A report published Friday challenges the way the Goods and Services Tax (GST) is applied to financial services such as mutual funds and insurance.
The report from the School of Public Policy, University of Calgary, finds serious flaws with the current application of the exemption-based approach applied to financial services.
Under the exemption approach no GST is levied on transactions designated exempt under the GST, nor is a financial institution able to recover the GST on inputs used to provide the good or service.
“When a financial institution is not able to recover GST on its purchases of inputs, the GST will be embedded in the price charged for those financial services,” write the report’s authors Ken McKenzie and Michael Firth. “This will be true for both consumer and business purchases of financial services.”
“Consumers should choose among various financial services — investing in GICs versus mutual funds, term versus whole life insurance, etc. — on the basis of their relevant merits, not because of differences in effective tax rates due to differential treatment under the GST,” they write.
McKenzie and Firth propose several tax reforms to rectify these issues. They recommend retaining the exemption-based approach, but offer up several ways in which it can be improved. One of these is the zero-rating of business-to-business transactions by allowing businesses to recover GST paid on inputs related to providing financial services. To accomplish this goal, a new system for determining recovery of GST by financial institutions will need to be created, including rules around attributable costs. A system for taxing imported supplies will also be needed.
They also recommend that all financial services be treated in a similar matter and taxed at the same effective rate so that consumers face a “level playing field between different types of financial services.”