Credit Union Tax Issues Opportunities DRAFT FOR INTERNAL CONSIDERATION

Background Corporate Income Taxes - Additional Deduction for Credit Unions (ADCU) Background Federal deduction phased out between 2013 and 2016. PEI deduction phased out between 2013 and 2016. Ontario, BC have reinstated deduction for 2017 Sask. phasing out deduction starting in 2017 Manitoba phasing out deduction starting in 2019 Alberta, Nova Scotia, New Brunswick, Nfld & Lab no ADCU

Background Corporate Income Taxes - ADCU Background Federal elimination of ADCU resulted tax rate increase of 5% (6% - 2019) of taxable income earned in Canada Provincial elimination of ADCU resulted in tax increase of between 8% and 13% of taxable income earned in a province Increase in income tax decreases net income significantly and without corresponding changes to regulatory capital requirements (if anything, going other way). Inconsistent provincial income tax rates may cause provincial income allocation issues with federally incorporated credit unions over time

An Early Warning Indicator?

Broad Approach Background Research Government Relations Opportunities Update analysis of impact to Credit Unions and their members from elimination of Federal and Provincial ADCU Develop policy rational to support reinstatement of ADCU or introduction of alternative based on analysis of impact Develop strategy to determine how different interprovincial tax rates ( before and after ADCU) will impact federally incorporated credit unions Government Relations Opportunities Engage with Federal and Provincial governments to discuss reinstatement or introduction of ADCU or alternatives (next slides)

Tie Tax Relief to Regulatory Objectives Background Capital demands going up Taxation rates going up Mutually incompatible Opportunity Have tax relief phase out after certain target capital ratio

Lever Patronage Deduction? Background Benefits to members are provided through reduced costs and/or patronage payments Patronage dividends paid or payable are deductible in computing income for both Federal and provincial income taxes. Patronage payments received (or receivable) by members are considered income for income tax purposes Reduced costs to members are only taxable to members whose costs are associated with income from business, property or investments. Opportunity Explore provincial/federal treatment of patronage in form of membership shares from regulatory capital perspective. Patronage in form of member shares may qualify as regulatory capital – potential dual benefit of lower taxes and more regulatory capital Socialize understanding?

Expand Small Business Deduction? Background Federal business limit- $500,000 Business limit is reduced when taxable capital employed in Canada is greater than $10 million and eliminated when reaches $15 million Taxable capital employed in Canada is different for financial institutions (including credit unions) than for other corporations. All provincial business limits are $500,000 except for Sask. $600,000 and Manitoba $450,000. Opportunity Explore and analyze impacts of increases to Federal and or provincial business limit and/or The taxable capital earned in Canada for financial institution that are credit unions.

FCUs and Capital Tax Opportunity Background Manitoba, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador all impose capital taxes on financial institutions The capital taxes do not apply to provincially incorporated credit unions. New Brunswick needed to make changes to its legislation to exempt federally incorporated credit unions from capital taxes Changes appear to be required to legislation in Manitoba, Saskatchewan, Nova Scotia and Prince Edward Island to ensure federally incorporated credit are not subject to the tax Opportunity Engage with provincial tax and regulatory officials in the impacted provinces to ensure federally incorporate credit unions are not inadvertently subject to capital tax

Consider Payroll Taxes? Background Payroll taxes in BC, Manitoba, Ontario, Quebec, PEI and Nfld and Lab. Lowest wage thresholds is Ontario where tax is phased in between $200,000 and $400,000 in wages. ( Rate is 1.95% at $400,000) BC’s payroll tax is phased in between $500,000 and $1.5 million ( Rate is 1.95% at $1.5 million Opportunity Explore impact of Increase to wage thresholds for payroll taxes for provinces with low thresholds