As July 1 approaches, our thoughts turn to Canada Day parades, backyard barbecues and, oh, the launch of the Harmonized Sales Tax (HST) era in Ontario and British Columbia.
In the financial services field, there has been much hand wringing about the HST applying to mutual fund management fees and other investment services previously not subject to such provincial taxes.
While the HST launch may be imminent, it is not necessarily an immutable change. Let’s put it in context.
Taxes are innately good
It is true. Taxes are the primary means by which we finance our society, particularly in providing the infrastructure and public goods and services that otherwise would be left undelivered or unsupported.
So the issue is not really “if” tax revenue must be raised, but rather “how” to do so.
The impending HST
A broad-based consumption tax aligns the cost of producing goods and services with taxpayers who are currently consuming them. Combined with a tax credit for those at low income, it can be an effective and equitable way to spread tax need across a population.
Being broad-based is critical as exceptions and exemptions – whether attributable to the pursuit of social policy or due to industry lobbying – lead to a higher tax rate being applied to remaining taxable units.
How then can we reconcile the concept and practicality of personal savings within such a tax regime?
Savings as consumption
Savings is not as simple a concept as one might expect. There is a large body of tax and economic literature on the issue, and it is an ongoing debate. To the person on the street, a reasonable definition of savings might be that which is not consumed, or that which is set aside to be consumed later.
So, is the HST a tax on savings? No, but it is a tax that is borne by those savings. The best illustration may be the case of mutual funds held in registered plans, where it causes a direct decline in savings and a permanent loss of future tax-sheltering opportunities.
In that light, and knowing already that there will be exceptions and exemptions to the HST, would it make sense to exempt services that support savings? If saving is consumption-in-waiting, then arguably this is no more than a deferral of tax revenue.
Toward retirement
As our federal and provincial Ministers of Finance continue public consultations on retirement income adequacy, perhaps some explicit consideration may be given to coordinating income taxation and consumption taxation – one of those “left hand/right hand” things.
And as the HST comes into place in July, here’s hoping that future amendments to the GST and HST consider the practical impact these taxes have on savings, retirement and the broader economy.