Wednesday, March 30, 2011

Eliminating GST on Mutual Funds Unlikely to Help Investors Much

In Rob Carrick’s recent election wish list for investors, he led with a wish to eliminate GST on mutual funds. I share his desire to give mutual fund investors a break on mutual fund costs, but I don’t think this measure is likely to help investors much.

Any time there is a reduction in the cost of providing a product or service, the savings get shared by producers and consumers. This split isn’t necessarily even, though. In very efficient markets for commodity items, most of the savings are enjoyed by the consumers. In inefficient markets, producers keep most of the savings.

The mutual fund industry in Canada is competitive, but not on fees charged. Only a small slice of the industry competes on fees. The rest compete for access to customers who don’t understand fees.

The bottom line is that if we eliminated the estimated annual GST of $567 million paid by mutual fund investors, there is little reason to believe that much of the savings would be passed on to investors. Much of it would go to increased profits for mutual fund companies.

I don’t see GST on mutual funds so much as a tax on investors as it is a tax on mutual fund companies. As a result, I’m not in a huge hurry to see this tax go away.


  1. Even though we aren't competing on fees at Steadyhand...we just believe charging 'fair fees' (read low by industry standards) is the right thing to do if you're looking to get good returns....this proposed GST is going to hurt our unitholders.

    If GST gets passed, we likely have to pass on the costs and raise our fees.

  2. @Chris: For mutual funds like Steadyhand's where fees are fair I have some sympathy. I think a good solution would be to change GST on fees in excess of 1% on equity funds and 0.5% on fixed-income funds. But, this type of fine-tuning is likely to generate even more heated argument.

  3. While Mr Stephenson has a point, someone has to pay taxes. The mere fact that taxes raise prices is not a valid argument against them. And these taxes would be paid disproportionately by those with large investment portfolios. What's not to like?

    If the mutual fund industry (Mr Stephenson aside) is so very concerned about its poor, dejected customers, why are they so focused on the $500M in GST, and not that other $10,000M that's going straight into their own pockets?