Prime Minister Justin Trudeau is learning the hard way that populism makes for poor public policy.
Last August, the Liberal Party, which he leads, unveiled an election campaign promise to claw back some of the profits that financial institutions generated during the COVID-19 pandemic.
But the party’s cynical attempt to make political hay by targeting banks and insurance companies for bigger tax bills failed to translate into a majority government.
What’s more, the Trudeau government now finds itself in the awkward position of toning down its hastily concocted tax plan for the second time this year as fortunes shift for the financial sector.
Ottawa’s latest climbdown came to light this month when the Department of Finance released draft legislation to implement various budget measures, including a two-pronged plan to extract more tax revenue from financial institutions with earnings over $1-billion.
But its proposed language included a change that will cushion the blow for those banks and insurers.
Specifically, Ottawa is revising how it will calculate the Canada Recovery Dividend, a special levy that has caused consternation for company executives, investors and even the federal banking regulator.
The one-time fee, which is a 15-per-cent tax on profits in excess of $1-billion, will now be tallied based on a corporation’s “average taxable income” for 2020 and 2021, according to a government explanatory note.
That’s a notable revision. Budget documents, published in April, stated the Canada Recovery Dividend would apply to taxable income above the $1-billion threshold for 2021 – a year that marked the height of the financial sector’s pandemic profitability.
Ottawa’s draft legislation also reiterated the government’s plan to slap those same banks and insurers with a 1.5-percentage-point increase to their corporate tax rate. As a result, their federal corporate income tax rate will rise to 16.5 per cent from 15 per cent on taxable income above $100-million.
Even though that hike is consistent with plans outlined in this year’s budget, the Liberals’ 2021 election platform had originally envisioned a bigger 3-percentage-point increase to the corporate income tax rate (to 18 per cent on all earnings above $1-billion) for big banks and insurers.
During the election campaign, the Liberals estimated the two measures would rake in $10.5-billion for government coffers over four fiscal years (ending in 2025-26). But the 2022 budget later revised that estimate downward to $6.1-billion in revenue over five years.
It’s not known if the government has once again lowered its revenue forecast as a result of the proposed revisions to the Canada Recovery Dividend. Nor is it clear if Ottawa still plans to use this tax revenue to help more Canadians buy homes.
In an e-mailed statement on Friday, the Department of Finance reiterated its rationale for the proposals, saying the banks and insurers “made significant profits during the pandemic and have recovered faster than other parts of our economy — in part due to the federal pandemic supports.” The tax measures “ensure those large financial institutions help support Canada’s broader recovery.”
That reasoning is fundamentally flawed.
There’s nothing wrong with ensuring that large corporations pay their fair share of taxes, but it is inappropriate to single out financial institutions when so many businesses experienced pandemic surges in profitability.
Besides which, the financial sector’s pandemic profit boom is likely over. Four major banks reported lower third-quarter profits so far this earnings season and the entire industry is bracing for a potential economic slowdown.
On Thursday, Canadian Imperial Bank of Commerce became the first bank to estimate the potential impact of the Canada Recovery Dividend, pegging its one-time payment at roughly $550-million. That amount was higher than at least one analyst’s estimate.
“We do not think this tax has been substantively enacted yet so there may be a chance this hits reported earnings in [the fiscal first quarter],” wrote Darko Mihelic, an analyst with RBC Dominion Securities Inc., in a research note to clients.
Although he noted that CIBC is in a “good position to absorb this tax hit,” he indicated that he would revisit his assumptions about the potential impact of the special levy on other banks.
For instance, in a separate research note, Mr. Mihelic said he originally assessed Toronto-Dominion Bank’s one-time payment to be $890-million.
“Seeing as [CIBC’s] disclosed impact was higher than our original estimate it stands to reason that our [revised] estimate for TD might also be higher. Timing is not great as TD plans to close acquisitions in and around the timing of this extra tax,” he added.
Given that gathering economic headwinds are putting pressure on the industry’s profitability, the timing of this levy stinks for other financial institutions, too.
In fact, pursuing these two tax measures – but especially the Canada Recovery Dividend – is a surefire way for Ottawa to further rile retirees who rely on the income from these dividend stocks. Those folks will actually turn up to vote on the next election day.
Banks and insurance companies are easy targets for populist scorn, but these financial institutions will ultimately squeeze ordinary Canadians to make up for the lost revenue.
The Trudeau government’s rationale for these two tax measures never made sense. It’s time to nix them altogether.
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