By Ian Duncan MacDonald

Special to the Findependence Hub

In the 2022 Federal budget a surtax of 1.5 per cent on bank profits over $100 million was proposed along with a one-time 15 per cent charge on income above $1 billion for the 2021 tax year.  Canadian banks are already among Canada’s largest taxpayers.

The six largest of Canada’s banks accounted for more than $12 billion in tax revenue and more than double that in dividend income.  They contribute 3.5%, or over $65 billion, to Canada’s gross domestic product. Over 280,000 are employed by these banks.

When Toronto-Dominion Bank’s chief executive, Bharat Masrani, recently stated that a proposed corporate tax rate increase that targeted financial institutions ““could lead to unintended consequences,” you could see the battle lines being drawn.

The pawns in this high-stake battle looming on the horizon are the millions of Canadian pensioners, charities, endowments, mutual fund investors, bank shareholders, pension funds, RRSP investors and others dependent on bank dividend payments.  The banks will do their best at every opportunity to frighten their 34,000,000 customers with dire predictions of the harmful, personal financial consequences these proposed taxes will cause.

The banks have your phone number, your e-mail address, and your street address.  Every time you deposit or withdraw funds, I would expect them to remind you of how you are being impacted by the proposed taxes. Every bank statement could carry their message their message that the tax is hurting you more than them. They are far better organized and motivated than the civil servants.

The stakes are huge.  The Royal Bank of Canada (RBC) would likely pay the most, an estimated additional $334.7 million. The Toronto-Dominion Bank would pay about $285.5 million, the Bank of Nova Scotia (Scotiabank), approximately $191.9 million, the Bank of Montreal would owe about $137.9 million, the Canadian Imperial Bank of Commerce around $120.2 million, and the National Bank around $42.0 million.

The Federal government is already anticipating the pushback. It has stated they will not tolerate “sophisticated tax planning or profit-sharing” by the financial institutions to dilute the new measures. As well, new “targeted anti-avoidance rules” will be put in place.  The federal Financial Consumer Agency of Canada will be policing any “excessive” fee passed on to customers to offset the cost of the new corporate tax measures.

One thing to propose this tax, another to implement it

It is one think to propose such a tax.  It is another thing to implement it.

Canadians tend to take their long-established, successful banks for granted. They have no idea that out of the thousands of banks in the world, their banks are in the top 35 of the safest. These are banks that dwarf any of the banks that rank ahead of them. In North America they are the top six safest banks.  As commercial banks, they are in the top 18 of the safest banks.

What impact will the battle over the taxes have upon your shares in financial service companies? The taxes are still too hypothetical to base investment decisions on. All we can do now is work with the current financial information that is available.

In a March, 2022 an article that appeared in the publication Investment Executive, by Daniel Calabretta, was  headlined, “Financial services firms in a good position to weather expected market volatility.”The article was not directed at investors’ main concern.  Investors want to know ”For the long term, which Canadian financial service companies should  you consider adding to your investment portfolio?”

Charts in the Investment Executive article showed a comparison between 2020 and 2021 of “Assets, Revenues, Net Incomes and Earnings Per Share” for 40 financial service firms.  However, whether these figures went up or down from one year to the next does not really address which of these companies are expected to provide share price gains and an increasing dividend income for investors. Thirty-seven of the forty stocks did pay dividends.

Speculators only control share prices.  The experienced executives of these 40 companies, through their revenue and expense decisions, control profits.  From profits come dividends.

There are many financially weak, marginally profitable companies who can motivate speculators to buy their shares based only on promoting the potential for eventual profits and skyrocketing share prices. There are also many financially strong, profitable companies that are ignored by speculators.

That constant debate between thousands of optimistic speculators who think a share price is going rocket up and the thousands of pessimistic speculators who think the same stock’s share price is going to crash makes accurate predictions of future share prices impossible. A stock can not be bought by a speculator until another speculator who owns the stock is prepared to sell it upon receiving an attractivebid from a buyer. To accommodate such investment uncertainties, wise investors, diversify their share ownership among the stocks of different sectors to account for unpredictable speculator bids.

The Great Canadian Financial Stock Challenge

Which of the shares of these 40 Financial Industry stocks would you confidently buy if you could review an Excel spreadsheet with the following additional eleven facts that go beyond assets, revenues, and net income?  Continue Reading…