Credit unions losing tax deduction

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This article was published 14/03/2018 (2739 days ago), so information in it may no longer be current.

Credit unions of Manitoba got blindsided in this week’s provincial budget with the announced phase-out of a special deduction that, by 2023, will mean an additional $15 million its 30 members will have to pay in provincial corporate income tax.

While Credit Union Central of Manitoba (CUCM) CEO Garth Manness said it was a surprise, Finance Minister Cameron Friesen said they should have seen it coming.

The special tax deduction which currently allows credit unions and caisses populaires to pay a lower rate of tax on a portion of their income is being phased out over five years beginning on Jan. 1, 2019. It was a program originally introduced at the federal level about 45 years ago, according to Friesen.

It was intended at the time to give credit unions, then in their infancy, a leg-up to allow them to survive in the very competitive financial services industry.

“Fast forward to 2018 and credit unions are now modern, mature financial institutions,” Friesen said.

“They are competing full-on in personal banking, corporate banking, ag lending… with the chartered banks. We are saying at this point, we don’t believe they need an additional deduction available only to them.”

In addition to phasing out the special deduction, the province also eliminated a one per cent profit tax. But the two measures hardly cancel each other out. Credit unions will go from paying one per cent tax on net earnings over $400,000 to paying 12 per cent by 2023.

But Manness disagrees that the assistance is no longer necessary.

“Our primary competition, the banks, have access to capital markets and have many more vehicles in order to build their capital base,” Manness said. “But the co-op financial institutions are structured differently than corporate financial institutions. The way for credit unions to build equity is primarily through building retained earnings.”

Since the 2008 banking crisis, financial institutions around the world are now compelled to secure greater amounts of equity capital as security against their loan portfolio. In the case of credit unions in Manitoba, that has gone up from eight per cent to 11.5 per cent.

“We are not really challenging those targets,” Manness said. “We are simply stating that we have really only one clear mechanism to get the best form of capital and that is through retained earnings, and taxing away our income just makes it that much more difficult for us to meet those targets.”

There are 30 credit unions in Manitoba with more than 600,000 members in total with combined assets of just more than $30 billion. Friesen estimates that the five largest — theoretically the most capable of handling the additional cost — will likely bear the brunt of about 70 per cent of the increase.

Manness believes the fact that credit unions have become such an integral part of the fabric of so many communities and are making available important debt financing to many businesses in the province, that his members should not be hit with such a significant tax increase.

“We are very disappointed,” he said. “It is going to make it more difficult for us to run our business. We are a Manitoba success story. Why we should be rewarded with increased tax as a result of being successful and helping to build the Manitoba economy is a question we would raise.”

Friesen said the government is a big supporter of credit unions and has a lot of confidence in their ability to continue to grow.

He said the rationale to phase out the deduction was part of the Pallister government’s broader strategy of re-evaluating about $600 million worth of tax credits across a range of sectors.

“They are extensive, poorly co-ordinated and more than that, what we noticed was there was no format under the former government for tax credits to be reviewed for efficiency or effectiveness,” Friesen said. “They were enacted and then stuck there. There was no way to measure their value either to the sector or group or to the tax-payer. That season is over.”

As well, the province took a cue from the federal government and three provincial governments who have already eliminated the deduction or are in the process of it. The Saskatchewan government announced a phase-out of the credit union deduction in its 2017 budget.

Manness said CUCM will try to convince the department of finance to rethink the deduction phase-out, but Friesen does not intend to budge.

“We have made up our mind,” he said. “We will go down that path.”

martin.cash@freepress.mb.ca