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The recent 2018 Manitoba budget announcement will have a significant impact on provincial credit unions, through the elimination of the credit union and caisses populaires profits tax (profits tax) and the phaseout of the credit union special deduction.
How much of an impact will be directly correlated to the size of the credit union.
Large Credit Unions to Pay
Those with equity greater than $15,000,000 will feel the biggest bite: through the use of the special deduction, these credit unions may have paid as low as zero percent provincial income tax. The phaseout over the next five years will see their tax rate increase to the full provincial level (12 percent in 2018).
When combined with federal tax rates, these credit unions will end up paying a combined corporate tax rate of 27 percent (the federal credit union special deduction was also eliminated in a five-year phaseout process ending in December 2016).
In most cases, credit unions below the $15,000,000 level in equity, shares or retained earnings will see little to no impact by this phase out, as they are currently entitled to a portion or all of the small business deduction.
Any income eligible for the small business deduction is taxed a zero percent rate in Manitoba. These credit unions will benefit from the increase of the small business deduction to $500,000 that was also announced in the budget.
Any income greater than $500,000 will continue to be taxed at the 12 percent Manitoba rate (27 percent total), noted above.
Profits Tax Elimination
Credit union size is also a key factor for the elimination of the profits tax, which becomes effective January 1, 2019. This additional tax ensured all Manitoba credit unions paid a minimum of 1 percent provincial tax on taxable income over $400,000 regardless of size or access to the credit union special deduction.
However, the taxable impact of the special deduction phaseout for larger credit unions will far outpace any saving by the profits tax elimination. The phaseout of the special deduction will mean virtually no credit unions will trigger payment of profits tax after the five-year phase out.
For credit unions with shares or retained earnings or equity greater than $15,000,000 the new change will have a significant impact on their tax rate going forward. Credit unions that would have seen a decrease in their tax rate with amalgamation now can expect an increase in tax rate with the removal of the credit union special deduction and the inability to access the small business deduction.
For smaller credit unions, eliminating the profits tax will have little to no impact because their provincial tax rate already is in excess of the profits tax rate and they currently are not triggering payment of profits tax.
Whether large or small, credit unions should discuss their specific situation with their tax service provider as the impact will be significant as the special deduction is phased out.
For more details, view the full Manitoba 2018 budget summary.
Contact Candace Turchinski, Partner, Assurance Services, at 204.571.7683 or candace.turchin[email protected]
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