Bank tax shows Canada doesn't have a sufficient eye for growth: Sean Speer
The Liberal government is scaling back its strategy to single out Canada's most profitable banks and insurers with targeted tax measures, resulting in about $4 billion less in revenue than originally planned.
The budget released on Thursday shows the government is now planning to raise the corporate income tax rate to 16.5 per cent from 15 per cent on taxable income above $100 million at the financial institutions.
When the Liberal Party of Canada first presented the measure during last year's campaign, the plan was to hike the tax rate to 18 per cent from 15 per cent on earnings above $1 billion for the most profitable banks and insurers.
The government estimates its revised proposal will result in almost $4.05 billion in cumulative revenue by the 2026-27 fiscal year. The original proposal was pegged to generate $5.3 billion by 2025-26.
The budget also maps out a less generous haul from the other policy designed to make the giants of Bay Street contribute more revenue to Canada's economic recovery from the pandemic.
The so-called Canada Recovery Dividend, which was similarly unveiled in the election campaign but hasn't attracted as much attention as the surtax, will see banks and insurers pay a one-time 15-per-cent tax on taxable income above $1 billion for the last tax year, according to the budget. The payments will be broken up into equal instalments over the projection horizon.
The finance department now estimates the Canada Recovery Dividend will generate almost $2.06 billion in revenue over five years. When it was first proposed, the Liberals forecast $5.5 billion in revenue through the 2025-26 fiscal year.
While the government has lessened the severity of its sector-specific surtaxes, it nonetheless ran into criticism in the immediate aftermath of the budget being tabled.
“My reaction is disappointment. I don’t believe that this is good policy, I think it sets bad precedent. It’s that simple, really,” said Ray Williams, vice-chairman of National Bank Financial, in an interview.
“It seems to me what the bank tax does … [it] reinforced this sense that Canada doesn't have a kind of sufficient eye for the question of long-term growth. And that's really damaging,” said Sean Speer, a former senior adviser to Prime Minister Stephen Harper.
“And so it seems to me the cost of the bank tax is far larger than the relatively minimal revenue that it's going to bring in, just in terms of what it says about this government, and what it says about Canada's openness to investment,” he added.
Darko Mihelic, who covers most of Canada’s large financial institutions for RBC Capital Markets, told clients he still has concerns about the targeted measures even though the “tax collector is not grabbing as much as we feared.”
One of his concerns is that the lower threshold for the surtax means more institutions will be ensnared, including Laurentian Bank of Canada, Canadian Western Bank, and iA Financial Corp.
Among the institutions that he covers, Mihelic estimates the average hit to fiscal 2023 profit will be 1.4 per cent. He pegged National Bank of Canada as being hardest hit, at 2.1 per cent.
Mihelic doesn’t cover Royal Bank of Canada. Gabriel Dechaine at National Bank of Canada Financial Markets estimates the profit hit for RBC at 3.2 per cent.
Before the details were presented in the budget, there was a range of sentiment expressed by some of the leaders whose institutions will be subjected to the targeted taxes.
Bank of Nova Scotia Chief Executive Brian Porter was poised to blast the surtax as "a knee-jerk reaction," in remarks that were prepared for delivery at his company's annual meeting on Tuesday. However, he was sidelined from the event due to testing positive for COVID-19.
“How are we planning on handling it? I guess we’re going to pay it,” Royal Bank of Canada Chief Executive Dave McKay told reporters after RBC’s annual meeting Thursday afternoon, just a few hours before the budget was tabled.
“Not to be facetious – it goes into law and it’s something we have to accommodate. We abide by the laws and programs in the countries we operate. Not sure what else to say.”