About the Canadian Banking Industry

8/2/2019 About the Canadian Banking Industry

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~ CANADIAN BANKERS ASSOCIATION Box 348, Commerce Court West199 Bay Street, 30th FloorToronto, Ontario, Canada M5L 1G2www.cba.caLindsay WilliamsDirector, Ontario and Atlantic RegionTel: (416) 362-6093 Ext. 224Fax: (416) [email protected] 3, 2006

Honourable Mitch MurphyProvincial TreasurerSecond Floor South, Shaw Building95 Rochford StreetP.O. Box 2000Charlottetown, PElC1A 7N8

Dear Minister Murphy:Re: Canadian Bankers Association Submission for PEl Budaet 2006On behalf of the members of the Canadian Bankers Association (CBA), we are pleasedto present our 2006 pre-budget submission. We appreciate the opportunity to provide thefollowing comments and recommendations of the banking industry, which we believe willpromote greater prosperity for Prince Edward Island.

We commend the government for PEl's fiscal progress to date, including the steps taken toeliminate the deficit, control program spending and raise additional revenue through consumptiontaxes. We also appreciate your government's attempt to balance important PEl priorities such ashealth care, education and jobs, with the need to achieve fiscal sustainability and a balancedbudget. By adopting prudent fiscal measures now,your government is creating a solidfoundation for increasing prosperity, to ensure PEl iswell-positioned to meet the challenges thatlie ahead.In our view, the best way to ensure that the government has a sustainable source of revenue tofinance those programsthat are important to the province and all Islanders is to create acompetitive tax regime.About the Canadian Banking IndustryThe CBA is a professional industry association, which provides information, research, advocacy,education and operational support services to its members, the chartered banks of Canada, aswell as to Canadians through its website and free publications. The CBA's mission is to be aleading contributor in the development of public policy on issues that affect the financial servicessector.The Canadian banking industry is one of the strongest industries in Canada. It creates wealth forCanadians by serving as an important intermediary between savers and investors on one hand,and borrowers and entrepreneurs on the other. By providing access to capital for businesses ofall sizes as well as Canadian households, the industry serves as a crucial catalyst for economicgrowth.

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Taxes Paid By Canadian BanksCanada's banks paid over $7.6 billion in taxes to Canadian governments in 2004 ($9.0 billionglobally). In PEl, the largest six Canadian banks paidalmost $7.5 million in taxes in 2004,including almost $2.6 million in capital taxes. The treasuries of Canada's governments benefitedfrom the banking industry since 85% of the taxes paid by Canada's bankswent to Canadiangovernments, while only 73% of the banks' earningswere generated in Canada.The size of the industry's tax bill underscores the important contribution that banks make toCanadian governments' ability to meet their expenditure requirements. In fact, the bankingindustry paysmore in taxes than any other industry in Canada. The CBA's members paid morein annual corporate income taxes than the total annual corporate income tax bill for the oil andgas, construction, real estate and insurance industries combined.1Other Banking Industry ContributionsThe Canadian banking industry employs almost one quarter of a million people in Canada andover 500 in PEL While the banking industry represents 0.81% of all employees in PEl, thebanking sector generates 2.3% of the province's GDP.2 To support our employees and toimprove continually the quality of the service we provide our customers, Canada's banks investover $1500 per employee per year in training.Canadian banks provided almost $189 billion in consumer credit last year and Canadianhouseholds currently benefit from almost $368 bill ion in outstanding residential mortgages fromCanada's banks.Canadian banks provided over $760 million in consumer credit to Islanders in 2004 and PElhouseholds currently benefit from almost $1 billion in outstanding residential mortgages fromCanada's banks. The banks also provided nearly $1 billion in authorized credit to over 4,800 PElbusinesses in 2004, most of which were small and medium-sizedenterprises.Further, Canadian banks donated more than $125 million to Canadian charities in 2005, of whichover $500,000 went to PEL In fact, there has been a three-fold increase in banks' charitabledonations since 1995.And finally, Canadians are more than just bank customers, they are bank owners. Through theirpension plans and other investments vehicles, Canadian bank shares are widely held by manyCanadians as noted is some examples below.

