The Conference for Advanced Life Underwriting (CALU), and the C.D. Howe Institute are both raising the alarm that measures proposed to impose double taxation on the dividends that Canadian financial institutions receive will impact both existing and future policyholders, as nearly $250-million each year in new taxes will need to be passed on to consumers. 

The 2023 federal budget specifically proposes to deny the dividend received deduction (DRD) for dividends received by life insurance companies on shares that are mark-to-market property.

“We understand that discussions have already taken place between life insurance company representatives and officials from Finance Canada regarding the rationale for eliminating the DRD as well as the consequential impact this proposed change could have on life insurance policyholders. CALU has also engaged in high level discussions with Finance Canada officials on this issue,” CALU writes. “We do share the life insurance industry’s concern that eliminating the DRD will result in double tax on the payment of inter-corporate dividends received by financial institutions.” 

CALU says its main concern is related to the cost of individual life insurance coverage and the benefits payable under such policies. CALU estimates that disallowing the DRD will result in additional taxes payable in the range of $250-million each year. “In turn, approximately 80 per cent of this tax ($200-million per year) will ultimately be passed on to existing and new life insurance policyholders in the form of lower benefits and/or higher premiums,” they write. “This is because a significant percentage of the assets backing life insurance policy reserves consist of common and preference shares issued by public companies.” 

They add that the change will particularly impact participating life insurance policyholders.

At the C.D. Howe Institute, meanwhile, EY Law LLP partner, Angelo Nikolakakis writes that financial institution dividend taxes are indeed a bad idea.

“This year’s federal budget included one very troubling tax policy change. It will end up costing many hardworking Canadians who have invested in Canadian banks and other financial institutions, whether directly or indirectly through their pension funds or RRSPs,” they write. “The budget included a proposal to impose double taxation (or worse) on dividends received by financial institutions. This proposal completely contradicts several fundamental principles of our tax system, affecting all shareholders and likely hitting pensioners disproportionately.” 

Nikolakakis continues saying income should be taxed on a consistent and progressive basis in the same way individuals are taxed. “Inter-corporate dividends shouldn’t be taxed because the profits being distributed have already been subjected to corporate tax. Any additional tax on inter-corporate dividends would result in double taxation and would violate the principles of consistent and progressive taxation,” he writes. 

“The best way to pay for government programs, whether new or existing, is to encourage investment in Canada, or at least not to discourage it through unfair double taxation. Many people don’t realize that taxing corporations is, ultimately, just an indirect way of taxing individuals,” he concludes. “We need to strike a balance between collecting enough revenue to fund public services and creating an environment that encourages investment in our economy. Tax rates should be reasonable, coherent and predictable, not random depending on how many layers of corporations there may be in the chain of ownership, and whether any of those may be financial institutions. If we fail to respect these fundamental principles, we risk harming our economy and the very people we are trying to support.”