Target hit in the center by arrow

As Canada’s big banks report massive profits this week, Prime Minister Justin Trudeau is pledging to impose higher taxes on financial institutions’ earnings.

A re-elected Liberal government would raise the corporate income tax rate for banks and insurance companies from 15% to 18% on all earnings above $1 billion, the party said Wednesday.

“During Covid-19, Canada’s financial services sector recovered faster and stronger than many other industries, due in part to the unprecedented federal support that ensured Canadians and Canadian businesses were able to weather the crisis,” a policy backgrounder said.

Want more immediate, memorable insights? Listen to this Soundbites episode, featuring Aylon Ben-Shlomo, principal and client portfolio manager with Aristotle Capital.

Government relief programs such as the Canada Emergency Wage Subsidy and the Canada Recovery Benefit prevented bankruptcies and credit loss, the document said, and “insulated our financial sector from the worst of the pandemic.”

Meanwhile, big banks have continued to beat quarterly earnings expectations. Canada’s largest bank, RBC, reported third-quarter profit of $4.3 billion on Wednesday. The Liberal backgrounder said the operating income of Canada’s six largest banks has increased by more than 17% since the beginning of the pandemic.

In addition to the tax, the same large financial institutions would contribute to a “Canada Recovery Dividend.” Banks’ and insurers’ allocation to the fund would be developed over the coming months with the Superintendent of Financial Institutions and apply for a four-year period.

The two measures would begin in 2022-23 and generate at least $2.5 billion per year over four years, the Liberals said.

“To address the potential for sophisticated tax planning or profit-shifting on the part of these companies, we will develop targeted anti-avoidance rules, and we will also enhance the powers of the Financial Consumer Agency of Canada to review and address consumer complaints of excessive fees as a means to ensure these costs are not passed on to consumers,” the backgrounder said.

The Liberals pitched the additional tax as a means of helping more Canadians afford homes, which has become a key campaign battleground. On Tuesday the party revealed a housing plan that included a tax-free home savings account for first-time buyers and incentives for cities to increase supply.

The Liberals aren’t the only party targeting financial institutions this election. The Conservative platform released last week said the party would require “more transparency for investment management fees so that seniors and savers don’t get ripped off,” and order the Competition Bureau to investigate banking fees.

The NDP, meanwhile, proposed a 15% “excess profit tax” on “large corporations that took publicly funded Covid-19 wage subsidies and turned around and paid out executive bonuses, executed stock buybacks or paid shareholder dividends.” The party would raise the corporate tax rate more broadly from 15% to 18%.

The Liberals also said Wednesday that they would implement the recommendations of the Advisory Committee on Open Banking to provide consumers with more options for financial services. The Conservatives also pledged to legislate open banking.

Correction: This article has been updated to state that the Liberal proposals would raise $2.5 billion per year over four years, rather than $2.5 billion over four years, as previously stated.