A Canada-E.U. summit in Brussels on Wednesday exposed what appears to be an unbridgeable gulf between the two sides over the international campaign for a new global tax on banks.
In a sneak preview of a debate that will come to a head at next month's meeting of the Group of 20 in Toronto, European leaders argue a new tax would ensure money is set aside in the event of a future financial meltdown and would discourage risky banking.
The European Union wants the upcoming G20 meeting to produce an accord that would raise billions - possibly hundreds of billions - from banks through new worldwide levies.
Prime Minister Stephen Harper counters that it makes no sense for Canada and other G20 nations that did not have to bail out their financial institutions with taxpayer dollars to turn around and impose a punishing tax.
Just prior to his private meeting with Mr. Harper, EU Commission President José Manuel Barroso provided a detailed briefing to Canadian reporters - at his invitation - during which he rebutted Canada's arguments against a tax.
"It's not a punishment. It's a type of insurance," Mr. Barroso said. "The reality is American and European taxpayers paid a lot to avoid a complete meltdown of the financial system … I understand there are some countries that did not face the same difficulties, but all our countries are in the same global system and we all suffered the impacts."
In response to a request from the G20, the International Monetary Fund recently produced an internal report that recommended two new bank taxes. One, a "Financial Stability Contribution," would be levied at varying rates to discourage risky practices. The resulting fund could be used in the event of a future crisis.
The second, a "Financial Activates Tax," would tax profits, salaries and bonuses.
Mr. Harper is travelling through Europe this week - with stops in Belgium, the Netherlands, Croatia and Germany - partly to prepare for Canada's G20 and G8 hosting duties.
At the end of private meetings Wednesday, which also included talk of Canada-E.U. free trade negotiations, climate change and nuclear issues, Mr. Harper remained unmoved on the bank tax.
"We believe there is no justification for levies on banks and financial institutions," he said. "Canada's position has plenty of support, but it will be an interesting discussion."
Central bankers and finance ministers from the G20 pledged last month in Washington to finish overhauling international financial regulations on schedule, with an emphasis on achieving appropriate minimum standards for the amount and type of capital banks keep in reserve and the level of debt they take on.
While they failed to come to a conclusion on a global bank levy, Wednesday's comments from Mr. Barroso make it clear that the issue won't go away.
Bank of Canada Governor Mark Carney last month called the debate over a tax a "distraction" from the "core agenda" and the idea itself "foolish." Mr. Carney, Finance Minister Jim Flaherty and Julie Dickson, head of the Office of the Superintendent of Financial Institutions, have all spoken out against the proposal, arguing the focus should be on ensuring the G20 nations agree on minimum common standards for banks' capital and liquidity.
Should the Americans and Europeans press ahead with taxes on their banks while Canada holds firm in its opposition - an increasingly likely scenario - foreign banks operating in financial centres such as New York and London might look at picking up and moving to Toronto.
"If the U.S. and Europe go ahead, it's going to provide additional policy ammunition, if you will, to foreign banks that must be looking at their situation and saying, 'You know, Canada's looking better and better all the time,'" Ian Lee, head of the MBA program at Carleton University's Sprott School of business and a former banker, said in an interview. "They've got the lowest taxation rate in the [Group of Seven] their country is stable, the people aren't rioting on television every night over austerity, and they haven't put in a bank tax.''
Mr. Flaherty might even win political support for letting more foreign banks into Canada by insisting that they would not be permitted to take over domestic institutions, and that they would be held to the same standards on capital and leverage that helped Canada's financial sector avoid catastrophe when the crisis spread around the world in 2008, Prof. Lee said.
"If he said something to the effect of, 'Look, we're going to retain the much more rigorous regulatory framework in Canada; we'll welcome foreign financial institutions to Canada so long as they agree to adhere to the more stringent Canadian standards,' then I think he could put forward a compelling argument that we're going to loosen up on the restrictions because, after all, the Canadian banks are so strong, so large, that they are not under threat.''