Trudeau Targets Big Canadian Banks, Vowing Surtax on Profits
(Bloomberg) -- Prime Minister Justin Trudeau took a populist turn in Canada’s election campaign, pledging to impose a 3% surtax on the nation’s big banks and insurers.
At a campaign stop in Vancouver, the leader of the governing Liberals promised to hike the corporate income tax rate by three percentage points on profit over C$1 billion ($793 million) at financial institutions. The measures, which would bring the rate to 18% from 15% currently, are expected to generate C$2.5 billion for government coffers over the next four years, starting in 2022, according to a party news release.
Industry groups bristled, calling the levy “counterproductive” and warning it could hurt the economy.
“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,” the Canadian Bankers Association said. “Banks are already among the largest taxpayers in Canada.”
Trudeau’s proposal is meant to complement another headline-grabbing pledge to ban foreign buyers from the nation’s increasingly expensive housing market. Trudeau is trying to regain momentum after stumbling out of the gates in his bid to win back a majority in parliament. The Liberals are fighting on two fronts -- competing for votes against the left-leaning New Democratic Party and the more centrist Conservatives.
“Given that our banks have posted extraordinarily large profits and continue to be incredibly successful, including through a pandemic where everyone else had to tighten their belts, we’re going to ask them to do a little bit more,” Trudeau said Wednesday.
The announcement landed in the middle of strong bank earning season. Four of Canada’s six banks reported fiscal third-quarter profits that topped analyst estimates, driven largely by gains in domestic mortgage lending. The remaining two are scheduled to report results Thursday.
The six biggest banks combined posted more than C$40 billion in net income in their most recent fiscal year. In addition to benefiting from the strong housing market, the firms also saw a surge in trading and corporate financing deals.
In its statement, the CBA said Trudeau’s proposal “would reduce income that would otherwise benefit the majority of Canadians who are bank shareholders, either directly through share ownership or indirectly through pension and mutual funds.”
The Canadian Life & Health Insurance Association also pushed back, saying it would expect any future government to consult with companies on new tax measures.
Trudeau’s proposed levy would cut the banks’ earnings per share by about 2% to 3% and could change their relationship with the government, which had been fairly favorable, according to Paul Gulberg, an analyst at Bloomberg Intelligence.
“This is not a positive for investor perception, for sure,” Gulberg said. “It does not change bank fundamentals, but it’s a concern for lower profitability -- and potentially capital returns -- for one of the largest segments” of the benchmark S&P/TSX Composite Index.
Canada’s eight-company banks’ index, which had climbed 1.1% on the strong earnings, fell as much as 0.6% from its high for the day after the announcement.
Polling after the first week of the campaign showed the Liberals losing ground to the Conservatives, weakening their chances of regaining the majority government they lost in the 2019 election. The NDP, which is rising in the polls, has also promised to raise taxes on large corporations.
Taking a bigger cut of bank profits “is precisely the type of political commitment that will entice the crucial progressive swing voter to the Liberals,” said Elliot Hughes, who advised former Finance Minister Bill Morneau before joining Ottawa-based consultancy Summa Strategies.
“I would expect to see more of these types of proposals as the campaign goes on and as we get closer to the release of the full Liberal platform,” he said.
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