Financial sector braces for bank tax following Liberal minority win

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Monday’s federal election, which produced another Liberal minority government, has many expecting the status quo to prevail over the coming weeks and months, but for the financial services industry, a big change could be on the way.

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During the election campaign, Justin Trudeau pledged to enact a three per cent surtax on banks and insurance companies on every dollar they earn over $1 billion, prompting complaints that the sector was being singled out and penalized for its strong performance during the COVID-19 pandemic.

With the NDP again holding the balance of power in Parliament, industry watchers said Tuesday they wouldn’t be surprised to see the tax proposal — the proceeds of which were earmarked to improve housing affordability — move forward quickly.

“It is consistent with the Liberals announced policy and plays well with the NDP desire to tax substantial sources of wealth,” said Jon Levin, a veteran Bay Street lawyer at Fasken Martineau DuMoulin LLP.

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“My guess is, especially in the context of a minority government, that they will quickly move ahead with the tax without any consultation,” Levin said. “I expect them to do this in order to show that they are meeting their election promises.”

It is consistent with the Liberals announced policy and plays well with the NDP desire to tax substantial sources of wealth

Jon Levin

In the run-up to the election, the NDP pledged to target the wealthy and large corporations, with plans to raise the top federal marginal tax rate by two percentage points, hike the capital gains inclusion rate would increase to 75 per cent, and add a one per cent wealth tax for the “super-rich” with over $10 million in wealth.

Analysts have suggested the Liberals’ proposed tax on financial services companies, on top of the 15 per cent corporate rate, could cost the banks around two per cent of their profits, though the impact varies from institution to institution. Insurance companies are less likely to feel the impact.

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The Canadian Bankers Association said the reduced income would penalize the majority of Canadians who are bank shareholders and receive dividends, either through share ownership or through pension and mutual funds.

The tax hit would “merely re-direct” bank profits from Canadians to government coffers, the CBA said in an Aug. 25 statement following the Trudeau’s campaign tax pledge.

One bank analyst, who spoke on condition that he not be named because he is not authorized to speak for his financial institution, said he doesn’t expect the Liberals’ campaign promise to be affected by the party’s failure Monday to secure at least 170 seats in the House of Commons.

“I don’t think it was contingent on a majority government,” he said.

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Business groups have been vocal about their opposition to new taxes on companies to fund government spending and reduce pandemic-related debt, and reiterated Tuesday that the focus of the newly formed government should be on economic recovery.

“The worst way to encourage new investment in Canada would be to bring in new taxes or regulations that say to businesses that our goal is to punish success,” said Perrin Beatty, chief executive of the Canadian Chamber of Commerce.

“While other countries are anxious to partner with their business communities, too often Ottawa treats business as an opponent or as an obstacle to be overcome. Business-bashing may be good politics, but it’s bad economics and comes at a very high cost.”

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A new tax on banks and insurance companies could also prove unpopular with some parties in Ottawa, but Levin, the Faskens lawyer, said the move would be unlikely to cost the Liberals key support among voters.

“I suspect Bay Street already votes Conservative, and running against the banks is likely good politically for the Liberals and helps them with the NDP,” he said.

Rocco Rossi, chief executive of the Ontario Chamber of Commerce, said Tuesday that his organization is calling on the new government to look beyond new taxes on businesses.

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“The alternative to new taxes is growth,” he said. “Tax reforms should focus on incentivizing increased business investments and streamlining the tax system.”

Goldy Hyder, chief executive of the Business Council of Canada, echoed those remarks.

“As Canada deals with the COVID-19 pandemic and its aftermath, we should be focused on economic recovery, not raising or lowering taxes,” he said.

Hyder added that since “no party can claim to have won a convincing mandate” in Monday’s election, the parties should set aside partisan interests in favour of working together on an economic growth plan.

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