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Minister of Finance Jim Flaherty responds to a question in the House of Commons in May. Earlier this year, Mr. Flaherty browbeat banks that dared offer five-year mortgages at less than 3 per cent. Now rates are headed for 4 per cent on the same mortgage. (Adrian Wyld/The Canadian Press)
Minister of Finance Jim Flaherty responds to a question in the House of Commons in May. Earlier this year, Mr. Flaherty browbeat banks that dared offer five-year mortgages at less than 3 per cent. Now rates are headed for 4 per cent on the same mortgage. (Adrian Wyld/The Canadian Press)

Finance says it will fix credit-union tax error pointed out by auditors Add to ...

A major auditing firm says credit unions and caisses populaires are facing an unexpected surprise from the federal taxman — a “technical issue” the Finance Department says it will fix.

The March budget included a measure designed to see credit unions and similar small lending institutions pay the same tax rates as other corporations.

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The move was a shock that “blindsided” credit unions, says Gary Rogers, a spokesman for Credit Union Central of Canada.

And accounting firm Deloitte says amendments passed in late June to implement the changes mean tax rates for credit unions will actually be 13 percentage points higher than those paid by banks and other corporations.

NDP finance critic Peggy Nash calls it a radical Conservative tax hike.

She called on Finance Minister Jim Flaherty to either fix the problem, or explain why credit unions and caisses populaires are being unfairly penalized.

Liberal finance critic Scott Brison has also written to Flaherty, insisting that legislation be drawn up immediately to halt the tax-rate increase.

Brison blamed the error on the Conservative government’s penchant for incorporating multiple changes in law in its omnibus budget bills.

“I have no doubt that such a mistake is the natural consequence of denying Parliament its proper oversight function and ramming omnibus legislation through both Houses,” Brison said in his letter.

A spokesman for Flaherty said tax professionals made the minister aware of the technical glitch earlier in the summer.

“Minister Flaherty has committed to fix it as soon as possible and ensure no credit union is disadvantaged by this technical issue,” Chisholm Pothier said in an email.

“We intend to deal with this through legislation this fall.”

The government says the original change was designed to improve the fairness of the tax system by eliminating a preferential tax rate paid by some financial institutions.

The intended move was an increase in the tax rate paid by most credit unions and caisses populaires, to 15 per cent on income in excess of the small business limit, from a federal rate of 11 per cent.

But Deloitte says the technical error in the legislation — unless altered — would instead subject them to a federal tax rate nearly double that.

“There is a technical deficiency in the legislation that adversely impacts credit unions and caisses populaires,” the firm says in a tax alert issued Aug. 14.

“The result is that the federal rate applicable to income that is not eligible for additional deduction is subject to a 28 per cent federal tax rate rather than 15 per cent.

With an apparent fix of the technical error on the way, the real issue for credit unions is the original tax hike, said Rogers.

“The federal budget introduced a tax change that was a total surprise, and we were blindsided by that,” he said, estimating the measure would cost credit unions $28 million annually.

Credit unions and caisses populaires consider themselves small businesses, with higher operating costs because they can’t achieve the same economies of scale as the larger financial institutions.

“We hope to convince (the government) that the words in the budget document that said this tax increase on credit unions would restore neutrality and fairness probably doesn’t achieve that goal,” he said.

“There are other measures that we think they’ll need to introduce to revert to some neutrality and fairness in the tax system.”

A general tax-rate change was introduced in 2001 for all corporations to reduce the federal tax rate from 28 per cent to 15 per cent.

Using a formula, corporations could claim deductions from taxes owing equal to what’s known as their “full rate taxable income,” multiplied by the reduced percentage rate.

But the budget bill changed the definition of full rate taxable income as it applies to credit unions and caisses populaires, yielding a much different result when they calculate taxes owed.

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