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Looks like the HST will add an extra 8 per cent
to management fees on Mutual Funds !
With funds being taxed at effectively at four to five times the rate of other
savings vehicles such as guaranteed investment certificates, term deposit
and stocks.

Does anyone have any ideas to avert this tax grab !
I know the simple answer is not to be in mutual funds, but I wonder how many people know how badly they will be effected if they don't take action?
Investors won't feel the additional tax on the fund fees because fund companies will take it from the fund instead of billing the investors. The tax will be reflected in slightly lower fund returns. Also, the tax is on the fund management fees, not on the income, dividends or capital gains generated by the funds. This will make funds slightly less attractive investments, but it's no reason to jump into holding a portfolio of stocks and bonds directly if you don't have enough capital.
 

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LIII1940,

I'm not so ignorant as to not know that the the introduction of the HST in Ontario and BC will reduce fund returns. What I said is that investors won't "feel" the effects of the tax on fees in the same that they they don't "feel" the effects of management fees already, even though the effects are there in lower fund performance. It's harder to get outraged about what you're paying when no one presents you a bill, which is probably one reason why Canadian unitholders can be so complacent. That being said, I don't see the increase in fees resulting from the HST as a reason to abandon my portfolio of low-fee index funds in favour of holding the underlying securities. Suppose the management fee on a fund is 1% per year before GST and HST. Then the after tax management fee is 1.12% (if the fund operates in BC where HST will be 7%). Of course, the effects are worse if the mandated fees on the fund are higher. That is yet one more reason to avoid high-fee funds like the plague.

You're also missing the point of what I said in the last sentence. Investors that don't have a lot of capital find it hard to achieve an optimal level of diversification if they are directly holding a portfolio of stocks and bonds. Also, transaction costs can kill investment returns almost as badly as management fees if one is making many small transactions.
 
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