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The corner of Bay Street and Adelaide streets in the heart of Toronto’s financial district.Gloria Nieto/The Globe and Mail

The Conservative government's 2015 budget was short on specifics for how Ottawa would ensure that taxpayers won't have to bail out systemically important banks during the next financial crisis. That came as a surprise to some observers who had expected more clarity on the Taxpayer Protection and Bank Recapitalization Scheme after consultations were launched in August.

But the budget did have something to say about Canada's banks. In a note, Peter Routledge, a National Bank analyst, figures that there were three items that stand out, all of which could offer a few challenges to bank earnings in the quarters ahead.

One. Ottawa estimates that banks have been given a substantial tax break when they make particular financial transactions known as synthetic equity arrangements – essentially allowing them to get tax-free dividend income using derivatives – and that's going to end. The savings to Ottawa: $365-million in fiscal 2016-17.

Mr. Routledge believes that Canadian Imperial Bank of Commerce, National Bank of Canada and Bank of Montreal are particularly vulnerable to the change, "but no bank will be left untouched by this proposal."

The tax savings to Ottawa amount to about 1 per cent of the collective net earnings of the Big Six in 2014. While not disastrous, there are other considerations here that could make for something to watch in second-quarter bank earnings:

"There remains a risk that this proposal, in the future, induces the banks not to make as many of these transactions, thereby leading to a larger reduction in capital markets trading revenue," Mr. Routledge said in his note.

Two. Ottawa intends to back away from the mortgage financing system – apparently in an attempt to reduce taxpayer exposure to the housing market – by limiting the extension of portfolio insurance through the substitution of mortgages in insured pools, tying the use of portfolio insurance to CMHC securitization vehicles and prohibiting the use of government insurance-backed mortgages as collateral in securitization vehicles that are not sponsored by CMHC.

The translation: Mr. Routledge believes these changes will push up the cost to banks for financing mortgages. "As a result of this initiative, the headwinds buffeting the banks' net interest margins will get a little stronger," he said.

Three. After Ottawa clamped down last year on corporate tax avoidance using insurance swaps, alternative strategies subsequently popped up. So, Ottawa is clamping down again.

"The further tightening of this anti-avoidance rule could increase the tax bill of the Big Six Canadian banks' personal & commercial banking segments," Mr. Routledge said.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 11:13am EDT.

SymbolName% changeLast
BMO-N
Bank of Montreal
+0.77%97.12
BMO-T
Bank of Montreal
+0.79%131.8
BNS-N
Bank of Nova Scotia
+0.88%51.61
BNS-T
Bank of Nova Scotia
+0.84%70
CM-N
Canadian Imperial Bank of Commerce
+0.94%50.54
CM-T
Canadian Imperial Bank of Commerce
+0.97%68.56
M-N
Macy's Inc
-0.1%19.83
NA-T
National Bank of Canada
+0.33%114.95
RY-N
Royal Bank of Canada
+0.37%100.77
RY-T
Royal Bank of Canada
+0.3%136.64
TD-N
Toronto Dominion Bank
-0.59%60.28
TD-T
Toronto-Dominion Bank
-0.7%81.69

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