Posted March 22, 2013

2013 Budget

Increased Income Taxes Disappoint Credit Unions

TORONTO - Canada's credit unions were disappointed to see that today's federal budget increases taxes for credit unions and caisses populaires in 2013 and in future years. A tax provision designed to help credit unions compete with big banks will be eliminated.

"We were surprised that Budget 2013 targets credit unions in this way," said Gary Rogers, Vice President, Financial Policy with Credit Union Central of Canada. "The Income Tax Act is no stranger to a myriad of tax incentives and credits, including many introduced by the current government. In the absence of a comprehensive review and widespread reduction of tax expenditures, it is curious that one specific to credit unions has been terminated."

Credit unions first became taxable in 1971. Tax rules implemented at that time recognized that credit unions are unlike their competitors. They are "the small business of financial institutions". Credit unions do not have access to capital markets to issue shares; they incur higher costs to operate in small underserved markets; and they provide social benefits different from big banks, especially in serving small communities across Canada. Governments have wanted to ensure there was a strong, competitive second tier of financial service providers. Those reasons continue to be valid today.

The Government of Canada's Annual Tax Expenditures report shows that the cost to the treasury of this tax incentive has been decreasing over a period of years. In the most recent year, 2012, it was projected to be $47 million.

These changes will be phased in over 5 years. Not all credit unions are impacted equally. Some have grown their retained earnings beyond the threshold for accessing this tax reduction and will see no change. Some very small credit unions may continue to access the lower tax rate through the conventional small business tax rate regime. But most credit unions will experience tax increases.

Rogers noted, "It is ironic that today's budget states the Government will ensure that it promotes the entry and growth of smaller financial institutions (page 147), while imposing this new tax cost on credit unions."

Credit Union Central of Canada is in the process of consulting with the credit union system, including its Board of Directors, to assess the impact on the credit union system and our next steps in response to today's unexpected announcement.

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