on Ontario Reputational effects mean long-term growth impact on Toronto, Canada

29 A reality check Ontario can t afford to lose revenue Complex rules likely to remove incentive to lower HST by relocating or sourcing outside HST zone Long federal history of preserving the tax base (retroactive legislation) Another source is federal government feds benefited at Ontario s expense

30 What different sectors want Advocis CBA CLHIA CUCC IIAC IFIC

31 Where to next Meeting with Ontario government Board meeting April 29 to confirm position and direction Need your involvement Stay tuned

32 Questions?

33 Thanks for joining us