MANITOBA'S credit unions will take a substantial hit to their bottom line if the federal government follows through with a plan to phase out a long-standing tax deduction for credit unions, says a senior industry official.
"It will mean lower net income for credit unions," Garth Manness, chief executive officer of Credit Union Central of Manitoba, said in an interview Tuesday.
Manness said CUCM, the umbrella group for the province's 40 credit unions, is trying to assess how big the hit will be for the local credit union system and its individual institutions.
But it's safe to say it will be in the millions of dollars per year, he said.
A spokesman for one of the province's largest credit unions, Assiniboine Credit Union, said the proposed change will slice about 18 per cent off Assiniboine's annual net earnings when it takes full effect in five years.
If that figure were applied to Assiniboine's 2011's earnings, it would mean the credit union would have paid an extra $3 million dollars in federal income tax, vice-president Gerry Campbell said. "So it would reduce our profit by that much."
The proposed change, included in last week's federal budget, would phase out the federal tax deduction granted to credit unions in the 1970s to help them compete with the major banks. It would be phased out at 20 per cent a year for each of the next five calendar years.
Campbell said Assiniboine would see its federal income tax rate climb from 11 to 27 per cent in that period.
He and Manness said it's too soon to predict what the fallout will be for credit union members.
Campbell said that broadly speaking, the choices are to increase revenues and/or reduce expenses to make up for the anticipated shortfall in profit.
"In all likelihood, it will be a combination of the two," he said.
On the revenue side, that could mean raising fees and/or loan rates, he said. On the expense side, it could mean delaying projects such as opening new branches. But he emphasized those are just possibilities at this point.
Manness said the federal government's move caught the industry by surprise, and the impact will vary from credit union to credit union. That's why it's taking a while to obtain a full assessment.
"We want to make sure we understand it very clearly."
Credit Union Central of Canada has said it plans to fight the proposed change in Ottawa on behalf of the country's 348 credit unions. Manness said CUCM will assist in that effort.
He said the number of credit unions in Manitoba has been declining in recent years due to mergers. The number is expected to fall to 37 on July 1, when several more mergers become official.
But although there are fewer institutions, the value of credit union assets continues to grow at a double-digit pace, he said.
Last year, they grew by 11.3 per cent to $21.35 billion. Membership grew by 3,239, or less than one per cent, to 585,500, according to figures released last week.