The government says the country’s major financial institutions made significant profits during the pandemic and have recovered faster than other parts of the economy — in part due to the federal pandemic supports for people and businesses.
The federal budget includes a one-time, 15 per cent charge on taxable income above $1 billion for the 2021 tax year for the country’s big financial institutions.
Ottawa also plans to permanently increase the corporate income tax rate for banking and life insurance groups by 1.5 percentage points for taxable income above $100 million.
The increase would bring the tax rate on income above that threshold to 16.5 per cent from 15 per cent.
The budget estimates the two measures combined will raise $6.1 billion over five years with some $4.05 billion attributable to the one-time tax.
The Canadian Bankers Association, which represents more than 60 domestic and foreign banks, said it opposes singling out specific economic sectors for special taxation.
It noted that banks are already among the largest corporate taxpayers in Canada with the six largest banks paying more than $12.5 billion in taxes to all levels of government in 2020, including $6.5 billion to Ottawa.
"During the pandemic, Canada's banks provided hundreds of thousands of Canadians with mortgage relief, waived millions in fees for individuals and small businesses, and were instrumental in standing up essential programs like the Canada Emergency Relief Benefit and the Canada Emergency Business Account," spokesman Mathieu Labrèche wrote in an email.
The Canadian Life and Health Insurance Association said it was reviewing the previously announced tax measures aimed at financial institutions.
"While we are still reviewing the details of the measures, it appears that the scope for the corporate tax rate increase has broadened from the original proposal and will have a broader impact for life and health insurers," said spokeswoman Susan Murray in an email.
"These measures come at a challenging time for life and health insurers as we continue to face headwinds from the COVID epidemic in the form of higher health related and other life protection costs. These higher impacts will be with us for many years."
This report by The Canadian Press was first published April 7, 2022.
The Canadian Press
DESPITE WHAT THEY SAY
THEY CAN PAY THEIR TAXES
CIBC CEO looks to affluent Canadians for next leg of growth
CAN IMPERIAL BK OF COMMERCE (CM:CT)
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Canadian Imperial Bank of Commerce, after benefiting from a strong turnaround in its mortgage business in recent years, is focusing on affluent Canadians for further growth.
The CIBC Imperial Service wealth-advisory business will be one of the top areas the Toronto-based bank invests in for future growth, Chief Executive Officer Victor Dodig said in an interview ahead of the company’s annual meeting. That business may also be one of the top beneficiaries of the bank’s acquisition of Capital One Financial Corp.’s $3 billion (US$2.4 billion) Costco-branded Mastercard business.
CIBC Imperial Service “has real room to grow, both within our existing franchise, by deepening relationships, and through the 2 million Costco clients that are coming our way, because many of them don’t bank with us,” Dodig said in the interview.
Two other major avenues for investment and growth include business banking, where CIBC recently partnered with financial-technology firm Pollinate to bring its Tyl payments and point-of-sale technology to Canada, and by “digitizing and simplifying banking” for existing clients, Dodig said.
Those priorities come after stretch in which CIBC worked to reinvigorate its Canadian mortgage business, which had lagged behind those of competitors. The bank’s balance of loans secured by real estate rose about 13 per cent in its most recent fiscal year, compared with 2.9 per cent the prior 12 months.
The bank’s investments in technology and front-line workers to boost revenue was a major theme of Dodig’s remarks at Thursday’s annual meeting, according to his planned talk. Dodig also was set to highlight the opening of the bank’s new main office, dubbed CIBC Square, as a “modern, purpose-built headquarters.”
Those investments are coming as Canada faces accelerating wage growth and the fastest inflation in a generation. Dodig said he expects the Bank of Canada to raise rates enough to tame inflation and that he still expects “decent” economic growth ahead, but CIBC is prepared to dial back its spending if needed.
“We’ve got a very structured portfolio of investments,” Dodig said. “If we see things are deteriorating, we can always pull back to make sure that we’re driving the kind of earnings profile that our shareholders expect.”
RBC poised to give rich clients access to
private credit market
, Bloomberg News
Royal Bank of Canada is in talks with several fund providers to steer individual investors into the burgeoning private-credit market.
The discussions include Brookfield Oaktree Wealth Solutions and Blue Owl Capital Inc., among others, people familiar with the matter said. These firms have become a bigger source of financing to companies as banks retrench from risky lending. RBC’s goal is to bring hard-to-trade corporate debt -- and the promise of higher returns than plain vanilla bonds -- to its clients.
Bank executives are exploring ways to give financial advisers and wealthy individuals ways to park cash in existing funds of alternative-asset managers. Money raised from RBC clients will be deployed immediately rather than committed for future investment, one of the people said, and the bank plans to begin offering such funds to customers later this year.
A spokesman for Toronto-based RBC didn’t comment. Blue Owl and Brookfield Oaktree parent Brookfield Asset Management declined to comment.
RBC is asking asset managers to provide share classes of funds denominated in Canadian dollars to allay financial advisers’ concerns about exposing clients to foreign currencies, another person said. Many smaller U.S. firms aren’t equipped to hedge foreign-exchange risk.
In January, New York-based Blue Owl announced it was giving accredited investors in Canada access to a lending business-development company.
The largest institutions, seeking higher yields amid a decade of low interest rates, have pumped money into private credit. Their money has given firms such as Brookfield and Blue Owl the firepower to displace banks in financing North American companies. The arrival of smaller investors will give private credit added heft.
The private-debt market is exploding in popularity, with assets under management for the segment roughly doubling over five years to more than US$1 trillion in 2021, according to data provider Preqin.
