# Ontario's HST impact on MERs



## lb71 (Apr 3, 2009)

Since the Ontario government announced they were planning on harmonizing their PST with the federal GST, the financial industry has been complaining that MERs in mutual funds and expenses other investment vehicles will go up 8%. Jonathan Chevreau discussed it in his column in yesterday's Post. 

http://www.financialpost.com/opinion/columnists/story.html?id=31d47748-87b5-415e-9122-f9091cab0a4a

Well my message to the financial services industries is stop complaining and lower your MERs to offset this increase. The MERs in Canada are high as it is. Why not lower your expenses (ie profits) to cover this increase? Think of the positive goodwill you could extract from your customers. "We at XYZ have decided to absorb the cost of the HST and not pass it on to our customers, who already pay some of the highest MERs in the world." 

Otherwise, stop whining about it.


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## mfd (Apr 3, 2009)

lb71 said:


> Since the Ontario government announced they were planning on harmonizing their PST with the federal GST, the financial industry has been complaining that MERs in mutual funds and expenses other investment vehicles will go up 8%. Jonathan Chevreau discussed it in his column in yesterday's Post.
> 
> http://www.financialpost.com/opinion/columnists/story.html?id=31d47748-87b5-415e-9122-f9091cab0a4a
> 
> ...



Because someone has to pay for that Porsche and it certainly won't be the mutual fund companies.


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## CanadianCapitalist (Mar 31, 2009)

lb71 said:


> Otherwise, stop whining about it.


I wrote about this recently as I find it ironic that the fund industry is complaining about expenses! Which is worse: 2.5% for your average mutual fund or 20 basis points in taxes? What I'd be interested in knowing is if the fund industry passed along the cut in GST to investors.

*Harmonization and mutual funds*


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## Jon Chevreau (Apr 4, 2009)

I followed the column up with two blogs. The first is:

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/04/13/mcguinty-s-wealth-tax.aspx

The main point is that this measure will increase MERs for all Canadians, not just Ontario residents -- because 80% of the fund companies operate out of Ontario. Maybe fewer if companies like C.I. follow up on their threat to move to tax-friendlier jurisdictions like Alberta.

The day after was a guest piece by the Canadian Taxpayers Federation:

http://network.nationalpost.com/np/...g-ontario-s-blended-sales-tax-ctf-s-take.aspx

Watch for a video interview with Assante Wealth's Joe Canavan tomorrow on this very topic: he was also mentioned in the original column. It can be found at the link below, as can all the other video interviews.

http://www.financialpost.com/personal-finance/wealthy-boomer/index.html


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## archanfel (Apr 7, 2009)

Jon Chevreau said:


> I followed the column up with two blogs. The first is:
> 
> http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/04/13/mcguinty-s-wealth-tax.aspx
> 
> ...


Jon,

How are MERs charged? For example, if the fund has a 1% MER, would it charge me 1.05% today or does that 1% includes taxes? 

Thanks.


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## CanadianCapitalist (Mar 31, 2009)

archanfel said:


> How are MERs charged? For example, if the fund has a 1% MER, would it charge me 1.05% today or does that 1% includes taxes?


Currently, I believe, the MER includes taxes. 

MER = management fees + operating expenses + GST.


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## archanfel (Apr 7, 2009)

CanadianCapitalist said:


> Currently, I believe, the MER includes taxes.
> 
> MER = management fees + operating expenses + GST.


Thanks. I guess the new rate would be 1.08% then. I am still wondering whether they will raise it since they didn't drop it after the GST drop, but chances are good. 

Yet people are cheering the changes. Sigh....


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## Germack (Apr 4, 2009)

I do not really care about the HST. However, I care a lot about the high MER's charged by the Mutual Fund companies in Canada. These high MER cost you so much money in the long term it is ridiculous:

Let's assume 25 years old investing for retirement (40 years). Initial balance:$5000; Monthly contributions:$200; Rate of return:10% per year; Mutual Fund MER: 2.5%

After 40 years:
Balance before fees: 1.5 million dollar
Final balance after fees*: $700,000
Amount paid in fees: $800,000 Yikes!

* MER + Lost return potential


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## archanfel (Apr 7, 2009)

Germack said:


> I do not really care about the HST. However, I care a lot about the high MER's charged by the Mutual Fund companies in Canada. These high MER cost you so much money in the long term it is ridiculous:
> 
> Let's assume 25 years old investing for retirement (40 years). Initial balance:$5000; Monthly contributions:$200; Rate of return:10% per year; Mutual Fund MER: 2.5%
> 
> ...


I remember there was a lady trying to sell me a fund. It's an index fund with 3% MER. (It's some sort of universal life thingy). Her pitch was with $12000 investment for my son today, assuming 6% growth per year, after 100 years, he would have $3 million or something (tax free). (I am not kidding, she actually did use 100 years and her fund does have a 3% MER). 

So my counter example was at 9% growth, I would have $66 million after 100 years. (I didn't choose the number of years). Give government $16 million. I still got $50 million after tax. In other word, she took away $47 million from me. 



To be fair, I later found out it's a segregated fund (she was too shocked to point that out), but the argument still stands.


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## CanadianCapitalist (Mar 31, 2009)

archanfel said:


> Yet people are cheering the changes. Sigh....


