The Income Tax and GST/HST Treatment of Credit Unions
Credit unions are full-service financial cooperatives. Like other financial institutions, they provide various services, such as operating savings and chequing accounts, issuing loans, and providing financial advice. However, credit unions differ from banks in that its members (the customers) own and control the union. They are often guided by cooperative principals and hold strong ethical values. In Canada, credit unions are for-profit, and they are regulated either provincially or federally. Regulators provide oversight to ensure credit unions remain sound financial institutions.
Regarding the tax treatment of credit unions, they are taxed like a corporation, with some variations. Credit Unions are subject to the corporate income tax rate, which is assessed at two levels. For a Canadian Credit Union, the first $500,000 of income is taxed at the small business rate of 9%; income above the first $500,000 triggers the higher rate of 15%. Since the 1970s, credit unions have been eligible for this preferential small business deduction. The Ontario credit union tax reduction allows credit unions a further deduction to the same net rate as the Ontario small business deduction.
In terms of the GST/HST treatment, the supply of a financial service is an exempt supply, unless it is specifically zero-rated. For example, when a credit union charges a service fee, the service fee is exempt supply. However, when a credit union provides supplies other than financial services and/or provides services to a non-resident person (with further exceptions), it is zero-rated, therefore, a taxable supply.
As per the current legislation, if a credit union earns more than 10% of its revenue from sources other than the specified sources (such as interest income from lending activities), it would not qualify as a credit union and the current income tax and GST/HST rules would not longer apply. The 2023 federal budget proposed to amend the credit union definition by eliminating the 10% rule. This transition to a renewed definition will have a significant impact on how credit unions operate, as they may be able to qualify for the deductions without having to function entirely as a financial institution. It will be worthwhile to observe how this furthers the competition within Canadian financial institutions.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.