TAX NEWS - June 2010

Canada won't go it alone on alternative to bank tax

Canada to push "contingent capital" for Basel reforms

Canada won't adopt a plan under which banks would issue convertible debt to help pay for for future bailouts until international supervisors embrace the concept as an alternative to a bank tax, Canada's main banking regulator said on Thursday.

Canada has pushed for the "embedded contingent capital" banking reform as an alternative to reforms proposed by other countries that would tax financial institutions.

Under the plan, banks would issue debt and preferred shares that would convert to equity in the event of a looming bank failure.

Canadian Finance Minister Jim Flaherty has taken the lead in opposing a global bank tax, saying it would unfairly penalize institutions that have not required government assistance during the recent financial crisis.

Canada's banks are considered to be among the world's soundest.

Canadian officials are hoping the contingent capital plan will be adopted when the Basel committee finalizes a bank reform package in November.

"We really have to explore the international avenue, because we are a Basel compliant country," Mark White, assistant superintendent at Canada's Superintendent of Financial Institutions, said at a briefing in Toronto.

"Unless we choose to diverge from (Basel), which is an unlikely course, the decisions that will get made at the Basel committee will circumscribe our course."

He said Canada initially encountered resistance to the contingent capital idea but is now finding "isolated support."

Critics of the concept say the convertible debt would prove difficult to sell unless banks agreed to pay prohibitively high interest rates.