Saving For Retirement to Cost Canadians More Due to New GST/HST Rules

March 29, 2010, (Toronto) – The Investment Counsel Association of Canada (“ICAC”), the voice of the country’s portfolio managers and investment counsellors, today urged the federal government to reverse its plan to modify the Excise Tax Act  to spare Canadians from the burden of paying more tax for professional investment management services.

“Canadian investors and pension plans have been striving  to regain lost capital since the recent economic downturn,” said Katie Walmsley, ICAC President.   “Although the capital markets have taken a positive turn in recent months, the addition of HST in BC and Ontario will result in a new tax on investment management services at a time when Canadians can ill afford it.  We believe there needs to be a moratorium and a period of consultation to ensure the resulting tax treatment is fair and clear and to allow Canadians and their investment managers time to plan accordingly. Taxation is necessary in our society but it’s important that the playing field is level among the different forms of financial services and that Canadians understand the impact of tax and any new tax (HST) on their investments and savings.”

The ICAC has long advocated for changes to Federal taxation with a view to improving the ability of Canadians to properly save for retirement and live on their pensions and life savings.   The organization – which represents Canadian investment management firms with over $700 billion of assets under management – would prefer to see no additional HST on discretionary investment fees.  The ICAC was pleased with the Federal government’s announcement of a Canada-wide consultation process on pension and retirement savings, and are hopeful the Government will see the opportunity to assist Canadians in reaching their retirement goals by minimizing the GST/HST impact on their retirement savings.

Background Facts:

  • Since the inception of GST in 1991, some financial services have been subject to GST and some have not.  With British Columbia and Ontario harmonizing tax in July 2010, some financial services will have an additional 7 or 8% tax added on services while some will remain GST/HST exempt;
  • Discretionary investment management fees (i.e. fees paid by pension plans to manage their investments or individual Canadians hiring investment counsellors to manage their portfolio) have been subject to GST since 1991 while broker commissions and sales of financial products by non-commissioned employees have been GST exempt;
  • In April 2009, the Federal Court of Appeal upheld a decision of the Tax Court of Canada in the Queen vs. The Canadian Medical Protective Association (“CMPA”) that “discretionary” investment management services are a “financial service” and therefore should be exempt from GST;
  • On December 14, 2009, the Federal government announced its intention to introduce legislation at its earliest opportunity to support the continued taxation (GST) of discretionary management fees and in effect overrule the CMPA court decision;
  • In February & March, the Federal government, through subsequent communications, clarified what financial services will and will not be subject to GST and eventually HST in harmonizing provinces; recent communications suggest the potential addition of broker commissions and continued inclusion of discretionary management services.

Example of Tax Impact

For the purposes of illustration, assume a 45 year old Ontario-based couple with $200,000 in RRSPs pays 1.25% (of assets managed) per year for discretionary management of their portfolio. This equates to $2500 plus $125 of GST.  After HST comes into effect in Ontario, in 20 years, the couple will pay an additional 8% or $200 tax each year, or  an extra $4,000 overthe 20-year period.

Wrong Timing, Wrong Result

ICAC’s Chairman, Bob Hill of Coleford Investment Management said: “These are complex issues with financial products and services being offered across Canada in different provinces with different tax rates; we recognize the challenge faced by Ottawa in providing clarity and fairness however, we ultimately believe now is not the time to introduce an additional tax on Canadian’s pensions and retirement savings.”  The ICAC is urging the government to seek further consultation on the impact of the proposed new GST and HST rules before moving forward.

About ICAC

The Investment Counsel Association of Canada (ICAC) is the representative organization for investment counsel and portfolio managers in Canada.  Our members are from across Canada and are comprised of both large and small investment management firms managing Canadian’s pensions and retirement savings.   ICAC was established in 1952 and its current members are responsible for managing in excess of over $700 billion of client assets.  The overall mission of the Association is to  advocate the highest standards of unbiased portfolio management in the interest of investors served by Members.  Member firms are only in the business of managing investments for clients in keeping with each client’s needs, objectives and risk.

For further information contact:

Katie Walmsley,
Investment Counsel Association of Canada
Toronto, Ontario