Dale Jackson

Personal Finance Columnist, Payback Time

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Many Canadians love to hate the big banks and their big profits, and Canada’s governing Liberals know that.

The government took aim at those profits in the latest budget, with a smaller-than-expected 1.5 per cent surtax on earnings over $100 million, which effectively broadened the measure beyond the largest banks and insurance companies. Ottawa also outlined a one-time 15 per cent tax on financial institutions’ taxable income over $1 billion in the 2021 tax year. 

While the two measures are expected to raise over $6 billion to help with the pandemic recovery, average Canadians might not realize how big a stake they have in the country’s largest financial institutions in their retirement portfolios; either directly in their registered retirement savings plans (RRSP), tax-free savings accounts (TFSA), or indirectly through Canadian equity mutual funds, exchange-traded funds, and pension plans. 

In this age of rock-bottom interest rates, banks and insurance companies have become de facto fixed-income streams; generating annual yields of between three and five per cent. The big Canadian banks have never missed or lowered dividend payouts since Confederation. Corporate dividends come from profits and higher taxes mean lower profits.

There’s been little market reaction in the Canadian financial sector immediately after the budget but it’s not clear how investors will digest the new tax measures over the longer term. Over the past few decades, Canadian bank stocks have (for the most part) grown in value consistently and steadily. Taking the biggest of the bunch as an example: Royal Bank of Canada’s share price is up about 429 per cent since 2002. On a total return basis, it’s up 1,021 per cent. 

Another de facto income stream, residential real estate investment trusts (REITs), were not specifically mentioned in this week’s budget but the Liberals have indicated they will review - and possibly reform - their tax treatment as part of a broader strategy to cool the housing market.

On the bright side, the projection for smaller deficits in the years ahead could put to rest (for now) concerns that revenue-hungry future governments will tap into a few sources near and dear to retirement investors. Even so, here are two to keep an eye on:  

COMPROMISING THE "TAX-FREE" IN TFSA

Canadians have been flocking to tax-free savings accounts since they were introduced in 2008 for the simple reason that investment gains are never taxed (aside from dividends on foreign stocks). 

Allowable contribution room has increased each year since then to a point where the TFSA has become a serious retirement investment tool; serious enough for a government to perhaps eventually reduce the allowable contribution room in future years or compromise its tax-free status.   

DILUTING RRSP TAX BENEFITS

Canadians also love their registered retirement savings plans because contributions can be deducted in years when their income is taxed at a high marginal rate, grow them tax-free in investments for decades, and withdraw at a low marginal tax rate (ideally, in retirement).

The RRSP has become a sacred cow and it would be political suicide for any government to mess with it, but its effectiveness can be watered down if marginal tax rates are increased.