Bay Street’s dirty little HST secret.

One of the largest streams of service revenues earned on Bay Street, namely underwriting commissions, is going fully untaxed (as consumption tax) at both the federal level (GST) and the provincial level (PST), and now the harmonized level (HST).

This tax holiday is a subsidy that is being meted out to Bay Street at a cost in foregone tax revenue of some $300 million a year. And Bay Street was the biggest proponent of HST in Ontario (i.e Ed Clark, CEO of TD Bank) and yet they want the tax implemented in a way that circumvents them from paying this tax? That is hardly fair. Nor would it be too bright for those of us who will be burdened with this new tax, to let such a gross inequity to go down.

The Canadian Capital markets are made up of capital users (corporations, governments etc.) and capital providers (individuals, pension funds etc.) The argument could easily be made that the capital providers are the life blood of the Canadian capital markets. And yet, the Dalton McGuinty government doesn’t see it that way, as his new fangled HST is going to make things more expensive ( and less attractive) for investors to provide capital to fuel the Canadian capital markets. Investors are going to be hit with a 13% tax on their mutual fund management fees, which is coming straight out of their pockets. Meanwhile the capital users are getting off without incurring any HST whatsoever.

The underwriting fees/commissions paid to investment bankers by capital users for selling their securities are completely free of GST and will now be completely free of HST. This is grossly unfair and inequitable to tax the capital providers with a massive 13% HST and not the capital users. If you were going to tax one and not the other, you would certainly tax the users and not the providers. At the very least Dwight Duncan has things ass-backwards, but that’s what you get when you bllindly sign on to a tax regime that was created in a different era (1989) and by different people (Michael Wilson, Paul Tellier and Michael Sabia) and essentially written by Bay Street and the Canadian Banks.

Commissions paid by capital users to sell their securities is completely analogous to home owners paying commissions to real estate agents to sell their home. So why are underwriting commissions free of HST when real estate commissions are not?

The introduction of HST to management fees paid by investors to have their savings professionally managed requires that the HST also apply to the fees paid by issuers to have their capital professionally raised. To not do so, creates a huge disparity. Better yet, neither should be taxed, as this tax creates a huge inefficiency in the Canadian capital markets and we’ve all learned how important the availability and cost of capital is to the Canadian economy.

I call on Dalton McGuinty and Dwight Duncan to justify this huge tax disparity and if they are unable to provide tangible justification for it, to either:

Tax both sides of the capital user/capital provider equation or neither.

I vote for neither.

If newspapers and the morning coffee are worthy of exclusion from this absurd HST tax, then certainly the lifeblood of the Canadian economy, namely capital, should be as well.