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Credit unions struck

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Clumsily worded tax laws can cause problems as wide as all outdoors. The Conservative government's March budget has produced a doozy.

A major goof in the language of amendments to the Income Tax Act Parliament passed in June means the tax rate on credit unions and caisses populaires is 13 per cent higher than chartered banks, according to accounting firm Deloitte.

The federal NDP has called it a radical Conservative party tax hike. NDP finance critic Peggy Nash describes it as a "deliberate attack on Canada's credit unions."

But the amendments, enacted to support the government's budget measure to make banks and lending institutions pay the same tax rate as other corporations, appear to be less ideologically driven tax grab than simple linguistic folly.

The legislation's intention was to improve the fairness of the tax system by eliminating financial institutions' preferential tax rate. The move was supposed to increase credit unions' and caisses populaires' federal rate of 11 per cent to 15 per cent, on income in excess of the small-business limit. But Deloitte, in a published tax alert, says a technical error in the wording of the legislation instead subjects them to a tax rate of near double that, at 28 per cent.

It's a significant error. But there are worse legal-drafting mistakes. The 50th anniversary of one passed recently, with little notice.

On Aug. 5, 1963 in Moscow, after eight years of difficult superpower negotiations, the United States, the United Kingdom and the Soviet Union signed the first Limited Nuclear Test Ban Treaty. Its objective was to ban all nuclear explosions in space, the atmosphere and underwater, and for all purposes, military or civilian. Each of U.S. President John F. Kennedy, British Prime Minister Harold Macmillan and Soviet Premier Nikita Khrushchev trumpeted the ban at home and abroad.

Shortly after its signing, however, former Yale University law professor Layman Allen uncovered a horrifying error on his review of the treaty. Slipshod legal draftsmanship resulted in the treaty being open to interpretation that certain types of above-ground nuclear tests were in fact permitted. Allen quietly sounded the alarm in legal and diplomatic circles, and the error was ultimately corrected.

A sharp increase in lending institutions' tax liability doesn't rank up there with radioactive fallout as a byproduct of sloppy legal writing. But it's no mere concern of accountants and tax lawyers. Its repercussions filter down to the millions of Canadians who bank or borrow at credit unions or caisses.

The jacked-up tax rate would reduce the financial institutions' net earnings. So anyone who's a member of a credit union or caisse could see his surplus share value drop, and annual cash dividend or rebate shrink or disappear.

Tax legislation, in particular, is often so poorly drafted it shouldn't surprise that a perverse outcome occasionally results.

The smart money says the penalizing of the credit unions and caisses populaires was unintended and accidental. Despite the federal NDP's allegations, it's a reach to believe there's a secret government agenda to target credit unions and caisses. The best available evidence to date suggests the harm created by the language of the amendments was simply the product of poor legal drafting.

The Department of Finance, however, has been disturbingly mum about the issue. Deloitte reports Finance officials are aware of the discrepancy, but have not said whether the problem will be corrected.

If the government doesn't fix the problem, the amendments will likely end up the subject of needless protracted litigation. And no one will have a firm idea what the Income Tax Act amendments mean for the next couple of years, as we all wait for the courts to sort it out.

The federal government should move to correct the error as quickly as possible.

Editorials are the consensus view of the Winnipeg Free Press’ editorial board, comprising Catherine Mitchell, David O’Brien, Shannon Sampert, and Paul Samyn.

Republished from the Winnipeg Free Press print edition September 9, 2013 A10

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