I'm not cheering the change. In fact, I fully expect the HST to cost me through (slightly) higher MERs on my ETF & index fund holdings.

It is a legitimate point that the HST will cost investors and is a tax on savings. What I find ironic is the fund industry suddenly getting the religion on expenses -- as long as it is not charged by them!


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## archanfel (Apr 7, 2009)

CanadianCapitalist said:


> I'm not cheering the change. In fact, I fully expect the HST to cost me through (slightly) higher MERs on my ETF & index fund holdings.
> 
> It is a legitimate point that the HST will cost investors and is a tax on savings. What I find ironic is the fund industry suddenly getting the religion on expenses -- as long as it is not charged by them!


Sorry, didn't mean you. There are a lot of people expecting lower prices across the board and booming economy due to the new HST. Apparently, some economist wrote a paper on how HST helped the Atlantic provinces. I think it would be true to a certain degree (although I question how many things we buy are produced in Ontario anyway), but not for many years. Right now, all I see are higher gas prices, higher MER, higher utilities, higher heating, the list goes on and on. I am all for lowering taxes for businesses, but this HST thing is going to be pretty costly to tax payers in the short term, probably at the worst time too.


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## lb71 (Apr 3, 2009)

In Jonathan's weekend blog that he posted was a link to a letter from EdgePoint Wealth Management 
http://www.edgepointwealth.com/documents/EdgePoint Against Tax Proposal on MER v2.pdf

Another complaint about the HST on MERs. They whine that and MER of 2.75% results in an additional 22 bps of expenses once you add in the PST. Over 20 years, on investment of 20K would lose out on 5K due to the tax. BS.

First off, they assume that you would earn 10% a year *after* MERs. So the assumption is you earn almost 13% a year. Too aggressive in my opinion. 

But then they neglect to tell you that if you invested in a lower cost fund, you could more than make up the extra 22 bps and earn lots more.

Also, the GST has been lowered 2% over the last few years. So in reality, this would only be a 6% increase to the MER versus a few years ago, because I know that the industry passed on those savings to the investment community.

Again, stop whining and lower your fees.


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## archanfel (Apr 7, 2009)

lb71 said:


> In Jonathan's weekend blog that he posted was a link to a letter from EdgePoint Wealth Management
> http://www.edgepointwealth.com/documents/EdgePoint Against Tax Proposal on MER v2.pdf
> 
> Another complaint about the HST on MERs. They whine that and MER of 2.75% results in an additional 22 bps of expenses once you add in the PST. Over 20 years, on investment of 20K would lose out on 5K due to the tax. BS.
> ...


Does it really matter? HST increases MER no matter how low it is. With a .5% MER, the HST would still increase it by .04%. With a $500,000 investment, it would be $200 a year.


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## lb71 (Apr 3, 2009)

archanfel said:


> Does it really matter? HST increases MER no matter how low it is. With a .5% MER, the HST would still increase it by .04%. With a $500,000 investment, it would be $200 a year.


I agree that the HST will increase the cost to invest. My issue is with the investment product selling community who are whining about the increased cost to investing. The fees they charge these days are high as it is, and yes this will make it higher. But the fact remains that MERs are high not because of the sales taxes, but because the fund managers are making a killing off of investors. 

So if they feel so bad for us, they should lower the MERs to offset the increase in HST. In theory, the harmonizing of the sales taxes should lower expenses for companies, because they can now deduct any HST from their purchases. In my opinion, this is just a smoke screen so they have an excuse to increase our MERs and blame the government.


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## archanfel (Apr 7, 2009)

lb71 said:


> I agree that the HST will increase the cost to invest. My issue is with the investment product selling community who are whining about the increased cost to investing. The fees they charge these days are high as it is, and yes this will make it higher. But the fact remains that MERs are high not because of the sales taxes, but because the fund managers are making a killing off of investors.
> 
> So if they feel so bad for us, they should lower the MERs to offset the increase in HST. In theory, the harmonizing of the sales taxes should lower expenses for companies, because they can now deduct any HST from their purchases. In my opinion, this is just a smoke screen so they have an excuse to increase our MERs and blame the government.


They don't feel bad for us at all. It's politics. A lot of politicians whine in our names, you think any of them actually feel for us? 

As for MER, if you don't think the MER is worth it, then don't get a managed fund. Free choices.


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## Jon Chevreau (Apr 4, 2009)

Moderators really should move this thread to the tax forum. Anyway, just a note that I just did a video interview with Assante Wealth chairman Joe Canavan on this subject, 2nd part will appear this week:

http://www.financialpost.com/personal-finance/wealthy-boomer/index.html


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## TaxGuy (Apr 7, 2009)

Jon,
I first heard this story the day following the budget, but it didn't get much attention in Ontario let alone nationally. Thanks for making it more public. 

Apologies for my ignorance, has this story run in the Post or only on the Wealthy Boomer?


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## Jon Chevreau (Apr 4, 2009)

It ran a week ago Saturday in FP Weekend. I was on March Break when the budget actually happened and on my return several advisors were asking me about this HST on MER issue.

Here's the story:

http://www.financialpost.com/person....html?id=31d47748-87b5-415e-9122-f9091cab0a4a


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