HST and your investments

I received the following bulletin from Mackenzie Financial on the effect of the new Harmonized Sales Tax (HST) on investments such as Mutual Funds and Segregated Funds.

How does Harmonization affect
Canadian mutual fund investors?
Mutual fund investors pay a management fee on their
mutual funds in order to obtain the benefit of professional
money management advice and other services.
Since professional money management is considered a
service, mutual fund investors currently pay 5 percent
federal GST on the management fee and certain
operating expenses of the investment funds. These costs
are included in the Management Expense Ratio (MER) of
each particular mutual fund.
As a result of the HST, investors will now be required to
pay an additional provincial tax on management fees (and
certain other expenses of the MER) where it did not apply
previously. Therefore, this will result in a proportional
increase in the MERs of mutual funds and an additional
cost to investors.
Higher taxes on mutual funds will result in lower returns
to investors. Using Ontario as an example, assume a
mutual fund has a pre-tax MER equal to 2.28 percent1
and earns an 8 percent rate of return.
Under the current rules, the MER is equal to 2.39 percent
when GST is applied2. In this case, the investor would
receive a net return of 5.61 percent. If the HST legislation
is approved, the MER will increase by a further 0.18
percent to 2.57 percent. As a result of the additional
taxes imposed by the government on mutual funds, the
investor’s return would be reduced to 5.43 percent. In
other words, this tax increase imposed by the government
will directly result in a lower net return to the investor.
The following chart summarizes the implications to
investors on investments returns because of HST.

In real dollar terms, assume you have a mutual fund

portfolio with a value of $100,000 and it earns an

8 percent rate of return annually. Using the figures

above, you would be subject to additional taxes

of approximately $194 at the end of the first year,

assuming the fee is charged at the end of the year. In

addition, since the tax is applied annually based on

the market value of the investments, the annual dollar

amount may increase over time.

As the chart below illustrates, the cumulative taxes over

a 10-year period as a result of the HST is approximately

equal to $2,460, assuming the investment grows at an

annual rate of 8 percent per year over 10 years.

TL;DR
HST will eat an additional 0.16% of your investment return
HST will cost you $1,608 extra when using the 10 Year, $100,000 example above.

Original Bulletin