Liberal Leader Justin Trudeau is targeting Bay Street as a source of new revenue, pledging to raise the corporate tax rate on all bank and insurance company earnings in excess of $1-billion.
Those financial institutions would also be required to pay a special fee called a “Canada recovery dividend,” over a four-year period beginning in fiscal 2022-23.
The two measures would bring in at least $2.5-billion in federal revenue per year over those four years, according to the party.
The measure would claw back some of the gains Canada’s financial sector has made during the pandemic partly owing to Bank of Canada assistance, government supports for wages, businesses and lost income, and ballooning asset prices.
The banks largely were able to avoid losses on loan defaults, with client delinquency rates at unusually low levels. The operating income of Canada’s largest six banks, which report earnings this week, have increased by more than 17 per cent since the beginning of the COVID-19 pandemic.
“Our financial institutions and our biggest banks did very well during this pandemic,” Mr. Trudeau said at a campaign stop in Surrey, B.C., on Wednesday. “We are going to ask them to do a little bit more. Our banks will continue to be strong and profitable, but we will ensure that they are also doing their part so we can support Canadians who sacrificed so much during this pandemic.”
Major banks were blindsided by the proposal, and some still had received no notice the Liberals were planning it in the hours leading up to the announcement, according to three sources with knowledge of the banks’ internal response.
The Globe and Mail is not identifying the sources because they are not authorized to discuss the matter.
The proposal echoes the NDP, which is competing with the Liberals for the support of swing voters in the Sept. 20 election. It’s the latest salvo in a campaign that’s taking on a distinctively anti-big business tone, with even the Conservatives’ platform promising to “stand up to Corporate Canada.”
The six big banks paid $12.7-billion in taxes in Canada to all levels of government in 2019, according to the Canadian Bankers Association.
The CBA, which represents the industry, balked at the plan.
“The Liberal campaign’s proposed new taxes would merely re-direct to government coffers the financial support that Canadians rely on directly from banks,” the CBA said in a statement sent by spokesperson Aaron Boles, adding that most Canadians are bank shareholders, either directly or through pension funds or mutual funds.
“Singling out specific economic sectors for special taxation is a proven detriment to economic growth and has been abandoned as a strategy from previous governments that tried to pursue similarly counterproductive policies,” the statement said.
The banks worked closely with the federal government at the outset of the pandemic, allowing nearly 800,000 Canadians to defer mortgage payments, and acting as a conduit for government aid programs, the CBA said.
Stephen Frank, president and chief executive officer of the Canadian Life and Health Insurance Association, said in a statement that “if a future government were to introduce new tax measures, we expect that the government would consult broadly with all stakeholders.”
The federal corporate tax rate is 15 per cent. The proposed change would set a new rate of 18 per cent on all bank and insurance company earnings of more than $1-billion. The federal corporate tax rate was as high as 28 per cent in 2000, but Liberal and Conservative governments gradually reduced that. It has remained at 15 per cent since 2012.
The NDP’s platform repeats past pledges to raise the corporate tax rate to 18 per cent from 15 per cent, a broad-based hike.
NDP Leader Jagmeet Singh’s campaign has focused heavily on calls to increase taxes on large corporations and the “ultrarich.” The NDP has also proposed a temporary COVID-19 excess profit tax of 15 per cent “on large corporate windfall profits during the pandemic.”
Mr. Singh said the Liberals were quick to provide massive supports for large companies at the onset of COVID-19 and expressed skepticism after Mr. Trudeau’s announcement.
“He’s been defending the interests of the superrich,” he said in Windsor, Ont. “So I don’t know how much Canadians can believe that he’ll actually follow through on this, but we absolutely believe that we need to be looking at increasing corporate tax rates, particularly for the wealthiest corporations. It’s part of our plan as well.”
The Conservative platform released last week did not propose changes to the corporate tax rate. It takes issue with the Liberal government’s recent decision to support Group of Seven efforts toward a global minimum corporate tax rate.
“Canadians and Canadians alone determine our nation’s domestic tax policy and rates,” the Conservative platform states.
The Liberals also announced in a news release on Wednesday that in addition to the higher corporate tax rate, banks and insurance companies with profits of more than $1-billion would be charged a “Canada recovery dividend.”
The party said details would be developed in the coming months in consultations with the Office Superintendent of Financial Institutions. The party said rules would be adopted to limit the ability of companies to use tax planning and profit-shifting to avoid the higher taxes. New powers would also be granted to the Financial Consumer Agency of Canada to address customers’ complaints about excessive fees.
Rob Jeffery, Deloitte Canada’s national tax policy leader, said the financial services sector is already subject to a more complex tax regime than most other industries.
“While the proposals refer to this as a Canada recovery ‘dividend,’ the measure really appears to be a special, temporary tax, on a group of taxpayers within the financial sector,” he said.
“When I think about tax measures in general, [they] often start off as temporary and sometimes become permanent,” he added.
According to S&P Global Market Intelligence, operating income for the six biggest banks is up 47.8 per cent in the most recent 12 months compared with the year prior. Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada combined for $74.2-billion in pretax operating income.
Spokespeople for the five largest banks declined to comment, referring questions to the CBA, or did not immediately respond.
National Bank of Canada CEO Louis Vachon was asked about the Liberal proposal on Wednesday afternoon during a conference call with analysts.
“I have enough scars on my face to not comment on proposals during an election,” he said. “So I’ll take the Fifth [Amendment] on that one, even though we’re in Canada.”
With reports from David Milstead and Clare O’Hara
Editor’s note: An earlier version of this article misstated the year-over-year growth in banks’ operating income as 17.4 per cent. Using the most current figures, the growth rate is 47.8 per cent, with the banks combining for $74.2-billion in pretax operating income. An earlier version of this story also said the two measures would bring in at least $2.5-billion in federal revenue over four years. In fact, the party projects to raise $2.5-billion per year over four years.
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