Jon Chevreau's blog has linked a spectacular piece of financial porn from Tye Bousada at EdgePoint
. His argument is that Ontario's imposition of an HST will add an extra 22bp to the MER of an average mutual fund and cost an investor a fortune. Here's the climax line.
Tye Bousada wrote:...a difference of $20,343 or 102% of your initial investment! The government has taken over 100% of your initial investment away from you.
Here's my rewrite of the whole piece, additions in italics.
Let’s assume you are 45 years old, you invest $20,000 in a mutual fund inside your RSP, and this investment grows at 10% per annum (before this recent tax grab). Unfortunately, fees in Canada are among the highest in the world but we’ll be generous and assume you only pay a 2.75% MER (before the GST of course) on your mutual fund investment. The harmonized sales tax (HST) would add approximately 22 basis points (0.22%) to the MER. Let's compare the effect of the tax grab to what we ding you for, assuming that we could charge a much more reasonable 0.75% before HST.
By the end of year one, your $20,000 would have been worth $22,000 before the tax grab. But, with the tax, you have only $21,956. A seemingly tiny $44 difference, thus increasing the likelihood the government slides in this tax without much of a fuss. If we had reasonable MERs, you would have $22,380, or $380 more even though the thieves in Queens Park are at work.
Interestingly, by the end of year two, you now only have $24,103 versus $24,200 (without the tax grab). That’s a bigger difference of $97. Why isn’t the difference $44 + $44 = $88? Because your investments are growing and the government is taking the same 8% from your expanding pie. Of course, we are too. If we had lower MERs, you would now have $25,044, $844 more than if we charge our usual rates.
By year 10, you are 55 years old. Luckily, the $20,000 you put in that mutual fund 10 years ago has grown to $50,847. You’re content, but unaware that without the tax, you would have had $51,875......$1,028 more! The magic of compounding interest is starting to take hold. The $1,028 is now 5.1% of your initial $20,000 investment. With reasonable MERs, you would have had $61,578 ... $9,703 more! But you are unaware of this fact. The magic of compounding interest is really working now, especially for Canadian fund managers. We want you to notice that the province has creamed off 5.1% of your initial investment. We definitely do not want you to notice that we have creamed off 43.5% of your initial investment. Bad Queens Park, Bad Dalton!
By year 20, you are 65 years old. Your initial investment has grown to a value of $129,269. Without the tax harmonization, you would have had $134,550.....$5,281 more or 26.4% of your initial $20,000 investment! By this time, reasonable MERs would see your investment grow to $189,594. The difference ..... $55,045 or 275.2% of your initial investment is now in our pockets.
Einstein once wrote that the 8th wonder of the world is compound interest. We have trouble debating him on that issue, especially if we consider the next 20 years.
You are now 75 years old. That $20,000 contribution to your RSP is now worth $328,645. Little did you know that it could have been $348,988 without the 2009 tax harmonization......a difference of $20,343 or 102% of your initial investment! The government has taken over 100% of your initial investment away from you. Even less do you realize that, without our big MERs, it could have been $583,746 .... a difference of $234,758 or 11.7 times your original investment! The government has taken your entire original investment from you and we want you to be mad as hell about it while you ignore that we've taken 12 times as much.
By year 40, you are 85 years old. Your $20,000 has grown to $835,524. Without the new tax, you would have had $905,185..... a difference of $69,661 or 3.5 times your initial investment! The government has collected $69,661 from your initial $20,000 investment for a 350% tax rate. What could you have done with that extra $69,661? Could that have made a difference in your life? In case you're interested, not that you should be, had we charged a more reasonable MER, you would have had $1,797,304 ..... a difference of $892,119! Of course, if you'd had that money instead of us putting it in our pockets, chances are you would have just wasted it and it would have made no difference in your life. But let me thank you for putting our children through the best schools.
Sometimes public policy has unintended consequences, as does shameless handwaving. We are not sure whether the current administration understands the materiality of this decision and how it could negatively impact the average person’s retirement savings, but we are sure how current fee structures impact our own retirement savings. The important question is, “Can we stop this?” More important, “Can we use this to distract everyone from a much bigger problem?”
We are worried that the various interests of industry participants will detract from the real issue at hand. Rather, arguments may be focused on potential financial job losses in Ontario due to the tax, or the inequality of the harmonization of the tax on mutual funds, or the timing of the tax given the weak markets rather than the ultimate cost of the tax to investors over the long run.
The reality is that this tax affects you much more than it affects mutual fund executives or mutual fund company shareholders, because we'll just stick you with the bill anyway. Politicians would gladly tax additional financial services and investment products to make this tax more equitable. They would be more than happy to stage this tax in. None of this helps you. We would hope the government would not want to take 350% of your initial investment if they truly understood the consequence of this tax. We’re not sure that they do. However, we are absolutely sure that we want to take your initial investment 45 times over - 13 times more than the government will take - because we truly do understand the consequences of the MERs we charge. Over 40 years, we will pocket 50% of your total portfolio through MERs, you will get 46%, and those bandits in Queens Park will get 4%. Focus on the bandits. Pay no attention to us.
A simple message needs to be delivered to the government, and we plan on delivering it. Quite simply, they must be made aware that this tax is bad for you, the investor. We would really appreciate it if you remain unaware and very very quiet about how much worse our MERs are for you, the investor.
If you're a mutual fund unitholder, feel free to send the amended version to Dalton McGuinty and Dwight Duncan. Tell them what you really think, not about HST, but about unconscionably high MERs.
Carbon Tye Bousada while you're at it.