Mistake acknowledged | Tax increase would have raised the rate to 15 percent from 11 but error meant a 28 percent hike
Canada’s credit union sector knew it was facing a significant tax increase after the 2013 federal budget an-nounced a 40-year-old tax break would be eliminated as credit unions become bigger.
But a drafting error in budget implementation regulations published in late June actually set the stage for a tax hike more than three times higher than the government projected by 2015.
It would have cost credit unions hundreds of millions of dollars in extra taxes over five years.
An analysis by the accounting firm Deloitte and others in late August revealed the error in hundreds of pages of budget documents and the potential consequences.
Opposition finance critic Peggy Nash quickly called a news conference last week to denounce it as a “hidden tax increase” and to demand the government reverse it and explain the error.
“The finance minister has to acknowledge this is a mistake and he needs to tell Canadians how he will fix it,” Nash, a Toronto NDP MP, told a Parliament Hill news conference.
In fact, finance department officials already had acknowledged the error and privately promised credit union officials that it would be fixed when a second budget bill is introduced to Parliament when a new session begins in October.
“They have acknowledged that it is a mistake that will be fixed so it has no real relevance for us,” Credit Union Central of Canada financial policy vice-president Gary Rogers said in an Aug. 29 interview from Toronto. “We accept it was a mistake and while it has taken effect, it will be fixed retroactively.”
However, he said the error in a long and complicated budget bill gives the credit union sector another chance to argue that the tax increases an-nounced in the last budget — even the lower level increase — is wrongheaded and should be revised.
“This does give us a chance, after a cooling off period, to go back to them to renew our arguments about why this is a bad decision,” said Rogers. “So the silver lining is that it opens the issue of credit union tax rates again.”
Finance minister Jim Flaherty announced in his spring budget that a longstanding credit union tax break would be phased out for credit unions too big to qualify for the lower small business tax rate. It would increase the tax rate from 11 percent to 15 percent over four years. The regulation error actually would have increased the tax rate on larger credit unions to a maximum of 28 percent.
Under the budget rule that stays in place, the tax break will begin to erode when a credit union accumulates $10 million in capital and will be phased out when capital accumulation hits $15 million.