March 27, 2009

The Ontario government's plan to create a new harmonized sales tax will drive up costs for the financial services sector and could eventually result in higher fees for consumers, experts say.Businesses most affected by the change include banks, insurers, credit unions and mutual fund firms - although the impact could vary across the industry.That's because Ontario has chosen not to "zero-rate" financial services companies as part of its harmonization plan, according to budget documents.That essentially means that financial services companies will bear a higher tax burden when the new 13 per cent blended rate is applied to costs currently exempt from provincial sales tax starting in mid 2010.

Of key concern, banks and other companies would have to pay the higher harmonized rate on "big ticket" items such as accounting services, corporate leases, commercial rents and legal fees. Currently, those items are only subject to the 5 per cent federal goods and services tax.Observers say higher costs will hurt the profits of financial services players, which are already suffering the knock-on effects of the global financial crisis.In addition to hampering investor returns, the move could have a ripple effect on consumers, said Paul Hickey, national tax partner with KPMG LLP.