Trudeau Hits Canada Banks and Insurers With Billions in Taxes
Trudeau Hits Canadian Banks and Insurers With Billions in Taxes
(Bloomberg) -- Finance Minister Chrystia Freeland is imposing a one-time windfall levy on Canada’s major banks and permanently increasing their income tax rate, fulfilling an election promise that has raised the ire of the industry’s top executives.
The measures will force banks and insurance companies to pay an additional C$6.1 billion ($4.8 billion) in tax over five years, according to Freeland’s budget plan released Thursday. The new taxes are virtually certain to be implemented because Prime Minister Justin Trudeau has already secured the support of a left-leaning opposition party to pass the budget law.
The government said that massive, government-funded Covid-19 support programs have helped the financial sector recover faster than other parts of the economy, and now it’s time to pay some back.
Trudeau’s plan to hit finance with a larger tax bill has been met sharp criticism from executives, who have said it will take capital away from lending and harm investors’ perception of Canada. Bank of Nova Scotia CEO Brian Porter earlier this week called the tax “a knee-jerk reaction that sends the wrong message to the global investment community” while other bank executives have said it’s unfair to single out their industry for its success.
While the measures are in line with what Trudeau had signaled was coming, the tax may prompt a negative share reaction for the banks on Friday, as some investors may have either ignored the issue or hoped that a flurry of lobbying from the banks would work, said Barclays analyst John Aiken.
“There was some concern, as imaginations started spiraling, that this was going to be absolutely awful,” Aiken said in an interview. “But it was within what had broadly been put out in the campaign promises.”
Longer term, the banks will likely be able to pass on the extra costs to consumers through higher fees or other measures, he said. Still, the perception that banks are in the government’s crosshairs may dent their appeal for global investors, he said.
The windfall tax of 15% applies to taxable income earned last year by banks and insurers in Canada over C$1 billion. That will force them to pay about C$4.1 billion, sliced into payments from 2022 to 2027, according to budget documents.
But the government did not go quite as far in increasing the banks’ income tax rate as Trudeau had threatened to during last year’s campaign. The prime minister had pledged to increase the maximum federal income rate for financial institutions to 18% from 15%.
Instead, Freeland is lifting it to 16.5% but lowering the threshold at which the new rate will apply to C$100 million from an original target of C$1 billion. That measure will mean about C$2 billion in additional taxes over five years, government estimates show.
“I’m sure government is happy that they have a targeted source for bringing in additional income, but I think it’s inappropriate,” Ray Williams, a managing director at National Bank of Canada’s capital markets unit, said on BNN Bloomberg Television. “I simply don’t like it as a way to reflect to the rest of the world that we’re open for foreign investment.”
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