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Draft Legislative Proposal Corrects Credit Union Tax Hike Glitch 

Canadian Tax Adviser


September 17, 2013


Carlene Hornby, Winnie Lam and Janet Mulcaster
Vancouver, Canadian Corporate Tax


Finance has corrected an unintended technical glitch in the credit union legislation in its September 13, 2013 draft legislative proposals. Although the 2013 federal budget proposed to phase-out the preferential tax rate for credit unions over five years, the enacted legislation in Bill C-60 did not technically work this way.

Legislative background
Credit unions have access to the small business deduction and an additional deduction that provides for a preferential income tax rate on taxable income that is not eligible for the small business deduction. The 2013 federal budget announced that the additional deduction for credit unions will be phased out over five years, beginning in 2013. According to the budget, in 2013, only 80% of the additional deduction otherwise claimed will be permitted and the percentage will be reduced to 60% in 2014, 40% in 2015, 20% in 2016 and will be eliminated for 2017 and subsequent years. These changes generally apply to taxation years that end on or after March 21, 2013. For a taxation year that includes March 21, 2013, the change applies only to the portion of the year that is on or after March 21, 2013. The rate is prorated based on the number of days in each calendar year.


Under the legislation in Bill C-60 (i.e., 2013 federal budget bill #1), which was enacted on June 26, 2013, if a credit union claims a deduction under subsection 137(3) (Credit Union Deduction), the tax rate applicable to the "phased-out" portion of the Credit Union Deduction is subject to federal income tax at the full rate of 28%. This is because the 13% general rate reduction is not available on this income to bring the federal rate down to 15%. Surprisingly, however, if the credit union does not claim the Credit Union Deduction at all, all of its taxable income (less any small business deduction claimed) should be subject to the 15% federal rate (the general rate reduction is available).


Finance fixes glitch
Finance has corrected this unintended technical glitch in its September 13, 2013 draft legislative proposals. The five year phase-out of the credit union deduction should now work as the 2013 federal budget originally intended. Specifically, the 11% credit union tax rate now increases to a 15% general corporate rate over five years.


The revised proposed legislation is in Clause 34, which contains the definition of "full rate taxable income" in subsection 123.4(1). The explanatory notes for this amendment specifically state that the amendment was made to ensure that the taxable income of a credit union that does not benefit from the additional credit union deduction is not precluded from benefiting from the general rate reduction.


Accounting impact
The revised legislation containing the fix cannot be reflected for financial statement purposes until it is substantively enacted (i.e., a bill containing the revisions passes first reading in the House of Commons). Currently, Parliament is not scheduled to reconvene until October 16, 2013.


For more information, contact your KPMG adviser.







Information is current to September 17, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500


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