Canada ETFs Begin Charging HST

ETFs, HST, and Canada

First Published Date : November 21, 2010 ADawnJournal.com

In Ontario and British Columbia, the Harmonized-Sales Tax (HST) is something that is not very popular. As well, it is beginning to chance how things are priced with exchange-traded funds (ETF). In the past, iShares, which was launched by Carclays Global Investors in the late 1990s, has never charged the Goods and Services Tax (GST) on its ETFs. The tax was paid out by the company itself, making ETFs more affordable and more desirable from the perspective investors.

Sadly, that changed this past year when BlackRock Inc, which recently purchased iShares in 2009, decided to begin charging HST.

HST is the combination of the provincial sales tax of Ontario, and the GST of the federal government. When put together, the HST comes to 13 per cent. On July 1, it took effect in Ontario, combining the eight per cent provincial sales tax and the five per cent GST.

In a notice to investors, BlackRock stated that it will no longer pay for GST on behalf of the family of iShare funds.

Many investors are now asking why this has become the state of affairs for the iShares ETF. The main reason is that globally, most ETF companies do not absorb the taxes and BlackRock wants to make sure there is an industry standard across the globe to make investing easier for countries around the world.

While they say that, most likely the reason is that the cost of paying 13 per cent of the tax for investors will simply amount to more than BlackRock can afford. While many investors are just told that the policy is to get everything under the same umbrella as the industry practice, it is not hard to figure out that BlackRock wants to make money, paying the HST costs them money, so they are no longer paying the HST.

Currently, iShares has three main rivals which is Claymore Investments, Bank of Montreal and BetaPro Management.

At this time, iShares controls 80 per cent of the ETF market within Canada, more than what smaller ETF companies hold in the market and those smaller companies have often not paid for the GST. Therefore, it can be seen that iShares is getting in line with companies that are much smaller than them, an odd thing to do when you are an industry leader.

Regardless, the days of iShares being GST, PST and HST free are now gone. From now on, when you are buying ETFs in Canada through iShares, you are going to be paying for the HST on top of your purchase meaning The HST will be a part of the management expense ratio. While it is the norm in the industry, that does not mean investors have to be happy about it and you may see a backlash in the coming months and years as investors decide whether or not the new higher cost of the ETF is worth it.