Policy 2011

BOARD APPROVED

January 19, 2011

Exempt Alberta from paying HST

On July 1 2010 the federal government implemented Harmonization of the GST with a number of provincial sales taxes.  While providing streamlined reporting and numerous cost savings for businesses, the implementation of the harmonization has resulted in Alberta residents paying HST on items purchased in Alberta.

The Alberta government lauds that fact they have not imposed a sales tax on Albertans and in fact promotes the lack of a provincial sales tax as one of its keys to prosperity.  At the same time they have sat idly by and allowed the federal government to collect potentially hundreds of millions of dollars from Albertans for distribution to provinces that have implemented a provincial sales tax.

Many people are of the understanding that financial services are a GST exempt service.  They do not pay GST on their mortgage, their credit cards, bank accounts or Guaranteed Investment Certificates.   However, many do not realize that the provision of asset management services, as defined by Canada Revenue Agency, are not GST-exempt services.  Investors are paying GST on the management fees for mutual funds, segregated funds, exchange traded funds, hedge funds and managed pension plans.

With the harmonized sales tax, asset management services are now subject to the combined tax rate.  Asset managers must collect and remit the HST that is applicable on their management fees.  Managed Asset products are distributed to investors in provinces that are subject to the HST as well as provinces such as Alberta, which are not subject to HST.  However, due to the pooled nature of expenses in an asset management account, all expenses are pro-rated to all investors. 

The HST implementation rules drafted by the federal government require that the HST be calculated in proportion to the amount invested by residents of HST–participating provinces when compared to non-participating provinces.  This results in a “blended rate” of tax for each pooled investment.

 Hypothetical blended rate calculation:

In this example, investors in Alberta, who are not subject to their own provincial sales tax, will now be paying the blended HST on any managed investment assets.  Rather than pay the 5% GST they will now be subject to a tax of 10.54% (as based on the above example).   This tax is payable to the HST participating provinces, not the federal government or the province of Alberta.

Investor Economics reported in November 2010 the following value of managed assets in Canada:

The following chart summarized the impact of the new HST on each of the various managed assets:

Value-added taxes such as the GST and HST are to by their nature intended to be transparent to the taxpayer.  With the inclusion of HST in the reported Management Expense Ratio of managed assets, investors do not see the GST/HST.  Most Canadians would be shocked to know that the provincial and federal governments are taxing their investments to the tune of $1.9 Billion per year. While it is difficult to ascertain the actual percentage of managed assets owned by Alberta taxpayers, by simply utilizing the percentage of the population of Canada we can estimate the HST that is being collected on assets owned by Alberta residents.

* Source: Statistics Canada – Canada’s population estimates July 1, 2010

The following table demonstrates the HST that hypothetically is being charged to Alberta residents on their managed assets.  The HST that is being charged to Alberta residents in excess of the GST may exceed $100 million each year.  These are taxes being collected on behalf of and paid to HST-participating provinces, not Alberta.

Despite assurances that the implementation of HST would be managed effectively and not have an impact on nonparticipating provinces like Alberta, Ontario sales tax is being paid by Albertans, potentially to the tune of over $100 million. As Alberta already contributes to the well being of other provinces through equalization payments, this issue must be corrected as soon as possible.

Consequently, the Red Deer Chamber recommends that the Government of Alberta:

1. Immediately request that the Government of Canada implement retroactively to July 1 2010, the exemption of managed assets* owned by residents of non-HST participating provinces from the Harmonized Sales Tax.

*Managed Assets are defined as investment products such as mutual funds, segregated funds, exchange traded funds, hedge funds and managed pension plans.