NDP calls on Ottawa to fix credit union tax problem revealed by audit firm

OTTAWA – A major auditing firm says credit unions and caisses populaires are facing an unexpected surprise from the federal taxman.

The March budget included a measure designed to see banks and other lending institutions pay the same tax rates as other corporations.

But accounting firm Deloitte says amendments passed in late June to implement the changes mean tax rates for credit unions will be 13 percentage points higher than those paid by banks.

NDP finance critic Peggy Nash calls it a radical Conservative tax hike.

She’s calling on Finance Minister Jim Flaherty to either fix the problem, or explain why credit unions and caisses populaires are being unfairly penalized.

The government says the change was designed to improve the fairness of the tax system by eliminating a preferential tax rate paid by financial institution.

The move effectively means an increase to the tax rate paid by most credit unions and caisses populaires from a federal rate of 11 per cent to 15 per cent on income in excess of the small business limit.

But Deloitte says a technical error in the legislation will instead subject them to a federal tax rate of nearly double that.

“There is a technical deficiency in the legislation that adversely impacts credit unions and caisses populaires,” the firm says in a tax alert issued Aug. 14.

“The result is that the federal rate applicable to income that is not eligible for additional deduction is subject to a 28 per cent federal tax rate rather than 15 per cent.

The firm says Finance Department officials are aware of the discrepancy, but have not said whether the problem will be corrected.

“Our contacts would not provide any assurance that the legislative fix would be enacted prior to the end of 2013 or whether the fix would be retroactive to budget day.”

Parliament would have to amend the legislation.

If left alone, the change would mean significant tax costs for credit unions and caisses populaires, which would likely be passed along to their customers.

The Deloitte report findings are troubling, said Nash.

“If this is a legislative error, the minister must immediately take corrective action,” she said.

“If this was a deliberate attack on Canada’s credit unions, then the minister must explain why credit unions and caisses populaires are being targeted by his government for such unfair treatment.”

A general tax rate reduction was introduced in 2001 for all corporations to reduce the federal tax rate to 15 per cent from 28 per cent.

Using a formula, corporations could claim deductions from taxes owing equal to what’s known as their “full rate taxable income,” multiplied by the reduced percentage rate.

But the budget bill changed the definition of full rate taxable income as it applies to credit unions and caisses populaires, yielding a much different result when they calculate taxes owed.