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Ottawa’s two-part tax on Canadian banks and life insurers will bring in $6.1-billion over the next five years, according to the federal budget, about 40 per cent less than projected during the most recent federal election campaign.

Last August, the Liberal Party unveiled a campaign pledge to charge a one-time tax on profits earned by Canada’s larger financial institutions, as well as to permanently hike their annual corporate tax rates. At the time, the two measures were estimated to bring in at least $2.5-billion in federal revenue per year for four years – or at least $10-billion in total.

After months of uncertainty on Bay Street, the Liberals released the final details of these tax changes in their federal budget on Thursday, and the total blow is less severe than the initial pledge. It is also spread over a slightly longer five-year period. However, it will hit a larger number of companies.

For the first charge, known as the Canada Recovery Dividend, banks and life insurers will pay a one-time 15- per-cent tax on taxable income above $1-billion for 2021. This sum, worth $4.05-billion in total, will be paid in equal installments of $810-million over five years. When first announced, the dividend was projected to raise about $5.5-billion over four years.

The second tax is a permanent change to the group’s corporate income tax rate. During the election campaign, the level of taxable income eligible to pay the new tax was expected to be set high enough to target only the largest financial institutions. However, the government has now lowered the threshold to cover income above $100-million.

The tax hike was expected to be three percentage points, yet it will only jump by 1.5 percentage points to 16.5 per cent, up from the current level of 15 per cent annually. In total, the hike is estimated to bring in $2.1-billion over the next five years. After that, it is projected to raise $445-million annually.

The Liberals had estimated the tax as originally conceived would bring in up to $1.3-billion each year.

Within the insurance sector, there was some relief Thursday because the government clarified that only life insurers would be affected – which means property and casualty insurers won’t be hit. However, lowering the taxable income threshold to $100-million will impact more life insurers.

The tax changes “are coming at a challenging time for the life and health industry as we continue to work through COVID and all the health impacts, which are not behind us yet,” said Stephen Frank, chief executive officer of the Canadian Life and Health Insurance Association.

It is rare for the federal government to target a specific industry with permanent hike to its corporate tax rate, but Ottawa has long levied different tax rates across industries after accounting for special tax deductions, such as exploration deductions for energy companies.

The proposed tax changes have frustrated leaders of large financial institutions who have felt unfairly targeted. While many of these executives acknowledge their businesses were undeniably aided by Ottawa’s wide-scale income support programs at the start of the pandemic, they do not understand why only banks and life insurers are affected.

Many industries benefitted from income support programs such as the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy, because these programs helped to prevent a prolonged recession. As well, some companies thrived during the pandemic, such as Amazon.com Inc. and Cargojet Inc., both of which benefitted from booming parcel deliveries while people were stuck at home.

Beyond that, many other financial firms not covered by the new taxes had banner years during the pandemic, including Canadian behemoths such as Brookfield Asset Management Inc. Senior bankers have also expressed concern about the signal that targeting specific sectors will send about Canada’s business climate, arguing that it could drive away foreign investment.

The Canadian Bankers Association said in a statement Thursday that “while we remain opposed to singling out specific economic sectors for special taxation,” its members remain “committed to accelerating a thriving Canadian economy and helping Canada emerge from the pandemic with a strong, sustainable recovery.”

After the Liberals won re-election, many bank and insurance CEOs privately accepted that they would not be able to change the government’s mind about the tax changes. Rather than fight back publicly and risk alienating any relationships with the government, the CEOs quietly urged Ottawa to spend the tax dollars in a way that could create some economic payback, the Globe has reported.

As part of the effort, bank CEOs jointly and individually pitched the idea of letting banks and insurers keep more than $5-billion if their earmarked that money for investments and lending in areas that are high on the government’s agenda, like housing supply or climate transition, but the Finance Department wasn’t interested.

With files from Clare O’Hara


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