Banking on tax cuts

TheStar.com – business/moneyville.ca/tax
Fri Mar 04 2011.   By Michael Lewis

Canada’s richest banks are reaping a windfall from a decade-long decline in corporate taxation.

It’s a reduction that translates into billions of dollars in lost tax income for Ottawa and the provinces from corporations in general and the profit-churning banks in particular — at a time of steep deficits and stubbornly high unemployment.

“That’s a lot of schools, a lot of hospitals,” said Toby Sanger, senior economist at the Canadian Union of Public Employees in Ottawa.

And the growing use of tax havens has eased the load on banks even further, while fattening their bottom lines, BMO Capital Markets said in a report.

The total tax burden of the so-called Big 6 banks, including non-income taxes, stood at 30.4 per cent of income in 2010, down from 41.9 in 2000, says the Canadian Bankers Association.

But the actual tax rate on income earned in Canada had fallen to about 26 per cent in 2010 from 31 per cent in 2000, according to research from the Canadian Centre for Policy Alternatives. And that rate is slated to drop even more sharply assuming the final round of planned business income tax reductions in Canada is fully implemented over the next couple of years.

Banks have been “major beneficiaries” of tax cutting, BMO Capital said, with lower levies pumping up their return on equity and adding more than 2 per cent to per share earnings growth.

Many economists see the banks’ lightened tax load as a net gain for Canada, even though the Big 6 slashed payrolls during the financial crisis and focused much of their direct investment south of the border.

Reduced taxation said Bill Robson, president and CEO of the Toronto-based public policy think tank, the C.D. Howe Institute, assures that Canada’s banking system remains stable and robust, which in turn supports a broad economic good.

He said data shows that the easing burden on banks that began when Paul Martin was finance minister in the previous Liberal government is leading to new investment, stimulating lending to households and small businesses and keeping a lid on costs for consumers.

“Hands up if you want higher banking fees,” Robson, said. “Sign here if you want to pay more to manage your mutual fund.”

Robson also said ire over multi-billion-dollar bank profits is misplaced, suggesting that the public is actually incensed over bank executive bonuses that, if excessive, could be clawed back through the personal tax system.

“I’m not advocating a personal tax increase,” he said. “But raising the corporate tax rate is a clumsy way to attack executive compensation.”

In 2005, Canada was the fourth highest taxed jurisdiction in the world, but “since then, corporate tax cuts have made Canada an attractive place to do business,” added Jack Mintz, a fiscal and tax policy specialist at the University of Calgary.

He said that while federal estimates put the annual loss starting in 2013 from a three percentage point reduction in the general corporate tax rate at $4.6 billion — the Liberals estimate it at $6 billion — a lower tax results in shifting of profits from less favourable jurisdiction that can greatly offset the drop in revenue.

Banks paid as little as $2 billion in total tax in 2008 when their profits were hit by the financial crisis and as much as $8.7 billion in 2010 when their earnings recovered sharply, according to Statistics Canada. Banks including TD and RBC, Canada’s most profitable corporation, reported record earnings this week, with TD paying out its first dividend to shareholders in more than two years.

Banks will gain half a billion dollars alone from cuts in Ontario’s corporate income tax and elimination of the provincial corporate capital tax, said Armine Yalnizyan, senior economist at the Canadian Centre for Policy Alternatives, also based in Ottawa.

The financial services industry, which includes banks, insurers and credit unions, made a $51 billion combined profit in 2010 on total revenue of $305 billion, for a 17 per cent profit margin, according to finance department data.

It paid $12 billion in income tax, an effective rate (federal and provincial together) of 24 per cent. The amount came in below the statutory rate but economists say results can be skewed by the finance sector’s ability to park cash assets in low-cost tax jurisdictions.

They add that banks benefit disproportionately from tax cuts because of the sustained profitability of the sector.

Economists estimate the finance industry as a whole will save $1.5 billion annually once planned reductions in the federal corporate income tax rate from 18 per cent last year, to 16.5 per cent in 2011 and 15 per cent in 2012 are in place.

That $1.5 billion, coincidentally, is exactly what the federal government estimates it would have cost to temporarily expand benefits for Canada’s unemployed, an extension that is being eliminated this month under the Harper government’s plan to phase out its stimulus package.

“Instead, (Ottawa) will now spend $1.5 billion per year to enhance after-tax profits in the financial industry,” said Jim Stanford, an author and economist at the Canadian Auto Workers union.

“Incredible.”

Taxing profits

TD Bank

First quarter profit: $1.54 billion

Taxes: $343 million

RBC

First quarter profit: $1.84 billion

Taxes: $612 million

CIBC

First quarter profit: $799 million

Taxes: $268 million

National Bank

First quarter profit: $465 million

Taxes: $129 million

Source: Financial reports

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