Sunday, November 29, 2009

Why are underwriting fees exempt from GST, hence HST?

Barrick Gold recently issued $4 billion of stock by way of a bought deal that saw Bay Street earn underwriting fees in excess of $140 million. How much GST do you suppose these underwriters/Barrick paid on that commission? Correct, Zero. Is that because underwriting fees are considered neither a good nor a service? Hardly. Why is it that I as an investor have to pay GST on the fees that I pay to Bay Street when it comes to managing my mutual fund investments and yet Bay Street itself pays not a cent on what is the largest and most lucrative side of its business, namely underwriting fees that are measured in billions of dollars a year? Why are investors taxed and issuers (corporations) are not, when it comes to the services of Bay Street?

Why the big tax holiday for these high rollers like Barrick Gold? Being exempt from GST also means that these underwriting fees are exempt from HST. I wished I could say the same about my mutual fund investments being exempt from HST, but I can not.

Why the enormous asymmetry between the “services” provided by Bay Street? Why do investors get hit with 5% GST and now the whopping 13% HST, when corporations like Barrick Gold get away paying ZERO for the services that are rendered to them by Bay Street?

There is nothing fair or equitable about this. What is good for the goose, should be good for the gander. Except in this case, the gander was actually employed as Canada’s Minster of Finance at the time that GST was introduced. That’s right. Michael Wilson was Canada’s Minister of Finance at the time that GST was ushered in. Michael Wilson came to that job with the qualifications that he worked in investment banking at Dominion Securities (now RBC Capital Markets) and was easily swayed by his former industry colleagues and corporate clientele that investment banking underwriting fees should be exempt from GST. How fortunate for them, and highly lucrative as well, especially now that the GST is being “harmonized” with Ontario and BC’s provincial tax rates and this 5% dodge of GST is now turning into a 13% dodge of HST.

This makes no sense and probably explains why Canada’s banks are being so meek and placid about the 13% HST tax being imposed on the savings of their investing clients, because they are too concerned about their issuing clients and losing their unfair tax treatment that sees billions in underwriting fees going FULLY UNTAXED?

Which leads to my conclusion...... Why are underwriting fees exempt from GST, hence HST? After all, we have Bay Street people like Ed Clark. CEO of TD Bank to thank for the introduction of HST. So why does he not want to pay HST, if it is such a good thing, on the hundreds of millions of dollars that TD Bank earns annually from underwriting fees? Seems hypocritical to me, that he wouldn’t want to pay the very tax that he so intensely lobbied for, namely HST?

What is the answer? What is the rationale? Why are mutual fund fees taxes at 13% HST and underwriting fees are taxed at zero, Why are investors being taxed, whereas corporations who draw upon those very investors are not?

Who wants to take a crack at answering that question? Harper? Flaherty” McGuinty? Duncan?.....maybe Ed Clark?

For the year ended October 31, 2009, Canadian Bank owned dealers ( including RBC Capital and TD Bank) underwrote US$47.3-billion in new equity issues. At an average underwriting commission of 4.5%, this translates into CDN$ 2.4 billion in underwriting fees on which ZERO GST was collected. Why is this highly lucrative “service” going untaxed? Why is the government foregoing $118 million in GST taxes?

Is it because the Harper and McGuinty governments think that every investment banker should have a Porsche in his or her garage?

Why is this highly lucrative and remunerative “service” not going to be subject to HST? Why is the government foregoing $417 million in HST taxes? Why is that? Meanwhile investors are being taxed 13% GST on their mutual fund fees.

Why are the corporations as USERS of capital along with their middle-men, the investment bankers, not being taxed, whereas the investors as the PROVIDERS of capital ARE being taxed?


Dr Mike said...

Jesus , Mary & Joseph---here we go again.

If they taxed these fees , they could lower the HST to 10%.

If they taxed the Income trust earnings within pension funds , they could lower the HSt to 5%.

If we kicked Flaherty , Duncan & their minions in finance to the curb , we could lower the HST to 3.5%.

Or we could just develop a flat tax system , fire the whole finance department (the accountants & lawyers) & pay 0%.

I hate these people.

Dr Mike

Anonymous said...

What became of leveling the playing field? I think skewing or screwing the playing field is the proper way to describe this.