The government is aware of a "technical issue" in last spring's federal budget that threatened to more than double the corporate tax rate for credit unions and is promising legislation this fall to fix it.

The issue was identified earlier this summer by tax professionals and the finance department has agreed a fix is needed, a spokesman for Finance Minister Jim Flaherty said in an email to CBC News Tuesday.

The response from Flaherty's office came after the NDP held a news conference earlier in the day calling on Flaherty to acknowledge the mistake and bring in a fix.

The government had signalled in its spring budget that it would raise the tax rate for credit unions and caisses populaires to 15 per cent from 11 per cent over the next five years, to bring them into line with the rate on Canadian banks.

But a recent Deloitte report found the budget implementation bill passed in the spring will effectively raise the credit unions' tax rate to 28 per cent over the next five years. Deloitte's report said the increase was due to a "technical deficiency" in the budget legislation and that the Finance Department was working to correct it.

"However, our contacts would not provide any assurance that the legislative fix would be enacted prior to the end of 2013 or whether the fix would be retroactive to budget day. Any legislative change is subject to parliamentary approval," the Deloitte report said.

NDP finance critic Peggy Nash said the government needs to address the error immediately.

"We've not heard from the finance minister on how he is going to fix this, we haven't even heard him acknowledge it," Nash said at a news conference in Ottawa Tuesday.

Flaherty's office said a simple phone call to the department would have answered the NDP's questions.

"Minister Flaherty has committed to fix it as soon as possible and to ensure no credit union is disadvantaged by this technical issue," said Chisholm Pothier, Flaherty's director of communications.

"We intend to deal with this through legislation this fall."

But Nash said if the increase was an error, it shows the danger of using omnibus bills to push through a raft of legislative changes at once and accused the government of using the tactic to avoid debate.

She said the NDP opposes the original intended increase of four per cent, because many credit unions are not for profit or serve a particular role in a community and higher taxes could hinder their ability to fulfil that role. She said some credit unions might not even be aware of the accidental tax hike.

Definition change behind unexpected jump

The problem arose when the government moved to end a special exemption for credit unions that dated to the 1970s.

There are two corporate tax rates in Canada:

  • The general rate, which is currently at 15 per cent.
  • A preferential rate of 11 per cent applied to the first $500,000 of income for small businesses.

Before the spring budget, credit unions were allowed to apply the 11 per cent rate to income above $500,000 through an additional deduction, up to a certain limit. The budget intended to phase out that additional deduction over the next five years and bring credit unions under the general rate.

But the Deloitte report found that Bill C-60, the budget implementation bill, modified a tax definition for credit unions and caisses populaires that means income no longer covered by the additional deduction will not qualify for the general rate reduction enjoyed by larger corporations, in effect raising the credit unions' tax rate to almost 28 per cent by the end of the phase-in period.

Asked if the NDP would support a fix if the government brings one forward, Nash pointed to the difficulty posed by prorogation, which has delayed the return of Parliament until at least mid-October.