With two provinces set to harmonize their sales taxes with the GST next year, the Investment Funds Institute of Canada is calling on the federal government to change the application of GST on mutual funds to prevent a surge in taxes on Canadians’ savings.

On Thursday, Joanne de Laurentiis, president and CEO of IFIC, held a conference call with members of the media to generate awareness of the impacts of the harmonized sales tax. While IFIC supports the HST for the economy at large, the association is concerned about the impact it will have on mutual fund investors.

“As an industry we fully support sales tax harmonization,” said de Laurentiis. “Our concern is that with the harmonization announcements by B.C. and Ontario, our fund holders face a significant increase in tax.”

The association disagrees with the way mutual funds are treated under the GST. In particular, GST applies to all goods, services and labour used to supply mutual funds, including labour and earnings, which are not taxed for GICs, securities and other non-fund products. As a result, Canadians pay four to five times more tax on mutual funds than other investment products, according to IFIC.

Under the HST regime in Ontario, set to be introduced in July 2010, the taxes paid on mutual funds will surge by as much as 160%. This is particularly concerning since the majority of mutual fund holders are middle class Canadians, and more than 70% of funds are held in retirement savings vehicles, according to de Laurentiis.

“The impact of the harmonized tax is on retirement savings of Canadians — an outcome that we think is pretty undesirable, given that we have a collective public policy concern about whether we are saving enough for retirement,” she said.

IFIC is urging the federal government to change the application of GST on funds and set it at a rate to yield an equivalent tax to that charged on non-fund products. By changing the application of this tax at the national level, it will automatically apply in B.C. and Ontario when the two provinces harmonize their taxes, according to de Laurentiis.

She noted that other countries, such as Australia and New Zealand, have similar sales tax exemptions and credits for mutual funds.

“It’s time to modernize the GST policy to bring it in line with other VAT and GST regimes,” said de Laurentiis.

Implementing the national change would require no additional compliance, and would prevent fund companies from having to develop different series of funds for various provinces that have different tax regimes, she added.

IFIC is having discussions with the federal government as well as the governments of B.C. and Ontario on this issue, de Laurentiis said.

“There is a simple fix to this,” she said, “it’s modernizing the way GST is applied at the federal level.”

IE