1 Financial and Taxation Statist ics for Enterprises, 2003, Statistics Canada2 Data includes monetary authorities and depository credit intermediation

Canadian Pension Plan (2005) 16,000,000 20.0%Nova Scotia Teachers' Pension Plan (2003) 21,800 22.0%Ontario Municipal Employees Retirement 354,619 I 18.3%System (OMERS- 2004)Local Authorities Pension Plan - Alberta (2001) 125,446 12.5%British Columbia Investment Management I 350,000 I 17.9%Corporation (2005)Caisse de depot et placement du Quebec I N/A I 3.3%(2004)


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Tax CompetitivenessThere is no question that the PEl governmentwill continue to face difficult challenges as itrestores the fiscal health of the province. Over the coming years, the CBA believes it is criticalfor the government to encourage employment and investmentgrowth, in order to ensure a strongeconomy and broad tax base to support future expenditure obligations (Le., health care andeducation in particular).We believe that a strong fiscal position, including balanced budgets and debt repayment,willprovide the foundation for improving the province's economic position, if the government reducesthe tax load borne by PEl householdsand businesses.The CBA's key message to the government is: Take the next step to make PEl's tax regimemore competitive. Lower taxes stimulate long-term economic growth by increasing investment,employment opportunities, and new technology, which ultimately strengthens the province's taxbase. A broader tax base provides the government with the revenue it requires in the short-termand an ongoing assurance that there will be sufficient revenue for the province's future needs.Moreover, given the nature and relative size of Canadian markets, combined federal and PEl taxrates need to be comparable, if not lower than other jurisdictions in order to be competitive.An uncompetitive tax regime undermines the long-term economic health of a jurisdiction. Itsends a signal to would-be investors (both those who might expand their operations and thosewho might make an initial investment in PEl) that PEl is not, as itwere, open for business. Thisleads to a loss of existing and new investment, including employment opportunities, newtechnology and expertise, and a reduced access to capital.In addition to having a negative impact on investment and employment growth, uncompetitivetaxes weaken the tax base that governments rely on for revenue. Fewer businessesand fewerPEl workers make it more difficult for the government to fund necessary and importantinvestments in health care, education and infrastructure to improve Islanders' standard of living.We therefore recommend that PEl reduce its business taxes to create a competitive tax regime.This will lead to increased capital investment, more employment, improved productivity andinnovation, and ultimately, a stronger economy.Corporate Income TaxesThe current PEl general corporate incometax (CIT) rate of 16% is one of the highest in Canada.This highCIT rate has a particularly negative impact on the PEl economy because the mostcompetitive tax regimes in Canadawith significantly larger markets have considerably lower CITrates. For example, the general CIT rates in British Columbia, Alberta and Quebec are 12%,11.5%and 9.9% respectively.The CBA has found that there is a direct correlation between competitive tax regimes andemployment growth in the banking sector. For example, between 1999 and 2005, bankemployment has increased in more competitive tax regimes - + 9.3% in Alberta, +5.2% in BritishColumbia and +2.7% in Quebec - while bank employment has decreased by 5.3% in PELClearly, the PEl government needs to act now to create a more competitive business tax regime.In particular, we recommend reductions to the general CIT rate as soon as possible, and at aminimum, a schedule of reductions to make this tax more competitive with other Canadianjurisdictions.


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Recommendation No.1:The CBAencourages the PEl government to reduce the general CITrate as soon aspossible, and at a minimum, introduce scheduled reductions to make this tax morecompetitive with other Canadian jurisdictions.Capital TaxesAnnual capital taxes are almost a uniquely Canadian phenomenon that undermine investment,and in turn employment, because these taxes are profit insensitive. In the banking industry,capital taxes are a direct tax on employment to the extent that salaries and wages of ouremployees are required to attribute capital. Moreover, capital taxes are particularly punitive toour industry since our members are compelled by regulation to hold high levels of capital tosupport the safety and soundness of the financial system and then are taxed for doing so.A highly regarded study - the C.D. Howe Institute's 2005 Tax Competitiveness Report3 - notedthat Canada has the second highest effective tax rate on capital among 36 industrial and leadingdeveloping countries. A lesser known finding of that study is that Newfoundland, Nova Scotiaand New Brunswick have the lowest effective tax rates on capital in Canada at 20.1%, 28.1%and 22.5% respectively. Prince Edward Island, however, ranks in the middle of the packwith amarginal effective tax at 37.1%. Another study by the federal Department of Finance estimatesthat a one-per-cent-of GDP reduction in revenue from cutting the cost of new capital wouldincrease steady state GDP by4.39 per cent, and concludes that capital tax cuts are morebeneficial to the economl than reductions inwage and consumption taxes.While we commend the PEl government for recognizing the negative implications of capital taxesand for eliminating this tax on general corporations, we are concerned that the capital tax onfinancial services firms has continued and that the government increased this capital tax from 3%to 5% in its 2004 Budget. This creates a very significant economic distortion bysingling out thefinancial sector for a higher, more punitive rate of taxation.Moreover, the CBA strongly believes that every government's fiscal policies should strive toachieve a level playing field within an industry sector and across industries. Economicdistortions such as subsidies and targeted taxation measuresare detrimental because theycause an inefficient allocation of resources and serve to dampen overall growth even if certainbusinesses or industries are (artificially) supported. Punitive tax measures that target specificindustries or specific sectors within an industry send a very strong and negative signal topotential investors.For these reasons, one of our main budgetary concerns in PEl today is the elimination of thecapital tax levied against the financial services industry. We encourage the PEl government torecognize the negative implications of capital taxes for all industry sectors and eliminate thecapital tax on financial institutions as soon as possible.Recommendation No.2:The CBA recommends the elimination of the financial sector capital tax as soon as this isfeasible, in order to create a more competitive tax regime in PEL At a minimum, werecommend a schedule of reductions to achieve the elimination of this tax.

