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Budget 2022 Tax Measures Impacting Financial Institutions and Credit Unions

September 27, 2022

Budget 2022 Tax Measures Impacting Financial Institutions and Credit Unions

Synopsis
5 Minute Read

Uncertain about whether tax measures in the 2022 Federal Budget will impact credit unions? Here’s what we’ve learned.

The 2022 Federal Budget (Budget 2022) included a number of tax measures impacting financial institutions. At the time of its release, it was uncertain whether credit unions would be included in the tax measures. On August 9, the Department of Finance released draft legislation to implement some of these measures. MNP has analyzed the draft legislation to confirm whether credit unions are included. Additional insight on the proposed measures is provided below.

Canada Recovery Dividend

The Canada Recovery Dividend is a one-time tax of 15 percent on banks, life insurance corporations carrying on business in Canada, and certain other corporations. The tax is calculated based on 15 percent of the corporation’s 2020 and 2021 average taxable income in excess of $1 billion. The $1 billion exemption threshold can be shared among related group members by filing a CRA-prescribed form. Under the proposed rules, the 2020 and 2021 taxable income used is income before the application of any non-capital losses or net capital losses in those years. 

The resulting tax liability must also be reported and filed with the corporation’s income tax return starting in the corporation’s 2022 taxation year. The tax is payable over five years, with one-fifth paid by the corporation’s balance due date for its 2022 taxation year and payments made in each of the four subsequent taxation years. If the corporation has more than one 2022 taxation year, the tax will apply starting in the latest 2022 taxation year.

Additional Tax on Banks and Life Insurers

The proposed additional tax will increase the corporate income tax rate for certain bank and life insurance groups by 1.5 percent for taxable income above $100 million. The $100 million exemption can be allocated among related group members by filing a prescribed form.

As a result of this measure, the federal corporate income tax rate for bank or life insurer groups for income in excess of $100 million will increase from 15 percent to 16.5 percent. An anti-avoidance rule is included in the proposals to address tax planning that may reduce or eliminate the additional tax.

The additional tax will apply to taxation years ending after April 7, 2022. For taxation years that include that date, the amount of tax will be prorated based on the number of days after April 7, 2022.

MNP Insight: Based on the proposed legislation, it appears the Canada Recovery Dividend and additional tax rules above will not apply to credit unions unless they are related to or control a bank (as defined by Section 2 of the Bank Act, excluding federal credit unions) or life insurance corporation. For credit unions that own bank subsidiaries, both the credit union and bank subsidiary would be subject to both provisions.

IFRS for Insurance Contracts

The proposed legislation incorporates newly adopted International Financial Reporting Standard (IFRS) 17 for insurance contracts. The rules address the deductibility of the contractual service margin (CSM) reserve for tax purposes. The proposed rules, along with transitional rules, will apply for taxation years beginning after 2022. We do not anticipate that this change will impact credit unions.

Hedging and Short Selling by Canadian Financial Institutions

Canadian corporations can generally claim a deduction for the amount of a taxable dividend received on a share they hold in another Canadian corporation. In addition, under the securities lending arrangement rules, registered securities dealers are allowed to claim a deduction for two-thirds of a dividend compensation payment. The proposed legislation is intended to address concerns that certain artificial transactions could be carried out to obtain the benefit of both these deductions by imposing limitations on the deductions where certain conditions are met. The proposed rules will apply in respect of dividends paid or payable on or after April 7, 2022. Transitional rules apply for arrangements in place before that date.

Reporting Requirements for RRSPs and RRIFs

Under the proposed rules, an issuer of a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) will be required to report the fair market value of all property in each plan at the end of each calendar year. This aligns the reporting requirements with those for Tax Free Savings Accounts (TFSA). These rules will apply to 2023 and later taxation years.

As we have outlined, the budget changes may have impacts on certain credit unions, so it is important to consider your specific situation.

Contact us

For more information on the above, or on tax requirements specific to credit unions, please reach out to:

Matt Bolley, Partner, Specialty Tax
[email protected]
204.720.4360

Annette Bester, Partner, National Leader Credit Unions
[email protected]
306.380.4300

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