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Mutual Fund News

Small fund player gives investors a tax break

INVESTMENT FUNDS REPORTER

EdgePoint Wealth Management Inc. plans to set up a special series of mutual funds in provinces that do not have a harmonized sales tax (HST) so that its investors in those regions won't be unfairly dinged by higher fees.

The decision by the Toronto firm, which was founded by managers who cut their teeth at Trimark Financial Corp. in the 1990s, is the latest move by smaller fund players to give investors in non-HST provinces a tax break.

Larger players such as CI Financial Corp. and DundeeWealth Inc., which sells the Dynamic funds, aren't ruling out the possibility of taking the same path, even if they are now applying the HST through a so-called blended rate that varies per fund.

Because mutual funds are pooled investments, investors in provinces that charge only the 5-per-cent federal GST end up paying higher costs from the new HST applied on July 1.

"We think it is flat-out wrong to expect investors in non-HST province like Alberta and Manitoba to subsidize investors in HST provinces, like Ontario and British Columbia, by paying this tax," Patrick Farmer, chief executive officer of EdgePoint, said Monday.

Even with a blended rate, investors in non-HST provinces may end up subsidizing peers in the HST provinces by paying more than the 5-per-cent GST on their funds, Mr. Farmer said. "It's not in the best interests of all investors," he said, adding that if a unitholder moved back to an HST province, he or she would go back into the regular HST fund. "It would be a non-taxable transaction."

EdgePoint, which has about $1.2-billion assets, will roll out its new series in four funds at the start of August, pending regulatory approval.

Smaller fund players can be more nimble in creating a new fund targeted at investors in non-HST provinces, but it could be an administrative headache for giant firms with hundreds of funds should their investors move, Mr. Farmer said.

Brandes Investment Partners & Co. recently launched a new series for non-HST provinces but only for its four largest funds, including its Brandes Sionna Canadian Equity run by high-profile manager Kim Shannon. It is also eating the higher HST costs in its other funds until at least the end of the year.

Hartford Investments, a unit of U.S.-based Hartford Financial Services Group, is absorbing the higher HST costs in its 18 funds until it figures out what to do.

"We would like to take some time to figure out the best and fairest way to charge the taxes," said Mary Taylor, a senior vice-president of marketing.

CI Financial, which lobbied unsuccessfully against applying the HST to mutual funds, is looking at launching a special fund series in non-HST provinces, CEO Bill Holland said. "We are considering other classes of funds. We just don't know if that is the best way to do it."

He took issue with a notion that firms eating the HST on funds might be considered doing a noble deed.

"If you eat it, it is just called lowering your fees," Mr. Holland said. "The only thing that matters is the total fee charged. If a company that is charging super-high fees says it is eating the HST, and yet their fees are still higher than CI's, what difference does that make? We have been the undisputed leaders in cutting expenses charged to mutual funds."

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BLENDING THE HST

Until recently, investment funds had to pay only the 5-per-cent federal GST on management fees and most operating expenses.

But with the harmonized sales tax that combined the goods and services tax with the provincial tax in some provinces as of July 1, the higher cost associated with the HST applies to all funds. Investors are affected even if they don't live in the HST provinces of Ontario, B.C., Nova Scotia, New Brunswick and Newfoundland and Labrador.

Because funds are pooled investments and it is hard to administer the tax according to where investors live, most companies have opted for a government-approved blended-rate option.

That means a different HST rate is charged per fund based on where investors live and the market value of their assets.

For example, a fund might have 50 per cent of its assets in Alberta (which charges a 5-per-cent GST); 25 per cent in Ontario (13-per-cent HST) and 25 per cent in B.C. (12-per-cent HST).

The effective tax rate would be 8.75 per cent no matter where unitholders live.

Shirley Won

© 2007 The Globe and Mail. All rights reserved.

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