The Canadian flag flutters in the wind at the TD Centre in Toronto’s Financial District, in March, 2023.Fred Lum/the Globe and Mail
Canada’s banking industry lobby group is calling out Ottawa for targeting financial institutions and ignoring warnings that the government’s taxes aimed at extracting billions of dollars from banks and insurers will dampen lending and further stunt slowing profit growth.
The talks between the voice of the industry and the government have led nowhere, according to the Canadian Bankers Association. In an exclusive interview with The Globe and Mail, the CBA spoke out publicly on the matter for the first time since the government first unveiled the taxes in 2021. It’s a rare move by the industry group, taking aim at a government that has come under increasing fire for economic concerns and its deficit spending.
Over the past two years, Ottawa has imposed three new taxes specifically on banks and insurers to help drum up funds to support government initiatives and help pay down climbing debt. Each change was unveiled without prior consultation, blindsiding the companies that typically have an opportunity to provide input on economic policy.
The new taxes target banks and insurers at a time when rising expenses and mounting lending risk are stunting profit growth, prompting some banks to trim jobs. While the CBA has provided feedback on its issues with the taxes, the group says that the government has not addressed the potential of the amendments to reduce lending by the banks.
“We don’t believe this economic policy of singling out the banks is the correct way to go,” CBA chief executive officer Anthony Ostler said in an interview. “We have had significant discourse with the federal government, but it’s fallen on deaf ears.”
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TMX Group X-T, the Canadian Chamber of Commerce and the Business Council of Canada have joined the CBA in denouncing some of the tax proposals in recent federal budgets. They are asking the government to revisit the policies and find alternative measures.
Each tax change over the past two years was a surprise to the industry, Mr. Ostler said.
“If the government came to us and said, ‘We have this objective. We want to do X Y Z. Can you help us with that objective?,’ we could have had a dialogue about the different alternatives to solving that problem,” Mr. Ostler said. “That is what we’ve done historically, and that has not been happening as of the recent past.”
The Ministry of Finance said that since proposing the new taxes last year, it has invited the public and stakeholders to provide feedback, and that it will launch public consultations on the additional tax measures proposed in March.
“Canada’s major financial institutions made significant profits during the pandemic and recovered faster than other parts of the Canadian economy – in part due to the federal pandemic supports for people and businesses that helped de-risk the balance sheets of some of Canada’s largest financial institutions,” spokesperson Katherine Cuplinskas said in an e-mailed statement.
“That is why the federal government in our 2022 budget asked these large financial institutions to contribute to Canada’s recovery from the pandemic. This was also a commitment that our government ran on – and Canadians voted for – during the 2021 campaign.”
The government is searching for new revenue streams to fund federal programs while grappling with its deficit and reining in soaring spending.
In the federal budget released in March, the Liberals unveiled an amendment to the tax treatment of dividends paid on Canadian shares held by financial institutions. The update would require banks and insurers to count those dividends as business income.
The government expects the plan to generate $3.15-billion over five years starting in 2024, and $790-million annually after that.
The amount levied by the taxes pales in comparison the amount the banks earn each year. Canada’s six largest banks booked more than $66-billion in net income in 2022.
This year’s proposed changes could cause a modest hit to earnings per share by less than 1 per cent, analyst Mike Rizvanovic of Keefe, Bruyette & Woods said in a note to clients in March. But he also said that the broader sentiment from government signals a “worrying trend.”
Mr. Ostler said the moves mark a “negative vicious cycle on Main Street,” because repeatedly levying new taxes specifically on banks could further stunt the economy by raising the cost of mortgages, loans, and other financial products and services. Each dollar taken in taxes is money pulled from bank lending capacity that would otherwise “enable people to start businesses, invest in factories, buy a home or a car.”
Liberal Leader Justin Trudeau first unveiled two substantial tax changes for banks and insurers the 2021 election campaign. The government later launched both proposals in last year’s budget.
The Canada Recovery Dividend requires large banks and life insurers to pay a temporary 15 per cent charge on the average of 2021 and 2020 taxable income above $1-billion, payable over five years beginning in 2022. The Parliamentary Budget Officer expects the initiative to raise $604-million annually in 2022, for a total of $3.02-billion over five years.
The federal government also launched a permanent change to the sector’s corporate income tax rate that will raise an estimated $2.25-billion over five years. It increases the tax rate by 1.5 percentage points to 16.5 per cent on taxable profits over $100-million for banks and insurers.
Senior bankers and industry groups were largely silent when the federal government first proposed the industry-focused taxes as it spent money to avoid a recession during COVID-19 and bank profits soared. Executives said that the government was unfairly targeting the financial industry, while technology and telecommunications companies that also had their profits propped up by pandemic spending were exempt from the new taxes.
But the banks are now facing a significantly different business climate compared to last year. “Picking on a sector that is the core to supporting the growth and long-term health of the economy is doubly detrimental,” Mr. Ostler said.
In their recent third quarter, most big banks missed earnings expectations even after analysts slashed their estimates ahead of the results releases. As high interest rates dampen loan demand, rising credit risks prompt banks to set aside more money for bad loans, and expenses across the sector spiked.
Meanwhile, Canada’s banking regulator has increased capital requirements, forcing the banks to hold billions of dollars in excess reserves. The Office of the Superintendent of Financial Institutions head Peter Routledge has referred to the extra cushion as “insurance” to hedge against rising risks in the sector.
The CBA says that Canada’s banking system has repeatedly proven its stability even in the most difficult times, such as the financial crisis in 2008.
“An ironic thing is that despite the fact that we are a paragon of safety, OSFI’s approach to capital requirements is adding insult to injury and is limiting the flow of capital into the economy at the same time that there are a lot of other things going on,” Mr. Ostler said.
Ottawa also introduced a new 2 per cent tax on share buybacks, which applies to all companies, saying it would encourage companies to reinvest their profits in workers.
But the TMX Group says it will further boosts costs for its more than 3,000 publicly traded companies – most of which are small and medium-sized businesses – and will hinder a key tool that companies use to return money to shareholders.
In August, the United States also imposed a tax on buybacks, but limited it to 1 per cent.
“If companies have extra capital, we want them to return it to the shareholders because then the shareholders can reinvest it in other growth, businesses and other businesses that are going to help grow the economy,” TMX CEO John McKenzie said. “When you add a friction point like a new tax, it incents somebody just to hang on to cash and not use it efficiently.”
Stefanie Marotta