HST and your Finances

From: Manulife Taxation Team

This communication will provide you with general information about expected changes related to the new Harmonized Sales Tax (HST), and how it will affect clients.

Ontario and British Columbia (BC) will implement the HST effective July 1, 2010. The province of Nova Scotia will increase its HST rate concurrent with the Ontario and BC implementation.

Following the July 1, 2010 implementation of HST in Ontario and BC, half of the provinces in Canada will have integrated their provincial sales tax with the federal Goods and Services Tax (GST). Based on the information shared by the government up until today (May 4), the HST rates for those provinces participating in this tax system will be as follows:

British Columbia – 12%
Ontario, New Brunswick and Newfoundland and Labrador – 13%
Nova Scotia – 15%
All remaining provinces and territories in Canada – 5%
Non-residents of Canada – 0%

With the expansion of HST, customers can expect fees and other amounts currently subject to GST will become subject to the HST depending on the province in which the supply or service is considered to be provided. This will include:
Program Fee charges , Annual Administration and Service Fees and Service Charges as applicable to both dealers (Manulife Securities Incorporated and Manulife Securities Investment Services Inc.)
Group Benefits pure Administration Services Only (ASO) and similar fees
Management Fees and operating expenses applicable to mutual funds, segregated funds, pooled funds and exchange-traded funds
Referral fees
Asset management and other similar fees charged directly to plan sponsors or other investors such as mutual fund Elite series and institutional clients
Trustee fees for registered accounts

How will the appropriate tax rate be determined?
Along with the implementation of HST, the Department of Finance has announced changes to what are known as the “place of supply” rules. These revised rules will be used to determine in which province the service or supply is considered to occur and ultimately which tax rate should apply.

In general, the tax rate to apply will be based on the location or address of the client. Therefore, a client residing in Ontario will be subject to 13% HST while a customer residing in Alberta will continue to be subject to GST at a rate of 5%. This same rule will apply to plan sponsors in respect of pure Administration Services Only (ASO) fees.

When a trust is considered to receive the supply or service, the residence of the beneficial owner will generally be used to determine which tax rate will apply. For example, trustee fees imposed on an RRSP trust with the beneficial owner resident in British Columbia will be subject to HST at 12% while beneficiaries resident in Saskatchewan, a GST tax rate of 5% will continue to apply.

How will the appropriate tax rate be determined for segregated and mutual fund trusts?
Based on discussions with the Department of Finance officials, Manulife anticipates fees applicable to segregated and mutual fund trusts (and mutual fund corporations) will be based on the proportion of fund holdings held by residents in each province. A fund, with a large proportion of assets held for residents in provinces with the HST, will pay tax at a higher rate than a fund with a relatively smaller proportion of assets held for residents in provinces with the HST.

It is important to remember that the GST/HST is a tax on the fund and not a direct tax on the client. Investors will see the effect of the new HST reflected in their fund values. The specifics of this calculation have yet to be released by the Department of Finance. In the meantime, Manulife is preparing its systems in order to determine the appropriate rate of tax to apply as of July 1, 2010.

How will other provincial sales taxes be changing?
For the rest of this year, Québec will continue to administer its own provincial sales taxes without change. However, Québec has confirmed that the Québec Sales Tax (the provincial equivalent of GST) rate will increase from 7.5% to 8.5% on January 1, 2011 with a further proposed increase to 9.5% on January 1, 2012. In addition, the Québec compensatory tax which is a tax imposed on life insurers has increased from 0.35% to 0.55% effective March 31, 2010. Québec has indicated that this increase is to remain until March 31, 2014.

Ontario has confirmed that the Ontario Retail Sales Tax (also referred to as ORST or PST) tax will continue to apply at the current rate of 8% to group insurance premiums and non-medical travel insurance policy premiums.

Please contact us if you have any questions