Taxes on Mutual Funds Slow Down SaversBy Andrew Rickard | October 02 2015 01:22PM
A paper published by the Montreal Economic Institute (MEI) argues that governments are slowing down savers by charging sales tax on mutual fund management fees.
While on one hand governments are encouraging Canadians to take responsibility for their own retirement by allowing them to place funds in sheltered savings vehicles such as RRSPs and TFSA, MEI economist Mathieu Bédard says they are also undermining this objective by inflating mutual fund costs with taxes.
Mutual funds are a popular choice with Canadians, accounting for 27.2% of all of the savings they hold in financial investments. However, Bédard notes that mutual funds are subject to higher taxes than other products; he calculates that sales taxes make up about 8.2% of mutual fund management fees, while people who buy guaranteed investment certificates pay sales taxes of 1% to 3%, and those who directly purchase securities like stocks and bonds pay none at all.
Bédard points out that these taxes can add up significantly over time. For someone who invests $5,000 a year for 25 years in a fund with average returns of 8% (not counting management fees), taxes will come to $7,307. Seen another way, he calculates that regardless of the amount invested it would take someone 5 extra months to reach an investment objective that would have taken 25 years without taxes, 6 extra months for an objective that would have taken 30 years, and 9 months longer to reach a 40-year objective.
The paper proposes various solutions to the problem. For example, mutual funds could be subject to the same rules that are applied to pension funds, allowing for a reimbursement equivalent to 33% of sales taxes paid. Another option would be to replace the sales tax with another, more equitable compensatory tax, or simply not to charge sales tax on mutual funds at all.
"The implementation of one or another of these reforms would put an end to a disadvantageous situation that exists for no good reason — especially in a in which governments want to encourage retirement savings," concludes Bédard.