Thank you, Mr. Chair and the committee, for this opportunity to share with you the credit union's systems recommendations for your pre-budget consultation process.
I am especially grateful that you have done something different this year by asking to hear from on the ground practitioners like me. This shift feels right to me, because one of the things we do at Conexus Credit Union where I'm the CEO is to always ask how we can do things differently. This approach has helped us to grow, to become Saskatchewan's largest credit union and one of the 10 largest in the country.
With that in mind, I, too, want to do things a bit differently today. Instead of telling you about the credit union system in great detail, I want to jump straight to what you in Ottawa refer to as our ask. As I discuss our proposal, I'll weave in facts about our system.
What are we asking for? Quite simply, credit unions are calling on the federal government to create a capital growth tax credit. It would be calculated at 5% of the growth in year-over-year retained earnings. If a credit union were to increase its retained earnings by $1 million, it would save $50,000 on its tax bill. It's that simple.
I'm sure you're accustomed to receiving requests that probably sound a lot like mine do. Your default response is probably to ask why the federal government would create a special tax measure for credit unions. My answer is that we're not asking for special treatment; we're asking for fair treatment that recognizes credit unions are structured very differently than charter banks. Both operate in the same sector. Both offer similar banking services. Both are required to hold large amounts of capital and both are well-regulated and prudent, but that's where the similarities end.
We're cooperatives. They're joint stock corporations. They're regulated federally. We're regulated provincially. They're small in number and operate across the country and are internationally active around the world. We have 320 credit unions operating within provincial boundaries and serving communities.
These differences show up in ways that are relevant to the question of how we should be taxed. We give back proportionately more to our communities than they do—on average, 4.5% of pre-tax profits across our system versus 1% for charter banks. In my particular credit union, last year it was 5.8% of pre-tax profits, and most recently, a $1 million contribution to a new children's hospital in Saskatchewan, the first in our province.
Because we're cooperatives and not pressured to generate short-term results, we tend to stay invested in our communities even when competitors chase more profitable opportunities elsewhere. In fact, the credit union system today operates 380 branches in communities where there is no other physical banking presence.
These differences show up in other ways. CFIB data shows that credit unions, including Desjardins, have the second highest share of small business lending in this country at 18.6%. In my province of Saskatchewan, the credit union system provides just over half of all small business loans. We have been able to achieve that kind of success because the CFIB says we dominate the banks in providing exceptional service to the small business market. How? The CFIB would say that small businesses value our ability to offer financing at low fees with high-quality account managers. Our people understand small business. They know this sector is vital to a growing Canadian economy, the local economy, both in good times and in bad.
The data also tells another important story. On average, almost 80% of our credit union equity is made up of retained earnings versus only 45% for charter banks. In my credit union, that number is virtually 100%. The composition of our capital tells a story of a sector that grows its business in an organic way, at a speed that's profitable, sustainable, and prudent.
Our tax proposal recognizes this fact about credit unions. It also recognizes that we do not issue shares on publicly traded markets to support our growth. Because of that, our cost of capital is higher than that of the banks, whose shareholders can benefit from the 50% capital gains exemption and tax-incentivized savings plans, such as RRSPs, RRIFs, and the like.
At the same time, our calculations suggest that if the federal government does not act on our proposal, my credit union could potentially pay a higher effective tax rate than the banks by 2017. Obviously we think the tax system should strive for fairness and a competitive balance among organizational forums, especially when regulators, provincial, federal, and other, are demanding that financial services companies build and hold more capital.