The impact of Ontario and British Columbia’s harmonized sales tax will be negative for investors. No matter who you want to blame – the government or the investment industry – there is no getting around the fact that resulting higher all-in fees, compounded over a long investment horizon, add up to real dollars. For a long-term investor, it will be the difference between an Audi and a Taurus, or golfing in Florida versus watching the Battle of the Blades on CBC.
It is true that the HST is an additional burden that penalizes investors saving to meet their financial goals. But it is mutual fund fees that hurt investors the most, not the HST. If mutual fund fees have the effect of a mortal wound on investor portfolios, the effect of the HST would be akin to a paper cut.
Let’s consider the case of Investor A who puts $100 to work in the equity market and earns an average of 8% over 25 years. At the end of 25 years, Investor A’s initial investment has grown to $685. Investor B also adds $100 to his portfolio but buys the typical mutual fund charging 2.5% in fees. Since B’s returns have dropped to 5.5% net of fees, his investment only grows to $381 (or 45% less than A). If B had paid a 8% HST on his mutual fund fees and his returns dropped to 5.3%, his investment would have grown to $363 (5% less than B and 47% less than A). Of course, a 5% difference is nothing to sneeze at but the reason B is driving a Taurus and watching Battle of Blades on CBC isn’t the HST; it’s the sky-high mutual fund fees.
Update: Michael James points out that the effect of fund fees is worse than 2.5%. Since mutual funds charge a MER on a daily basis on assets under management, the net returns at the end of the year is less than 5.5%. It is more like 1.08*0.975 -1 = 5.3%. The returns net of MER and HST is 5.084%. I’ll update the numbers in the post a little later in the day. Thanks Michael for pointing out the error.