OTTAWA - Canada is preparing for a showdown at the G20 meetings in Toronto over the issue of an international bank tax that is gathering momentum in Europe and the United States.

Finance Minister Jim Flaherty has written his colleagues in the global decision-making body saying Canada won't go along with the levy and it shouldn't be imposed universally.

"While some countries may choose to pursue an ex ante, systemic-risk levy or a tax, I do not believe that this would be an appropriate tool for all countries," he wrote Tuesday.

But Flaherty also believes the scheme would be ineffective unless all countries in the G20 agreed, telling reporters Wednesday that allowing opt-outs would not work well "in terms of a goal to have a system that is globally reliable."

The idea of taxing banks has been gaining currency in Europe and the United States as a means of penalizing institutions that triggered the global recession and of creating a cushion against future crises. The tax is meant to create a fund that could be dipped into whenever needed.

Recently, Germany joined the advocates and proposed raising the equivalent of euro1.2 billion annually. France has indicated it is on board, and Britain and the U.S. have suggested measures along the same lines.

Flaherty hinted he may be the lone dissenter in the G7, but also that he has some backing in the broader G20, where the measure would need to find support. He mentioned Australian and some Asian countries as possible allies.

The minister also appeared prepared to battle some of his colleagues on other measures under consideration, including that banks increase capital reserves on mortgages they hold. Scotiabank chief executive Rick Waugh has argued if some of the proposed changes go through, Canadian banks will be hamstrung in how much they can lend.

The Canadian banks argue they need no additional safeguards on mortgages since they are already backstopped by government insurance.

"We're not going to have them (Canadian banks) disadvantaged because they performed well because we have a solid system in this country and the systems in other countries did not work as well," said Flaherty.

The bank tax represents a significant split in the united front projected at the G20 to reach consensus on financial market reform that would guard against future crises like the one that sunk the world into a deep recession.

In his letter, Flaherty urged his colleagues to re-focus on areas of agreement so that the Toronto leader's summit in June can make progress. These include improving the quantity and quality of bank capital, strengthen liquidity standards and discouraging excessive risk-taking by setting a cap on leverage.

A key problem with the bank tax, he said, is that it will encourage the very behaviour it seeks to prevent.

"A global levy could result in excessive risk taking as a result of a perceived guarantee against an institution's failure," he wrote.

As well, Flaherty said a tax would take capital away from financial institutions and banks, thereby weakening their ability to absorb losses.

And he suggested some governments, rather than set aside the tax revenues for a rainy day, would merely absorb them into general revenues, thereby leaving taxpayers once more exposed to bad banking practices.

Many have blamed excessive leverage and risk taking as key factors in the financial crisis that began in 2007, resulting in the failure of major financial institutions on Wall Street and Europe and the need for government bailouts.

Instead, Flaherty proposed the G20 establish a mechanism recently proposed by Julie Dickson, Canada's superintendent of financial institutions, that large banks be forced to establish a "contingent capital" fund that could be draw from in future crises.

The key difference, said Flaherty, is that the capital would remain at the bank level and be available whenever such institutions get into trouble.

"This goes back to appropriate leverage and appropriate capitalization of banks ... to make sure the banks have adequate capital so that if a financial institution gets into trouble, they will have the capital to deal with (it)," he explained.