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Noah Zivitz

Managing Editor, BNN Bloomberg

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Bay Street could be about to learn its fate in Canada’s halls of power.

CTV National News Ottawa Bureau Chief Joyce Napier reported Tuesday that the federal government's budget on Thursday will include long-awaited details on its plan to apply a surtax on the country's most profitable financial institutions.

The Liberal Party of Canada laid the groundwork for that targeted tax policy in last year's election campaign. At the time, the Liberals said they'd hike the income tax rate on banks and insurance companies by three points to 18 per cent on earnings above $1 billion. They also stated their intent to implement a so-called Canada Recovery Dividend, which would be paid by those same institutions covered by the surtax, and done in consultation with the Office of the Superintendent of Financial Institutions.

In their costed platform, the Liberals estimated the surtax could generate $5.3 billion in total revenue by fiscal 2025-26, while they pegged the proceeds from the Canada Recovery Dividend at $5.5 billion.

Details on the implementation of those measures have been sparse since they were announced last August, and there has been anticipation that Thursday's budget could be the government's platform to spell out its strategy.

According to Napier's reporting for CTV News, the federal budget will detail the percentage that those large financial institutions will pay in the surtax.

"I'm just waiting for the inevitable at this point," said Gabriel Dechaine, an analyst who covers Canada's large banks and insurers at National Bank of Canada, in an interview Wednesday.

He downplayed the immediate impact of the tax, as initially proposed, for shareholders, stating that it would only have a "marginal" drag on the outlook for dividend growth.

Dechaine said he's looking forward to seeing the "way, shape, and form" of the surtax, and he is also hopeful for details on the Canada Recovery Dividend, which he suggested has flown under the radar in comparison to the surtax.

The targeted measures against Canada's largest banks and insurers were thrust back into the spotlight last month when NDP Leader Jagmeet Singh reached a support agreement with Prime Minister Justin Trudeau that could keep the Liberals' minority government in power until 2025. Their pact includes a commitment to move forward with tax changes for the most profitable financial institutions.

It was hard for the Big Six banks to evade the Trudeau Liberals’ scrutiny when they reported fiscal year-end results in December. As a group, the average year-over-year increase in annual net income was 46.3 per cent. Canadian Imperial Bank of Commerce led the way with profit that surged 68 per cent to $6.4 billion. TD Bank Group posted the most modest gain, as annual profit rose 20 per cent to $14.3 billion.

Bank of Nova Scotia Chief Executive Brian Porter was prepared to deliver an 11th hour shot across the bow in remarks at his company's annual meeting Tuesday.

"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," he included in prepared remarks that ultimately were not delivered as a result of Porter being sidelined by COVID-19.

Singh has also made it clear he'd like to see other industries pay more in taxes. In a release on March 21, the day before the deal with the Liberals was announced, Singh said the surtax should also be applied to big box stores and big oil companies.

Dechaine cautioned that such a move could backfire on the government and would have unintended consequences.

"I kind of doubt it, but if there's any other indication (in the budget) of other industries that are going to be taxed at a higher rate, that would be a big takeaway ... if moves are made to make Canada less business-friendly, it will reduce the economic growth potential."

Dechaine added that if the government wants highly profitable companies to contribute more to the economy, it should look at other options — such as an innovation fund — that would send a less damaging signal to international capital.

"That's really what's at stake here. If you make Canada a less attractive destination for capital in which to invest, then that hurts the economic growth potential of the country," he said.

With a file from BNN Bloomberg Producer Ian Vandaelle