Financial Update For March 26, 2010

• TSX -4.86 to 11,962
• DOW +5.06
• Dollar +.05c to 97.58cUS on a growing conviction that Canadian interest rates could rise sooner than later.
• Oil -$.08 to $80.53US per barrel.
• Gold +$4.10 to $1,092.70 USD per ounce

Ottawa changes GST rules, setting up finance battle
Tara Perkins
From Friday's Globe and Mail
Ottawa has quietly moved to tax some financial services , setting up a fight the sector says will cost more than $1-billion a year.
The government has changed the rules on a goods and services tax exemption in a way that the industry says applies GST for the first time to a number of financial services offered by, for example, mortgage brokers and insurance advisers. The industry says the costs will be passed on to consumers. Banks, insurers, mortgage and insurance brokers, and investment companies are urging the Finance Department to retract its amendments and hold broad consultations before going back to the drawing board.
At issue is the definition of “financial service” in the tax laws. Such services are generally exempt from GST but Ottawa has changed the definition so that many activities that “facilitate” or “prepare” financial services are now subject to tax. The industry says Ottawa hasn't clarified how broadly the rules will apply but it appears that many services offered by brokers and advisers are newly taxable, including, for example, trailer commissions paid to mutual fund dealers, commissions paid to a car dealer to arrange credit for a car buyer, and some work telemarketers do for insurers.
Mike Firth, a tax partner with PricewaterhouseCoopers, has written a paper for the CCH GST Monitor, a tax publication, in which he calls the situation a “ghastly mess.”
In an interview he said that Ottawa either made a “deliberate decision to extract billions more in revenue from the financial sector, presented as a ‘clarification,’ or the intention was much more limited but the combination of legislation drafted by the Finance Department and execution by the [Canada Revenue Agency] has mutated into a very radical policy shift. Neither possibility is very attractive.”
Ottawa issued a press release in December saying it was clarifying the rules, and the CRA followed up with a notice in February. Legal and accounting experts with financial services clients say that notice went far beyond what the sector was expecting and made a number of services that have been exempt from the GST since 1991 taxable.
A finance department official said Ottawa issued its release to address the uncertainty that some recent court cases created respecting the scope of the definition of “financial service” in the Excise Tax Act, and to “affirm the longstanding tax policy.”
“We are aware that some industry representatives have raised concerns,” the official said. “They have been invited to contact Finance and the CRA with further information, so that we have a better understanding of their concerns.”
The GST is currently 5 per cent but the relevant services would be charged 12 per cent and 13 per cent in British Columbia and Ontario respectively when they roll out the harmonized sales tax, said Barry Segal, a partner at Ogilvy Renault with concerned mutual fund industry clients.
“The big concern for our members would be it applying to commissions,” said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals. “There would probably be a significant net reduction in income to mortgage brokers.”
The Canadian Life and Health Insurance Association says the move could cost life insurers half a billion dollars a year.
For example, insurance advisers are paid commissions that could now be taxable, said Ron Sanderson, the CLHIA’s director of policy-holder taxation. “Ultimately these things are going to show up in customer costs.”
Joanne De Laurentiis, chief executive of the Investment Funds Institute of Canada, wrote to the Finance Department saying the amendments have created “tremendous concern” and asked for them to be withdrawn.
“During our consultations over the last several months, you have consistently indicated that policy changes to the GST regime will not be contemplated until after implementation of the newly harmonized regimes has occurred,” she wrote. “These announcements are a reversal of that position.”
Like many, Ms. De Laurentiis argued the announcements were not “clarifications” but “a significant policy change.”
IFIC has questions about how the GST and HST will now apply to commissions on buying and selling stocks and mutual funds, as well as redemption fees paid by investors.
Advocis, the financial advisers association, is concerned the moves will create an uneven playing field between financial products sold by commissioned-based financial advisers and products sold by banks using non-commissioned employees.
“The CRA notice amounts to an expansion of the GST tax base,” the group said in a bulletin.
Ottawa has said it plans to tackle the deficit without raising taxes.
There is fear that work will leave Canada as a result of this issue, Mr. Segal said. “A lot of the services that are provided, particularly many of the administrative services, are portable.”
Another problem is that the changes apply retroactively to Dec. 14, he said. “I know there is grave concern in the financial community about the operational complexity that this is going to cause. There may be GST or HST owing on transactions back to that date that hasn’t been collected.”
http://www.theglobeandmail.com/report-on-business/ottawa-changes-gst-rules-setting-up-finance-battle/article1512595/