No one in the streets will protest the bank tax increase that Justin Trudeau has proposed. On the contrary, the action will arouse sympathy.
Our financial institutions make a lot of money. And against all odds, they have won more during the pandemic, save for two months of general containment.
Example ? Royal Bank. The foundation announced on Wednesday that it generated $12.2 billion in profits in the first three quarters of its fiscal year 2021. And that’s as much in nine months as during the whole of 2019 (12,9 billion), that is, before the dreaded virus appeared.1.
I know that higher profits don’t mean anything if you don’t take into account the importance of the business. But the ultimate metric that takes volume into account, the return on equity, is reaching new heights.
At Royale, that return is 19.2% in 2021, much more than 14.2% for 2020 or 16.8% for 2019. This performance greatly exceeds that of other companies (Metro Grocery at 13, 1%, for example) or certification yield. Deposit (often less than 1%).
This return for banks is abnormally high given the moderate level of their risk. Its rise in particular is explained by the low level of banking competition in Canada, made possible by the protection afforded to banks under Canadian laws, which are intended to ensure a sound financial system.
“Banks are a big cartel that the federal government protects,” Martin Boyer, professor of finance at HEC Montreal, told me.
So the liberal promise to raise the federal tax rate on banks and insurance companies by 3 percentage points is inseparable. It will apply to profits in excess of $1 billion.
To this increase is added a temporary tax for a period of four years, the nature of which has not yet been determined. These two measures would generate $2.5 billion a year. About 45% of the amount will come from the tax and 55% from the interim tax, called the “stimulus dividend.”
Within the liberal apparatus, such attrition is thought to be justified, because federal aid measures during the pandemic have allowed banks to reap more.
Having said that, this proposed increase pays a lot more electorally than financially, in my opinion. For Mr. and Mrs. everyone, it is a good idea to tax bad banks, which will attract votes. Concretely, it is not certain that the federal government will be able to raise the $2.5 billion that the Liberal Party is planning.
why ? Because institutions find all kinds of ways to reduce their taxes.
Currently, banks claim a 26.5% tax on their earnings in Quebec and Ontario, or 15% at the federal level and 11.5% at the provincial level. In fact, the rate paid is already much lower, for example 20.5% at Royal Bank in 2020, and 9.7% at TD Bank.
The woman told me that “the problem is not that the tax rate is not high enough, but that there are too many loopholes, too many ways to lower the legal tax rate.” Tax expert Brigitte Alban, who prefers to focus on the minimum tax rate.
Mario Mendonca, a financial sector analyst at TD Bank, believes there will be tax evasion. He worries that these targeted taxes could move profitable businesses to places with lower taxes and less stringent regulations.
Either way, with competition weak, the bill risks passing on to customers one way or the other.
Liberals know this. They plan to increase the powers of the Canadian Financial Consumer Agency to reduce excess fees. In addition, they plan to develop rules directed at combating avoidance.
Finally, for a “stimulus return,” they will work with the Office of the Superintendent of Financial Institutions. Will it be a capital tax? Probably not, because it is fairly easy to prevent. Higher fees for deposit insurance? more impressive.
As I understand it, the Liberals will adjust the rate of “dividends” payable to $2.5 billion based on the calculations of the Parliamentary Budget Officer, which takes into account the effects of avoidance.
Either way, whatever the procedure, the imaginations of banks and insurance companies to raise their fees and lower their taxes are very fertile.
Martin Boyer of HEC Montréal recalls that at the end of the day, it’s bank shareholders who can see their profits plummet. And that these shareholders are often pension funds, which benefit a large number of individuals in Canada. He would have preferred to tax individuals, but the measure would be less profitable politically.
For my part, I support the principle of a higher tax on banks, in the context of massive deficits. It remains that the method will be critical to its success.
1. Annual exercise starts at 1He is Therefore, November and the first three quarters of 2021 ended on July 31, 2021.
In collaboration with Richard Dufour, Journalism
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