Canada's credit unions will see their federal taxes increase under the country's 2013 budget released this week, according to Credit Union Central of Canada, the industry's national trade association.
The increase comes as the result of a five-year phase out of a tax provision designed to help credit unions compete with big banks.
"We were surprised that Budget 2013 targets credit unions in this way," said Gary Rogers, Canadian Central's vice president, financial policy.
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"The Income Tax Act is no stranger to a myriad of tax incentives and credits, including many introduced by the current government," Rogers said Friday. "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."
Canadian credit unions first became taxable in 1971. Tax rules implemented at that time recognized that credit unions are unlike their competitors, because they have no access to capital markets to issue shares, pay higher operational costs due to serving small, underserved markets, and they provide social benefits.
The government wanted to ensure there was a strong, competitive second tier of financial service providers, Canadian Central said, adding that 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.
"It is ironic that today's budget states the government will ensure that it promotes the entry and growth of smaller financial institutions while imposing this new tax cost on credit unions," Rogers said.
The trade association said it 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 decide its next steps.
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