Sector bemoans loss | Tax credit introduced in early 1970s as a way to level the playing field with major banks
Canada’s credit union leaders were caught off guard when federal finance minister Jim Flaherty presented his March budget in Parliament.
The budget cancelled a 40-year-old tax break that will cost credit unions hundreds of millions of dollars in the years ahead.
“This came out of the blue,” Credit Union Central of Canada financial policy vice-president Gary Rogers said.
“There was no consultation, and I believe the reasons it was brought in in 1972 are still there.”
Minister of state for finance Ted Menzies told the House of Commons that the government continues to support credit unions and the work they do in small rural communities.
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“The changes that are being made to credit unions across this country would eliminate an outdated tax subsidy,” he said.
Liberal co-operatives critic Mauril Bélanger accused the Conservatives of increasing the credit union tax rate by 36 percent.
“Why are the Conservatives turning their backs on credit unions and caisse populaires?” he said in the Commons.
“Why kill the level playing field?”
It is a question Rogers said credit union officials are asking themselves.
“We have asked for a meeting with the minister to find out the rationale for the change and if there is another way in future to deal with this issue,” he said.
“We have not heard back, but I’m sure there will be a meeting. This definitely puts more pressure on smaller credit unions and affects their ability to compete with banks.”
In the budget, the government estimated it would increase the credit union system tax bill by $10 million this year and as it is phased in, up to $75 million by tax year 2017-18.
However, a Finance Canada assessment of the cost of foregone taxes in 2012 estimated the tax saving for credit unions at $47 million.
“We’re not sure where their numbers come from,” said Rogers.
It is a complicated tax issue.
Credit unions were taxed for the first time in 1972 after a massive tax reform effort.
However, because they typically were small players trying to compete with much larger chartered banks, the Liberal government of the day gave credit unions access to the lower small-business tax rate but also a lower rate than the big business tax rate over the small business income threshold.
It was an acknowledgement that without the ability to raise money through share offerings, a lower tax rate would allow credit unions to accumulate capital through retained earnings.
In the past 40 years, both the size of the credit union movement and the concentration of the banking industry have increased dramatically.
The current rule announced by the government would begin to phase out the tax break for any credit union with accumulated capital of $10 million, eliminating it once the capital pool reaches $15 million. Then the big business higher tax rate kicks in.
Rogers said those capital levels in the modern financial world apply to “micro-credit unions” competing with bank branches whose systems have large capital reserves.
He said 300 small communities are served only by credit unions because the banks do not see the financial benefit of a small branch.
