Canada’s major banks are expecting larger tax bills in 2022 as a new surcharge on financial institutions’ profits over $1-billion could be pushed through by Ottawa as soon as the start of 2022.
In late August, during the federal election campaign, the Liberal Party promised to raise corporate taxes on large banks and insurers by 3 per cent and collect a special fee from them called the Canada Recovery Dividend.
The permanent tax increase and the temporary recovery dividend are intended to raise a combined $2.5-billion each year for the next four years, with proceeds earmarked to help pay for a housing plan with the goal of making it easier for some people to own a home.
When the proposal was announced, senior bankers were privately outraged at being singled out as an industry. Major technology and telecommunications companies that provided essential services and performed well in the pandemic were spared. Among bank chief executives, Canadian Imperial Bank of Commerce CEO Victor Dodig was the only one who spoke out publicly against “intervention in any particular industry sector, because that doesn’t attract foreign capital.”
More recently, that anger has given way to a sense of resignation as top executives at banks broadly expect the tax will be imposed in the coming months, according to five senior banking industry sources – and perhaps as soon as January. The Globe and Mail is not identifying the sources because they were not authorized to discuss interactions with government.
The plan’s finer details have not yet been discussed publicly as the federal government is still setting legislative priorities to be outlined when the House of Commons convenes to sit for four weeks starting on Nov. 22. Government officials have not said when they might take steps to enact the tax increase on banks and insurers.
The Liberals’ campaign platform included some tax changes that were promised to take effect as of Jan. 1, 2022. To accomplish that, the government will need to introduce at least one Ways and Means motion at some point during those four sitting weeks. That motion would give the government initial approval for the tax change and allow it to take effect immediately.
A spokesperson for Deputy Prime Minister and Finance Minister Chrystia Freeland declined to comment on tax changes.
Some bankers are still stinging from the surprise tax-hike proposal. In his final days as CEO of National Bank of Canada, Louis Vachon said he was “disappointed” by the Liberal plan. He pointed to the key role banks played in the early months of the COVID-19 crisis to help government distribute relief funds to consumers and businesses, as well as the banks’ own programs that deferred payments on billions of dollars of loans.
“I felt we were being targeted politically, in circumstances where we were trying to figure out why,” he said in an interview in late October. “It’s not conducive to a positive business climate, that’s for sure.”
Mr. Vachon, who has since retired from National Bank, also called out the federal government for its aggressive spending. In the pandemic’s first year, that was “absolutely the right thing to do,” he said. But as the global economy recovers, he said the government needs to rebuild a “margin to manoeuvre” as soon as possible to prepare for a future crisis by reducing Canada’s federal deficit and debt-to-GDP ratio.
“That’s where I would like to see a greater sense of urgency by the government,” he said. If banks are “being asked to contribute financially, that’s one thing. It will be easier to accept if we saw more rigour on the deployment of the spending programs in Ottawa right now.”
The Liberals have suggested the 3-per-cent surtax on banks and insurers would apply to Canadian taxable earnings over $1-billion. The tax would collect between $1.2-billion and $1.3-billion annually over the coming years. Revenue forecasts from the party’s election platform, vetted by the Parliamentary Budget Officer, suggested the tax increase would raise $296-million in the government’s fiscal year that ends March 31.
It could take more time, and more consultation with banks, to decide how to apply the Canada Recovery Dividend – a temporary fee that would add up to $5.5-billion over four years as a way for the government to recoup funds from banks after Ottawa helped backstop the sector against potential losses during the pandemic.
The Liberals have signalled they intend to consult the country’s banking regulator, the Office of the Superintendent of Financial Institutions, but those discussions have not yet begun.
As a result, it is still unclear how the recovery dividend will be calculated for each financial institution – whether by profits, revenue, liabilities, capital or another financial metric. The Liberal platform projected the government would collect the first $1.3-billion from the fee in the 2022-23 fiscal year.
Spokespeople for Canada’s six largest banks declined to comment.
With a report from Bill Curry in Ottawa.
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