Tens of millions of dollars of “good money” from the members of B.C.’s largest credit unions will be flowing to Victoria if the B.C. NDP wins the election in May, according to the credit unions.
As part of its election platform, the NDP announced its plan to reinstate the corporate capital tax (CCT) on financial institutions, taxing the shareholder equity and retained profits of banks and credit unions in B.C. The tax is estimated to raise $75 million in additional revenue in the current fiscal year and $150 million annually after that by charging a 3% CCT on banks and a 1% CCT on B.C.-based banks and credit unions.
For financial institutions, the move is analogous to the drastic moves in Cyprus where the government plans to impose a tax on the savings in all Cypriot bank accounts with more than 100,000 euros.
“It’s a similar analogy, for sure,” said Launi Skinner, CEO of Langley-headquartered First West Credit Union, which is the third-largest credit union in B.C.
She noted the CCT, if implemented, would nearly double the amount of tax the institution would have to pay each year, which could hamper its ability to grow and improve anything from its products and services to its branch network or back-office technology.
“It would be a considerable new operating expense. If we use our 2012 results, it’s approximately a $3.6 million new tax for us,” she said. “Any time a business is hit with an additional operating expense, you have to look at what the options are, which could be anything. But you can’t invest more into your local business.”
Helmut Pastrick, chief economist at Central 1 Credit Union, noted the move would affect about half of the largest credit unions in B.C., which have more than $20 million in member’s equity on its balance sheets. An estimate suggests the 20 largest credit unions would be paying roughly $30 million a year to Victoria if the tax were to be implemented. However, the bulk of that would be paid by the five largest credit unions in the province. The remainder would come from the various banks in Canada with operations in B.C.
The Canadian Bankers Association (CBA) told Business in Vancouver that the CCT is “bad public policy” because it would reduce the ability of Canada’s big banks to maintain the same financing to B.C. households and businesses that it has in the past. In 2011, the banks provided more than $77 billion in financing in B.C. with $12 billion provided to B.C.’s small businesses.
“When you tax away capital, you are reducing the availability of credit that banks can lend to help the economy grow.”
Both credit unions and the big-five banks have been expanding their operations in the province over the last few years. Although CBA statistics show that the number of bank employees has fallen in recent years, the number of branches rose last year and will continue to rise this year.
In a recent interview, Jane Russell, Pacific region senior vice-president of TD Canada Trust, noted the bank opened 20 new branches over the last four years and plans to open another six over the next couple of years.
B.C.’s credit unions have also grown since the CCT was phased out in 2010. Their number of employees has risen 4.5% to 8,861 in 2012 from 8,483 in 2010.
Pastrick cautioned that other factors aside from the CCT could have affected the growth of financial institutions in B.C. But the tax could stall growth when credit unions are already facing numerous challenges, including:
•additional capital requirements stemming from the global financial crisis;
•low margins because of a persistently low Bank of Canada overnight interest rate;
•the elimination of federal tax deductions for credit unions; and
•an increase in B.C.’s corporate tax rate.
In addition, B.C. would become the only province in the country to impose a CCT on credit unions.
“Having these two tax increases at the same time is inopportune at the minimum,” said Pastrick. “It’s going to increase their operating expenses and decrease profitability.”
According to the Ministry of Finance, the CCT generated an uneven revenue flow between 2002 and 2010. •