3 J. Mintzet al. , The 2005 Tax Competitiveness Report: Unleashing the Canadian Tiger, C.D. Howe Institute Commentary,September 20054 M. Baylor and L. Beausejour, Taxation and Economic Efficiency: Results from a Canadian CGE Model, Department of FinanceWorking Paper 2004-10, November 2004


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Tax Neutrality - Income Trusts vs. CorporationsThe CBA believes that Canadian investors are sophisticated and therefore, Canada needs anintegrated tax system to prevent investors from shifting to tax-favoured investments. A neutraltax system puts investors and businesses on a level playing field, and benefits the economy byallowing for an efficient allocation of resources.

The CBA also supports the corporate structure and the income trust structure as effectivefinancing vehicles for certain companies. While the corporate structure may be best suited togrowing businesses, income trusts are an effective financing structure for companies in the moremature stage of development. The income trust option widens the pool of investors to thesecompanies and lowers the cost of capital. The income trust structure also provides an alternativeto the common equity IPO for launching small companies into the public marketplace. We are ofthe view that both business structures should exist and that similar regulatory obligations shouldbe applied to these entities. Like the federal government, we believe that the tax system forthese investment structures needs to be neutral and efficient, to ensure decisions concerningcorporate structure are based on financial, economic and other business factors, and not on taxarbitrage considerations.We appreciate the Liberal and Conservativegovernment proposals at the federal level to moveto a level playing field in terms of the tax treatment for income trusts versus corporations. Inparticular, we commend the federal politicians for their proposals to eliminate the "doubletaxation" of corporate dividends in the hands of investors. Unfortunately, the federal proposalswill only be fully effective once the federal corporate tax rate is reduced. Until then, the reductionin the tax on dividends only partly restores tax neutrality. More importantly, however, the federalproposals will only be fully effective if provinces also undertake reductions in their tax ondividends through an increase in their dividend tax credits. Moreover, given the way inwhichprovincial taxes are calculated, the failure of provinces to increase their dividend tax credits inlight of the federal measures could actually increase the tax on dividend income.Therefore, the CBA strongly recommends that, once the technical details of the federal proposalare released, the PEl government take the necessary steps to ensure that overall tax neutrality(Le., the federal and provincial taxes combined) in the treatment of corporate and income trustincome is enhanced by making the appropriate changes to its dividend tax credit.Recommendation No.3:The CBA recommends that the PEl government increase its dividend tax credit, therebyreducing the tax on corporate dividends, to enhance overall tax neutrality in the treatmentof corporate and income trust income.ConclusionThe PEl government faces a numberof important fiscal challenges. Perhaps the single mostimportant challenge is to ensure economic growthwhile continuing to manage the province'sfinances in a prudent and responsible manner. A strong economy and broad tax basewillensure the necessary revenue base to fund important programs and services to improveIslanders' quality of life.More specifically, the CBA encourages the government to make its business tax regime morecompetitive in three ways. First, we encourage the government to reduce the general CIT rateas soon as possible, and at a minimum, introduce scheduled reductions to make this tax morecompetitive with other Canadian jurisdictions. Secondly, we recommend the elimination of thefinancial sector capital tax as soon as this is feasible, and at a minimum, a schedule of


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reductions to achieve the elimination of this tax. And finally, we recommend that the PElgovernment increase its dividend tax credit, thereby reducing the tax on corporate dividends, toenhance overall tax neutrality in the treatment of corporate and income trust income.We believe these measures will create a more competitive tax regime in PEl that is fair andbeneficial for all businesses. Such measures will undoubtedly lead to increased investment andemployment, and ultimately, strengthen the province's tax base. The current and future fiscalplan of the government depends upon a strong tax base and a strong economy.Please do not hesitate to contact me if you have questions or wish to discuss our comments infurther detail.

Sincerely,

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About the Canadian Banking Industry

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