Most Canadian credit union executives can’t remember a time when they didn’t have to pay a nominal tax on income. But in the near future, the 40-year-old credit union tax, like most taxes, is scheduled to increase.
The current combined federal/provincial income tax, which mirrors Canada’s small business deduction and includes an additional deduction for other earnings not covered under small business, varies from 11% to 15% based on the province in which the credit union operates.
Those rates are scheduled to increase by 4% according to provisions in Canada’s 2013 federal budget, passed on June 26, which calls for a five-year phase-out of what had been considered a preferential tax rate.
Backers of Canada’s credit union tax, including several Canadian credit union executives who spoke recently at the CU Water Cooler Symposium in Nashville, Tenn., claim it gives financial cooperatives more influence over government decisions.
Others disagree, and Credit Union Central of Canada, the country’s trade association, believes it will have a hard time reversing the new law, according to the World Council of Credit Unions’ Michael Edwards.
“Supporters say it gives their credit unions a seat at the table, but that’s not true,” said Edwards, the Madison, Wis.-based international trade group’s chief counsel and advocacy and governmental affairs vice president. “The new tax will be another headwind for small credit unions.”
Despite the attention, Canada remains part of the minority of credit union systems that pay taxes on income. According to the recently issued 2012 Taxation Report, a member benefit produced by World Council, 70% of the 101 countries responding to a World Council survey reported paying no taxes on income.
Only 30% of credit union systems are fully or partially taxed, with rates ranging from a low of 10% to as much as 40% paid on non-cooperative transaction earnings like fees or commissions in Brazil.
Many of the taxed credit unions tend to be found among smaller systems and in developing countries. In addition to Canada, the other larger systems being taxed include Poland and Australia, the later of which has suffered from years of paying a 30% tax on net income as well as other taxes, Edwards said.
“Australia is working from a unified rule book that sees no difference between credit unions and banks, and many of the larger credit unions now refer to themselves as banks,” Edwards said. “Supporters call it a level playing field, but the taxation burden seems to be hurting small credit unions.”
Most taxed credit unions treat tax payments as they would other operating expenses, meaning that one way or another the cost is passed on to members in terms of reduced services or higher rates on loans.
Some smaller credit unions in developing countries have to post a negative a return on assets because the tax rates are so burdensome, Edwards said.
No matter what a country’s rationale may be, the idea of taxing credit unions at all is not a good one, especially in the U.S., Edwards stressed.
“The game plan for the bankers is get rid of the credit union tax exemption and not give them any more powers,” Edwards said. “What happened to the savings and loan industry is what would happen to credit unions. Without the corresponding broad investment powers of for-profit institutions, we would get crushed.”