Montreal, Thursday, October 1st, 2015 – Governments slow down Canadians’ efforts to save for retirement by unduly inflating mutual fund management fees, according to a Viewpoint published today by the MEI.
The share of sales taxes in the management fees paid by holders of mutual funds is more than 8%. This proportion is only between 1% and 3% for a guaranteed investment certificate, and is 0% when Canadians directly purchase securities like stocks and bonds.
Businesses are generally reimbursed for GST and provincial taxes. But mutual funds, due to legal subtleties, cannot be reimbursed for the GST and provincial taxes they have paid in carrying out their activities. These taxes therefore inflate mutual fund management fees and hence reduce the return on investments.
“This taxation, unique to mutual funds, represents significant amounts of money,” explains Mathieu Bédard, Economist at the MEI and author of the publication. “For an investor having placed $5,000 a year for 25 years in a fund with average returns of 8% not counting management fees, these taxes will have cost $7,307; for an annual investment of $20,000 over the same period, the share of taxes will be $29,228.”
Mr. Bédard adds that under the same assumptions, regardless of the amount invested, it will take 5 extra months to reach an investment objective that would have taken 25 years without taxes. “To make up for this shortfall, an investor therefore either has to contribute more, or make do with less, or delay his or her retirement.”
There is another disadvantage, especially for holders of mutual funds from the Western provinces: The sales tax levied on mutual funds reflects a weighted average of the sales taxes applied by each province. However, only the GST is applied in the Western provinces and the three territories, whereas much higher harmonized sales taxes are applied in the other provinces. As a result, investors from the West and the North end up paying provincial taxes to the Atlantic provinces, Quebec, and Ontario through their mutual funds.
The Viewpoint proposes to address the mutual fund situation by, for instance, applying the same rules that are applied to pension funds, namely a reimbursement equivalent to 33% of sales taxes paid. Alternatively, mutual funds could be exempted from all provincial sales taxes.
“With rising life expectancy, saving for retirement is becoming increasingly important,” says Michel Kelly-Gagnon, President and CEO of the MEI. “Programs like RRSPs and TFSAs encourage Canadians to save by allowing them to shelter certain portions of their incomes from taxation, but governments undermine this objective by excessively inflating mutual fund management fees.”
The Viewpoint entitled “The Excessive Taxation of Mutual Fund Management Fees” was prepared by Mathieu Bédard, Economist at the MEI. This publication is available on our website.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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