Thank you, Mr. Chairman, and committee members, for providing the opportunity to appear before you today to offer the perspective of Manitoba credit unions on Bill C-60, specifically the measure to phase out the additional deduction for credit unions.
Credit unions are an important part of the economic fabric of Manitoba. The province's 40 credit unions have 191 branches in 117 distinct communities, serving the needs of local consumers, businesses, and farmers. In 67 towns and villages, the credit union is the only financial institution operating to serve the community.
Many credit union branches are in communities that other financial institutions vacated because they were not deemed profitable enough. Our business model, paired with fair tax policy, like the additional deduction, has made it possible and attractive for credit unions to grow in places where our competitors have retreated. Although credit unions have a profit-for-service mandate, not the service-for-profit mandate of other financial institutions, they do need to be profitable to remain viable. That income is their primary source of funds with which to build capital. It is also an important source of funds for key investments in new technology and new services, which they must make to be competitive with the much larger chartered banks.
Since the financial crisis, regulators have been increasing the reserve capital requirements for all financial institutions. Despite the fact that credit unions performed very well during the crisis, stepping up to meet consumer and small business lending demand when other financial institutions stepped back, they are not immune from the higher capital requirements. As Mr. Phillips mentioned, the bulk of credit union capital comes in the form of retained earnings, which come from net income. In order to meet higher capital requirements credit unions need to increase net income by increasing margins, which means being less competitive on rates; by increasing service fees, which means increased costs for our members; or by reducing expenses, which could eventually mean a reduction in service and, potentially, job losses
The removal in Bill C-60 of the additional deduction for credit unions will simply compound the impact of regulatory demands by requiring credit unions to pay a higher portion of their net income in federal tax, and further reduce their ability to build capital, invest in new technology, and stay competitive. The decision to phase out the additional deduction comes at an extremely challenging juncture for the financial services industry. Speaking for credit unions, our members face increasing competition from large, powerful institutions, including federal crown lending agencies, a monetary environment with unprecedented low interest rates, which are driving low margins and reducing interest income; and increasing levels of compliance, which disproportionately impact smaller financial institutions like credit unions.
Now credit unions alone face the possibility of having to pay more of their net income in federal tax. Just as the banks did before us, it is no exaggeration to say that some people may begin to question the future viability of credit unions in many communities in rural Canada. Not only could people be left without access to a nearby financial institution, valuable and stable jobs at the credit union could be lost.
According to our analysis, based on 2012 financial results, 21 credit unions in Manitoba benefited from the additional deduction. Those credit unions have branches in 50 Manitoba communities, where the credit union is the only financial institution. The impact of removing the additional deduction, once fully implemented, would be $4.5 million per year. This may not seem like a large amount, but to the credit unions working with narrow margins and increased regulatory requirements and service needs of their members, it certainly is.
Removal of the additional deduction for credit unions, as proposed in Bill C-60, is characterized as closing a tax loophole. A loophole, by definition, is an ambiguity in the wording of contract or law that provides a means of evading compliance. The additional deduction for credit unions was never a tax loophole by definition or design. It was an intended feature of tax legislation, created when credit unions first became taxable in 1972, designed to help credit unions retain capital to meet regulatory requirements and to grow, thereby to provide effective competition in the financial services industry, a goal that this government and credit unions share.
Although the financial landscape is different from 1972, the need for this deduction to help qualifying credit unions accelerate the growth of the retained earnings continues to exist. Since the deduction was introduced in 1972, it has functioned exactly as intended.
I would argue that this tax deduction has proven to be good public policy. If it were to remain in place, it would continue to be good public policy as it will help credit unions provide effective financial services that can assist with the federal government's stated desire to increase competition in this sector. It would also represent good public policy by helping to maintain strong financial services in as many communities as possible and helping to contribute to the sustainability of the many communities in rural Canada where credit unions are the only financial institutions.
For these reasons, Mr. Chairman, I respectfully ask the committee and the federal government to reconsider this proposed change.