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OTTAWA, Aug 25 (Reuters) - Canada's ruling Liberal Party said on Wednesday that if re-elected it would raise corporate taxes on the most profitable banks and insurers to help pay for the cost of the COVID-19 recovery.

The Liberals said they would hike the rate to 18% from 15% on all earnings over C$1 billion ($793 million) and vowed to establish a special dividend, so that those same institutions contribute more. The measures are expected to generate C$2.5 billion per year over four years, starting in 2022/23.

Polls show the Liberals, led by Prime Minister Justin Trudeau, have a slender lead over their Conservative rivals ahead of the Sept. 20 election.

"Given that our banks have posted extraordinarily large profits, have continued to be incredibly successful, including through a pandemic ... we're going to ask them to do a little bit more," Trudeau told a campaign event in British Columbia on the same day that two banks reported big profits.

British Columbia is an influential province, accounting for 42 of the 338 seats in the House of Commons. Polls indicate the Liberals face a fight there from the opposition New Democrats, who also appeal to center-left voters.

The Canadian Bankers Association criticized the news, saying that "singling out specific economic sectors for special taxation is a proven detriment to economic growth".

The Canadian banks index (.GSPTXBA) slipped just 0.6% after the announcement, compared with little change in the Toronto stock benchmark (.GSPTSE), but still ended the day up 0.5% from Tuesday's close.

Maria Khoury, senior vice president for North American financial institutions' credit ratings at DBRS Morningstar, said

the muted reaction in part reflected skepticism over campaign promises and the broad expectation that some tax increases were inevitable following the flood of government support.

Large banks include Royal Bank of Canada (RBC) (RY.TO), Toronto Dominion Bank (TD.TO), Bank of Nova Scotia (Scotiabank) (BNS.TO), Bank of Montreal (BMO) (BMO.TO) and the Canadian Imperial Bank of Commerce.

RBC beat analysts' expectations for third-quarter profit on Wednesday after Scotiabank and BMO did the same on Tuesday. read more

Large insurers include Manulife Financial (MFC.TO), Sun Life Financial (SLF.TO), Intact Financial (IFC.TO) and Great-West Lifeco.

($1=1.2617 Canadian dollars)

Additional reporting by Julie Gordon in Ottawa;Editing by Sandra Maler

Our Standards: The Thomson Reuters Trust Principles.

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Canada's ruling Liberals vow higher taxes on big bank profits to help fund COVID-19 recovery - Reuters