The potential harmonization of Ontario’s provincial sales tax with the federal Good and Services Tax would be harmful to investors and would erode retirement savings, says the Investment Fund Institute of Canada’s director of research and strategy, Barbara Amsden.

“Investors may want to take this as a wake-up call because of what harmonization could mean to their savings,” Amsden said in a conference call on Thursday.

IFIC does not entirely oppose harmonization of Ontario’s sales tax with the GST, but urges the government to find ways to avoid punishing investors with higher taxes.

“We are not saying don’t move ahead,” said Amsden. “IFIC wants to work with the province to identify ways to minimize penalizing investors.”

IFIC estimates that the harmonized tax would more than double the taxes an investor pays from 5% to a combined rate of 13%. It would mean an individual investor with $20,000 saved could face an additional cost of $60 a year.

“It will eat into current and future investment returns,” said Amsden. She explained it would have multiplier effect in harming future returns, since investors would start earning returns each year from a lower base.

The additional bite out of investor returns would come at a time when Canadians’ savings have already been hit extremely hard in recent months, Amsden noted.

“We think economic stimulus — and not more taxes on investment — will help restore confidence and encourage people to save for the future.”

The tax would also hurt the investment industry by eating into sales, which could drive companies out of Ontario to other jurisdictions that are more tax-friendly, Amsden said. She added that there is no value-added tax in the United States.

In addition, the harmonization would put mutual fund investors and non-government pension fund investors at a particular disadvantage since they would face a higher level of taxes than people who invest in GICs, stocks, bonds and other products. Investors in mutual funds already pay higher GST, Amsden said, since the sales tax applies to 100% of the services provided to the mutual funds, including salaries of all the service-providers. In contrast, the GST faced by deposit instruments applies to only non-salary expenses.

The harmonization would increase this inequitable treatment, according to Amsden. Specifically, IFIC estimates that the sales tax facing Ontario mutual fund investors would increase by 160%.

“We think putting an additional tax on mutual funds is wrong,” she said. “If there is harmonization, we want a level playing field between different types of financial services and investment vehicles.”

Amsden acknowledged that the tax harmonization could have strong benefits for other aspects of the economy.

“A harmonized tax would be very good for manufacturers and many small businesses,” she said.

IFIC has written a letter to the Ontario Premier Dalton McGuinty, expressing its concerns and requesting the opportunity to participate in consultations with the government on the issue.

IFIC’s comments come nearly a week after Stephen MacPhail, president of CI Financial Corp., blasted the idea of harmonizing Ontario’s sales tax as a massive tax on the savings of ordinary citizens. He urged the Ontario government to avoid the tax harmonization altogether.

IE