Karen Mazurkewich, Reuters November 13, 2009

For Canadians trying to plan for retirement, a new harmonized sales tax will cut into your savings.

That is the message the mutual fund industry is now trying to get across to both the federal and provincial governments following Ontario Finance Minister Dwight Duncan’s recent announcement that the province would not exempt mutual funds when the provincial sales tax and federal goods and services tax are harmonized next July.

Investors now pay 5% GST on management fees and most operating expenses of mutual funds and segregated funds. A harmonized tax means these fees will be further taxed by 8% in Ontario and 7% in British Columbia, the other province set to combine the retail sales taxes.

That has the mutual fund industry crying foul.

“Relative to other financial products the tax is higher,” Joanne De Laurentiis, president and chief executive of the Investment Funds Institute of Canada, said Friday. “The problem goes back to the way GST is structured.”

Since the early 1990s, mutual funds services have been subject to GST, whereas other investment vehicles such as equities, guaranteed investment certificates, bonds and term deposits were not.

“There was already a gap between mutual funds that were charged GST and other investment solutions, and now that gap just gets 7% to 8% bigger,” said Glen Gowland, president and chief executive of Scotia Asset Management.

“The ideal solution would be to go back to change the policy framework at the federal level, and then harmonization wouldn’t be an issue,” said Ms. De Laurentiis.

But when Ottawa signalled such a review would come later, the lobby turned to the Ontario government for relief via rebates. Those talks continue.

The tax debate comes at a tumultuous time for the mutual fund industry. Not only has it faced a dramatic decline of assets under management to $567.6-billion as of Aug. 30 from $641.8-billion in 2007, but it’s seen administration costs rise with new regulations on disclosure.

“[The new sales tax] is one of those things we can’t continue to turn a blind eye to,” said Mr. Gowland of Scotia. “All those costs will be passed on and they have to be reasonable or people will look at alternatives.”

If no tax concessions are made, the industry warns, management fees will rise dramatically. And it won’t just be investors in Ontario and B.C. feeling the pain.

Mutual fund products are created and sold nationally, so the tax will be averaged out and charged to all investors.

“We have no mechanism in our existing structure to parse out the tax because these are co-mingled products,” says Charles Sims, president and chief executive of Mackenzie Financial Corp.

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