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McGuinty eyes changes to harmonized sales tax

TORONTO -- The McGuinty government says it is considering "modest changes" to its controversial harmonized sales tax, but sent mixed signals about how far it would go in response to a lobbying campaign by the mutual fund industry.

The industry has warned that the government will siphon money out of the retirement nest eggs of Canadians as part of its plan to combine the provincial sales tax with the federal goods and services tax. The industry says investors will pay another $500-million a year in management fees when the harmonized tax takes effect next July 1, and is asking for an exemption.

"I know that there are some modest changes that Finance Minister Dwight Duncan is looking at," Premier Dalton McGuinty said yesterday, hinting that some relief might be in store for mutual fund investors.

But Mr. Duncan appeared to pour cold water on the Premier's comments. While he said he has met with mutual fund executives on two occasions, he said he has sat down with dozens of other groups as well.

"We are talking to a lot of people about a lot of things, and I would caution against drawing conclusions at this point," he told reporters.

Mr. Duncan and his officials have told fund executives that they have no plans to make mutual funds exempt from the harmonized tax, said the president of a fund company who asked not to be named. "We were told there will be no more exemptions," he said.

However, the executive said Finance officials have indicated they are willing to consider other alternatives to help ease the increase in fees for investors. He said it is not known what those alternatives might entail.

Sources close to the government said Mr. McGuinty understands that there is much more at stake than just keeping mutual fund executives happy. Executives have made it clear to government officials that without some type of relief, there could be an exodus of jobs from Toronto, the country's financial capital, the sources said.

"The case has been made and very bluntly by some," one source said.

The industry will have more difficulty competing against other sectors if the fees on mutual funds are disproportionately higher than on other financial products, executives have said. Mutual funds will be taxed at four to five times the rate of other savings vehicles, such as guaranteed-investment certificates, which will be exempt from the new tax.

Fund companies will be under pressure to reduce costs and that could lead to job losses, industry officials said. As well, CI Financial, Canada's third-largest fund company, is considering creating a series of mutual funds that would be marketed just to residents of Alberta, a province with no sales tax. CI would relocate some employees to Alberta from Toronto, and other companies would likely follow, CI president Stephen MacPhail said in a recent interview.

Clients of CI will pay an additional $70-million to $75-million in fees because of harmonization, he said.

"You weigh that off against the cost of moving to Alberta," he said. "That means fewer jobs in Toronto and more jobs in that province."

The McGuinty government has hit back at the fund industry for making its complaints about the proposed harmonized tax public. The Globe and Mail reported earlier this month that the government has threatened the industry with a PR offensive against management fees unless fund executives mute their objections.

© 2007 The Globe and Mail. All rights reserved.

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