Bank tax could hurt Canada's
The Canadian Press
The Open 'Just waiting for the inevitable' on bank profits surtax: National Bank Financial’s Dechaine
Gabriel Dechaine, managing director and Canadian banks and insurance analyst at National Bank Financial, tells BNN Bloomberg the expected surtax on the pandemic profits of big banks in Thursday’s federal budget would send a signal that Canada is not a friendly place to do business, more so if taxes follow on other sectors like energy and big box retail. Dechaine will also be looking for details in the budget speech on the Canada Recovery Dividend, which he says would have nearly double the impact of the surtax.
02:12
CIBC’s chief executive officer says a tax hike targeting major financial institutions expected in today’s federal budget could send the wrong signal to the world about investing in Canada.
The Liberals promised in their 2021 election platform to hike the corporate tax rate for banks and insurers with profits over $1 billion.
The party estimated such a measure — aimed at companies that saw record profits during the pandemic — would bring in about $1.2 billion a year.
CEO Victor Dodig says he is an advocate for competitive tax policy, not policy that targets specific industries, and that he is supportive of moves that drive more human capital and foreign direct investment in Canada.
Dodig also weighed in on the state of the economy, saying it's too early to be sounding the alarm on a recession after some recent movement in the U.S. bond market sparked concerns about a possible contraction.
The bank is holding its annual meeting of shareholders today.
Scotia CEO planned to blast tax, but missed
meeting with COVID
, Bloomberg News
BANK OF NOVA SCOTIA (BNS:CT)
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Bank of Nova Scotia Chief Executive Officer Brian Porter had planned to criticize the Canadian federal government’s proposed surtax on bank profits during his company’s annual meeting, but a positive COVID-19 test forced him to miss the event.
Porter’s prepared remarks included a section denouncing the planned levy as a tax on the Toronto-based bank’s shareholders, including individuals and families saving for retirement or their children’s education. Prime Minister Justin Trudeau first announced the tax in August while campaigning last year, and re-committed to it last month in a cooperation agreement reached between his Liberals and the left-leaning New Democratic Party.
“Not only is the bank tax a knee-jerk reaction that sends the wrong message to the global investment community, it is ultimately a tax on you, our shareholders -- approximately 70 per cent of whom are Canadian,” Porter was scheduled to say, according to his prepared remarks.
With Porter missing the meeting to rest and recuperate, Chief Financial Officer Raj Viswanathan delivered a shortened version of the prepared remarks that omitted the section on the bank tax. Viswanathan said during his remarks that Porter is triple vaccinated and expected to make a full recovery.
Porter’s planned remarks would have come two days before the federal government is scheduled to put forward a budget that is expected to include the new bank tax. The plan, which would raise the corporate income tax rate by three percentage points on profit over $1 billion (US$806 million) at banks and insurers, is expected to raise $10.8 billion over five years, according to documents released in September.
Biggest risk of bank surtax is precedent it
sets: Analyst
, BNN Bloomberg
MARCH 22,2022
The federal Liberals’ proposed surtax on major Canadian financial institutions’ profits just took a big step closer to becoming reality after Justin Trudeau’s government struck a power-sharing agreement with the New Democrats.
But it’s not necessarily the extra money these firms could potentially have to pay that’s the biggest risk, according to one Bay Street analyst, it’s the precedent it would set in targeting financial sector profits.
“It's not something that's going to impact the banks’ earnings growth, or the return on equity materially going forward. To me, the bigger concern isn't this tax rate itself, but whether it sets a precedent for more onerous taxation on bank profits in the future,” said Nigel D’Souza, investment analyst of financial services at Veritas Investment Research, in an interview on Tuesday.
During Trudeau’s election campaign, he promised to impose a three per cent surtax on bank and insurance company profits above a $1-billion threshold. By lifting the tax rate to 18 per cent, from 15 per cent, the Liberals said they expected to collect an additional $2.5 billion in government revenues over the next four years. The promise was light on details at the time and still hasn’t come to fruition, but the move does have NDP support.
While speaking at a news conference on Tuesday morning, Trudeau said implementing the surtax remains a priority.
D’Souza estimates such a surtax would result in a one to two per cent impact on the big banks’ bottom lines, which is “very manageable.” He said he doesn’t think investors should lighten up on their bank holdings based solely on this new potential tax.
“The tax rate increase by itself, I don't think is a sufficient enough reason to have a more bearish or concerned outlook for the banking sector,” he said.
However, D’Souza said the additional tax could change how the banks decide to deploy capital, and even make them reluctant to lend if they expect their profitability will be hit by an extra tax.
“When you think about bank earnings - they're cyclical, they're tied to the economic cycle, and banks need to generate higher earnings in the good times so they have sufficient capital to weather the bad times - whether that's lower earnings or potential credit losses,” D’Souza said.
“If we get more onerous taxation on banks simply because they're making more profits, I'm concerned that changes the calculus of the risk-reward for the sector.”
In addition to addressing ever-growing bank profits, another major pillar of the Liberal-NDP support agreement is housing affordability, which D’Souza thinks is part of the political rationale behind the surtax policy decision.
If that’s what the government is aiming for, then D’Souza suggested removing the government guarantee on mortgage insurance for newly-issued mortgages. He argued it would force the banks to be more prudent with their lending standards, which in turn could help tamp down Canada’s red-hot housing market.
“If you end that, the banks will likely have to hold more capital against those insured mortgages. That will rein in some mortgage originations. They also might tighten up the underwriting standards, either requiring higher down payments for being more selective on who they approve for a high-ratio mortgages,” he said.
“Both of those will have an effect of lowering demand for the housing sector or housing purchases, and that should in theory - if we have supply also increasing and lower demand - that should address housing affordability while also addressing banks earning higher profits.”
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