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June 30, 2010

Important notice regarding the Harmonized Sales Tax (HST) in Ontario and British Columbia

Effective July 1, 2010, HST will apply in the provinces of Ontario and British Columbia on the sale of taxable goods and services.


What is the HST?

Ontario and British Columbia have announced that they will be following the lead of Newfoundland and Labrador, Nova Scotia and New Brunswick by harmonizing their provincial sales taxes with the federal Goods and Services Tax ("GST"), as of July 1, 2010, to form a single Harmonized Sales Tax ("HST").

The HST will combine a provincial sales tax component of 8% with the GST of 5% for a combined rate of 13% in Ontario, and a provincial sales tax component of 7% for a combined rate of 12% in British Columbia. The HST rates for those provinces participating in this tax system are as follows:

What does HST for Ontario or British Columbia apply to?

With the expansion of HST, clients can expect fees and other amounts currently subject to GST to become subject to the HST. However," the place of supply" rules have now been changed and a fund manager must determine the province in which the assets under management are located. As a result, a blended rate of HST will apply to charges to mutual funds and other investment vehicles.

The charges to a fund could include:

What does the new HST mean for you as an investment client in Ontario or British Columbia?

Beginning July 1, 2010, MD Physician Services and MD Private Trust would normally be required to collect a combined 13% HST on management fees and administration fees charged to the MD funds and in certain cases, the MDPIM Pool funds. Currently, management fees and administration fees are subject only to the 5% GST. Pursuant to information released by the Department of Finance, the fund manager is allowed to calculate a blended rate for each fund, which is the rate to be applied to management and administrative fees as of July 1, 2010. The blended rate varies for each fund, depending on the location of the investors; however, the average blended HST rate for all the funds is 10.10%. While the blended HST rate is less than the Ontario 13% rate, as the management expense ratio (MER) of a fund includes taxes, it is expected that the HST will result in an increase in a fund’s MER.


What is the impact for the Investor?

The blended HST rate will have a different impact on investors in mutual funds, depending on where they reside in Canada. For example, for a client in a harmonized province, there will be a positive impact, as the blended rate is less than the HST in effect for that province; conversely, there will be a negative impact for clients in non-HST provinces, as the blended rate will be higher that the basic rate of GST (5%) in effect for that province. The advantage or disadvantage to the client is calculated as the difference between the blended rate of 10.10% charged on fund management fees and the GST/HST rate applicable to the client's province of residence.

As an example of the impact a higher tax rate may have on a fund’s MER, the table below shows a hypothetical fund with a current MER of 1.68%. Applying a blended HST rate of 10.10% on the management fees and administration fees instead of the current 5% GST would result in an MER increase of 0.08%.

Chart is for illustrative purposes only. At the time of writing, the federal government has not yet finalized the rules and regulations as well as the details of how the HST will be administered for mutual funds.

When will MD begin charging HST to clients?

Generally, MD will be charging HST to its clients located in Ontario and B.C. , as well as in the other harmonized provinces, on products and services provided on or after July 1, 2010.

Please visit the Canada Revenue Agency's website at www.cra-arc.gc.ca/harmonization for more details regarding self-assessment requirements.

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