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Mutual Fund News

Funds wrestle with HST complexities


Investment funds will be hit by a new harmonized sales tax (HST) to be applied on July 1 by Ontario and other provinces, but unitholders will end up paying different rates.

Because funds are pooled investments, companies are scrambling to implement a recent federal rule that requires the new tax to be based on where investors live and the market value of their assets.

That has sent many firms trying to calculate a "blended rate" to be paid by a fund that will incorporate the HST, which combines the provincial sales tax with the federal GST from various provinces, and the GST in non-harmonized provinces such as Alberta.

"It's a major administrative burden," said Joanne De Laurentiis, chief executive officer of the Investment Funds Institute of Canada, which represents the mutual fund industry. "It will be costly ...We are doing our best to comply."

For example, a fund could have 50 per cent of its assets in Alberta (which charges a 5-per-cent GST); 25 per cent in Ontario (which will charge a 13-per-cent HST) and 25 per cent in British Columbia (which will charge a 13-per-cent HST). The effective tax rate would be 8.75 per cent no matter where the unitholders reside.

Funds owned by Ontario investors could end up paying less than the province's 13-per-cent HST rate, while funds owned by unitholders in non-harmonized provinces will bear some of the provincial tax, Ms. De Laurentiis acknowledged in an interview on Tuesday. But it's still the most practical way to apply the HST to make the near-term deadline, she said.

The new taxes will apply to all various investment funds, ranging from mutual and segregated funds to exchange-traded funds. In the past, all funds were only subject to the GST. While the mutual fund industry has lobbied governments, it has been unable to get relief from additional taxes despite warnings that higher fees would siphon off retirement savings from investors.

Invesco Trimark Ltd., CI Financial Corp. and Franklin Templeton Investments Corp. are among the mutual fund companies that plan to comply with the new rules by using a blended tax rate.

"It's not the perfect solution, but it is the fairest solution based on the tax rules that we have been given," said Peter Intraligi, president of Invesco Trimark.

There are other possible options, such as creating a new series of funds for a province like Alberta, which has no provincial sales tax so residents there won't be forced to pay higher taxes. One problem with that solution is the administrative headache caused when investors move to a new province.

"Unfortunately, that option is going to create much higher operating expenses that will actually exceed the incremental tax of a blended rate," Mr. Intraligi said. "By trying to do something that seems notionally fair, you end up punishing unitholders through the form of a higher expense ratio."

ETF provider Claymore Investments Inc. will also charge a blended tax rate. Unlike mutual fund companies that have easy access to where their unitholders reside, "we have to send a letter to all of the brokerage firms and back offices that would have our unitholder lists and request them to send us this information," said Scott Bartholomew, vice-president of operations.

"We don't have a final value yet [for tax rates to be applied to the ETFs], but we are in the process of getting numbers done, and audited. We'll be ready to go on July l."

© 2007 The Globe and Mail. All rights reserved.

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