Timothy Hughes
Mar 29, 2023
Proposed amendments to tax rules on dividends that banks and insurers receive from Canadian companies, unveiled in last week’s 2023 federal budget, point to a worrying reliance on the financial sector for revenue, according to analysts. Previously, financial institutions could exclude dividends from their business income for tax purposes. The proposed change would require them to include dividends of Canadian shares.
Osler partner Timothy Hughes, Tax, tells the Globe and Mail that, since dividends are paid on after-tax income, this change could contradict the long-held legal principle against double taxation.
“The intercorporate dividend deduction that prevents corporate earnings from being taxed twice when they are distributed to another corporation has been a feature of the Canadian tax system since the Income Tax War Act of 1917,” he says. “The view was it would be tantamount to double taxation if that wasn’t there.”
Almost 20 years ago, the federal government introduced mark-to-market rules requiring financial institutions to report gains and losses — and pay the associated tax — each year.
“There are already specific rules in the Act that contemplate dividends being received on those types of securities by financial institutions, they’re there,” Timothy says. “We’ve had the non-double-tax principle since 1917, we’ve had mark-to-market rules since 1994 and then yesterday the Department of Finance said those two things don’t go together, so it was very surprising to me.”
You can read the full article, “Ottawa’s newest tax hit signals concerning reliance on financial sector for revenue, analysts say,” on the Globe and Mail website.