Federal budget: life insurers and banks will pay more taxes

The Minister of Finance of Canada, Chrystia Freeland, announces an increase in the tax rate for banks and life insurance companies for income above the threshold of 100 million dollars (M$). This general federal corporate income tax rate will thus increase from 15% to 16.5%. The 2022-2023 budget was tabled on April 7.

In addition, a temporary dividend is imposed on the same financial institutions which will have to pay a one-time tax of 15% on taxable income over one billion dollars (B$) for the 2021 taxation year. This dividend will be paid in equal installments over the next five years.

Together, these two measures will bring in $6.1 billion over five years. The ongoing tax for banking and life insurance groups is expected to generate some $445 million per year thereafter.

Ms. Freeland justifies these measures by pointing out that the federal government’s direct support measures to support and revive the Canadian economy due to the COVID-19 pandemic have cost more than $ 350 billion in total. While many sectors are still on the road to recovery, major Canadian financial institutions have reaped significant profits during the pandemic.

According to Ottawa, the federal measures to help people and businesses have gone a long way to reducing the risks in the financial balance sheets of these institutions. The government therefore believes that they can now contribute to Canada’s overall recovery.

Changes will also be made to the income tax law to limit various loopholes that allow these same institutions and their shareholders to practice tax avoidance.

Reactions from the business community

According to Federation of Quebec Chambers of Commerce (FCCQ), “the federal government has unfortunately made a simplistic choice to increase the taxation of financial companies and life insurance companies,” reads its press release.

“This is certainly not the desirable path from the perspective of companies that have performed well in recent years or are recovering quickly from the crisis,” says Charles MillardCEO of the Federation.

The FCCQ instead believes that the government should review its expenditures to identify inefficient budgetary measures, which would constitute a better strategy for recovering revenue for the State.

For his part, the Quebec Employers Council (CPQ) states that “the surtax imposed on the financial sector risks affecting their competitiveness and could have repercussions on taxpayers”. Strict expenditure control and sound management of public finances are important, adds the CPQ.

According to Board of Trade of Metropolitan Montreal (CCMM), this measure “will likely lead financial companies to increase the fees charged to citizens and businesses, contributing to creating inflationary pressures on banking fees in Canada”, indicates Michael LeBlancCEO of CCMM.

Taxation of SMEs

The Canadian Federation of Independent Business (CFIB) welcomes the announcement concerning the reduction of taxation for small and medium-sized enterprises (SMEs). Corporations currently benefit from a federal tax rate of 9% on the first $500,000 of taxable income, while the general corporate income tax rate is 15%.

The SME is no longer entitled to this reduced rate when its level of capital employed in Canada reaches $15 million. Budget 2022 proposes to eliminate access to the small business tax rate on a more gradual basis. The accent will be completely eliminated when the capital reaches $50M.

“CFIB fought for years to get the small business tax rate reduced,” recalls Jasmine Guenette, vice-president for national affairs of the Federation. Growing SMEs did not have access to the reduced rate. Raising the cap to $50 million will encourage the growth of a large number of small businesses, according to Mr. Guénette.

The Quebec Manufacturers and Exporters (MEQ) also expressed their approval of this increase in the cap on the level of capital employed in Canada, as did the FCCQ and the CCMM.

However, CFIB regrets that the budget does not include any reduction in credit card fees for SMEs. However, Ottawa promises to hold consultations in this regard. The Federation also emphasizes the absence of payroll tax cuts.

IFRS 17

On January 1, the new international accounting standards IFRS 17 will come into force and will significantly change the presentation of financial information by Canadian insurers.

Budget 2022-2023 proposes legislative amendments to confirm support for the use of IFRS 17 for income tax purposes with the exception of a new reservation, namely the contractual service margin, except some changes. Without this exception, profits contained in the new reserve would be deferred for income tax purposes.

This measure should increase federal revenues by $2.35 billion over the next five years, estimates Minister Freeland. Transitional easing rules and related amendments to protect the minimum tax base are also proposed.

More deficits

In his tax bulletin, Raymond Chabot Grant Thornton (RCGT) notes, like many other observers, that the Trudeau government is still not planning to return to a balanced budget. During her speech delivered in the House of Commons, the Minister of Finance did not even mention the size of the budget deficit or the debt burden, except to announce the end of the support measures related to the pandemic.

The deficit for the current year should reach $58.4 billion. In five years, i.e. in 2026-2027, the deficit will still amount to $8.4 billion according to Minister Freeland, who remains at the forecast stage without making it a government commitment.

The debt-to-GDP ratio should drop from 46.5% in 2021-2022 to 41.5% as at March 31, 2027. Debt service will cost the government $42.9 billion in 2022-2023.

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