Finance Minister Chrystia Freeland is planning to raise billions of dollars from banks and insurance companies by changing the tax rules for dividends they get from Canadian firms. 

In a measure that officials billed as closing a loophole, Canada will begin treating dividends received by financial institutions from holding domestic shares as business income. It’s expected to bring in $3.2 billion over five years, starting in 2024.

Banks and other financial firms for years have used complex tax planning to effectively exclude these dividends from their income, lowering their overall tax burden. The new tax will apply to shares that are held as mark-to-market property — not to dividends paid from one subsidiary to another.

The change comes as Prime Minister Justin Trudeau’s government faces a deteriorating fiscal outlook and slowing economy, while it ramps up spending to help residents cope with inflation, prop up the health-care system and compete with the U.S. on low-carbon initiatives.

Trudeau and Freeland have targeted the financial sector for new revenue after the federal debt ballooned to pay for income support and other programs in the COVID-19 pandemic. The government previously introduced a corporate tax hike on large banks and life insurers and a one-time windfall tax on financial firms called the Canada Recovery Dividend. Those two measures were projected to raise more than $5 billion over five years, according to a government analysis last year.

Freeland’s new budget, released Tuesday in Ottawa, also proposed changes to an “alternative minimum tax” that will apply to some Canadians earning more than $300,000 annually. The hike in the special tax rate to 20.5 per cent, from 15 per cent — which comes with a fourfold increase in the income level at which it begins to apply - is expected to generate C$3 billion over five years.

“We’re making sure the very wealthy and our biggest corporations pay their fair share of taxes, so we can afford to keep taxes low for middle class families - and invest in our health care system and social safety net,” Freeland, who’s also Canada’s deputy prime minister, said in prepared remarks.

Some of the highest-income Canadians pay little to no personal income tax annually through “excessive use” of deductions and credits, the government said.

The alternative minimum tax, implemented in 1986, was intended to ensure that the wealthiest earners can’t escape taxes. Under the amendments, more than 99 per cent of the AMT paid by individual Canadians would be paid by those who earn more than $300,000 per year, and about 80 per cent of the AMT paid would be by those who earn more than $1 million annually, the government said.

These tax measures followed a 2 per cent tax on share buybacks for public firms announced late last year. The buyback tax will come into effect on Jan. 1, 2024.