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Ontario deals blow to fund industry

Mutual funds miss sales tax exemptions, but vow to keep up the pressure for other means to ease the cost to investors

The Ontario government has refused to exempt mutual funds from its new harmonized sales tax, but the industry is now jockeying for other measures to try to shelter investors from paying an extra levy on retirement savings.

Ontario Finance Minister Dwight Duncan announced yesterday that coffee, snack foods under $4 and newspapers will be exempt when the provincial sales tax and the federal GST are harmonized next July.

But he made it clear that there would be no further exemptions for groups that have lobbied the government. The mutual fund industry had pressed hard for relief from the tax, warning that the HST will add an extra 8 per cent to management fees and drive up the cost of an investment product used by many middle-class Canadians.

"We are certainly disappointed, but we hope they are going to look at another solution," said Joanne De Laurentiis, chief executive officer of the Investment Funds Institute of Canada (IFIC), the industry's lobby group.

Ontario could provide a rebate to mutual fund companies so that individual investors don't have to come up with the extra money when the provincial sales tax is harmonized with the GST, Ms. De Laurentiis said. "We have put that on the table ... Discussions have not ended."

An Ontario government official confirmed that the fund industry has asked for rebates, but said the province is not seriously considering this option.

There are currently no provincial taxes on mutual funds in Ontario and British Columbia, which also plans to harmonize sales taxes.

The fund industry says the move would mean an additional 7 per cent on management fees in British Columbia.

Canadian investors outside those two provinces could also end up paying a higher tax because it may be difficult for firms to avoid charging the levy on funds that are marketed across Canada, the industry has said.

Stephen MacPhail, president of CI Financial Corp., said he was "disappointed" with Ontario's decision not to give the industry an exemption, but was unaware of talks to give fund companies some kind of a rebate. (CI is not a member of IFIC.)

CI Financial has said it was examining the possibility of creating new funds specifically for Alberta, which has no provincial sales tax, so residents there won't be forced to pay higher taxes.

While the fund industry has been lobbying Ontario and British Columbia for some kind of relief, it says the root of the problem stems from Ottawa's decision to apply the goods and services tax to investment funds since 1991.

Funds are being taxed at effectively at four to five times the rate of other savings vehicles such as guaranteed investment certificates, term deposit and stocks, the industry says.

IFIC wants Ottawa to apply a single national sales tax to mutual funds - one that would be much lower than the 5 per cent GST. That would effectively reduce the HST for those products in Ontario and British Columbia, Ms. De Laurentiis said in an interview.

If the federal government did so, "that would solve the problem because it would be a lower tax," she said. "We have never said that we are against fund investors paying any tax. We want to pay a fair level of tax."

Earlier, Mr. Duncan said the exclusion of items such as newspapers, coffee and snacks is simply extending an exemption that has been in effect since 1961.

But Progressive Conservative MPP Peter Shurman told reporters he expects further exemptions. "If he [Mr. Duncan] caved on this, he will cave on other things," he said.

© 2007 The Globe and Mail. All rights reserved.

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