Bank towers are shown from Bay Street in Toronto's financial district on June 16, 2010.Adrien Veczan/The Canadian Press
Two new taxes the federal government is levying on Canada’s largest banks and insurers are estimated to raise $5.3-billion over five years, less than what was anticipated in the government’s April budget.
A permanent 1.5-per-cent increase to the corporate income tax rate for banks and insurers is expected to raise $266-million this year and $2.25-billion over five years, according to cost estimates published Thursday by the Parliamentary Budget Officer.
A temporary tax called the Canada Recovery Dividend that will be imposed over five years is expected to raise $604-million annually starting in 2022, for a total of $3.02-billion.
Both taxes apply only to large institutions: The corporate tax hike is charged on taxable profits above $100-million, while the recovery dividend is a 15-per-cent levy on taxable income above $1-billion earned in Canada. Those institutions have pushed back in public comments, with bank CEOs arguing that singling out one sector for higher taxes is bad for the country’s business climate, and that tapping financial institutions’ profits will ultimately hurt everyday investors who rely on returns from bank stocks and dividends.
Both tax measures are less onerous than the campaign pledges the Liberals made in the run-up to last year’s federal election. At the time, the Liberals estimated the two taxes would bring in at least $10-billion over four years. In April’s federal budget, they slashed that estimate to $6.1-billion as important tweaks to both taxes watered down their financial impact.
The current estimated total of $5.3-billion is lower still, as more recent draft legislation released by the government “differs from what was published in Budget 2022,” the PBO said.
The government has proposed to raise corporate taxes on banks’ and insurers’ Canadian income to 16.5 per cent from 15 per cent, instead of to 18 per cent as first proposed. And it intends to calculate the recovery dividend on an average of 2020 and 2021 profits, rather than just 2021, as originally planned. That will lower banks’ tax bills because they reported lower profits in 2020 as public-health restrictions disrupted economic activity and lenders stockpiled financial reserves against possible losses.
The PBO said its projections are based on estimates of banks’ and insurers’ taxable earnings in future years, and could be affected by “the magnitude of the behavioural response” by those institutions – whether companies change their tax or business strategies to reduce what they would owe.