In 2014, Canadian Prime Minister Stephen Harper made a commitment to Revenue Transparency Reporting at the annual G-8 conference. The Extractive Sector Transparency Measures Act received royal assent in December 2014, and is expected to come into force by June 2015.
Under the legislation Canadian extractive companies will be required to publicly report annual payments over $100,000 made to all levels of government, both international and domestic, including Aboriginal entities for the 2016 financial year. Natural Resources Canada is currently engaging key stakeholders in the development of industry guidance materials to inform the application of the legislation. We continue to work with the federal government toward developing a framework that achieves its revenue transparency objectives while recognizing the realities of the upstream oil and natural gas sector.
LNG Industry Capital Cost Allowance
As part of its 2015 federal government budget submission and advocacy efforts, CAPP recommended that the federal government change the tax treatment for LNG liquefaction facilities from Class 47 (8 per cent declining balance) to Class 43 (30 per cent declining balance) tax depreciation rate. This position was taken in order to help address inherent Canadian competitive disadvantages relative to competitors such as the United States and Australia
On February 19, 2015, Prime Minister Harper announced changes to the tax treatment of LNG facilities. For capital assets acquired after February 19th 2015 and before 2025, equipment and structures used for natural gas liquefaction will be eligible for an accelerated capital cost allowance (CCA) rate of up to 30 per cent (up from 8 per cent). Non-residential buildings at LNG facilities will be eligible for a CCA rate up to 10 per cent (up from 6 per cent). The Federal Government estimates that this change will reduce federal corporate income tax revenues by less than $50 million between 2015-16 and 2019-20.
CAPP is supportive of the changes announced, and will continue to work with the federal and B.C. governments on measures to ensure the BC LNG industry is economically competitive with other LNG jurisdictions.
Recent studies have suggested that Canada's oil and natural gas industry is heavily subsidized. When considering whether or not this is true, we must first review them within the context of a competitive fiscal framework and the benefits that the industry provides to Canadians.
As in other jurisdictions around the world, the design details of the tax and royalty elements of the Canadian fiscal structure aims to appropriately balance the high-risk, high-cost nature of oil and natural gas exploration and development activities.
Comparatively, oil exporting countries such as Venezuela and Saudi Arabia don’t have carbon levies or carbon taxes, but they do bestow consumer subsidies designed to keep consumers and voters contentedly awash in affordable hydrocarbon energy. According to the International Energy Agency, these consumption subsidies totalled $409 billion USD in 2010 - about four times as much as global fossil fuel production subsidies. These consumption subsidies are a stark contrast to the consumption tax Canadians pay at the pump.
When quantifying oil and natural gas industry subsidies, critics tend to focus on tax expenditure methodology and challenge deduction rules such as capital cost allowance, Canadian exploration expense, and Canadian development expense. However, these programs are in place to balance the high risk nature of the exploration and development stages of the industry and position the sector competitively relative to other jurisdictions - ultimately giving rise to an industry that generates significant tax revenues and jobs for Canadians across the entire country.
When considering the tax revenue benefits of the Canadian oil and natural gas industry, we contribute about $17 billion annually to public revenues through income tax, royalty and other payments to governments. For context, $17 billion is about seven per cent of the federal government’s total revenue in 2012. These payments help Canadians enjoy the high standard of living that we do today.
On the jobs front, oil sands contributed to 478,000 jobs (direct, indirect and induced) in 2012, equivalent to three per cent of total employment, and a larger contribution to overall employment than five out of 10 provinces.
Scientific research and experimental development
The federal government provides tax incentives to encourage Canadian companies of all sizes and in all sectors to conduct scientific research and experimental development (SR&ED). These tax incentives consist of three components:
- An income tax deduction
- An investment tax credit
- A tax credit refund (in certain circumstances)
Tax incentives modify the after-tax cost of SR&ED investment, thereby lowering the company's initial costs and making SR&ED activities more attractive.
Similar to the federal program, the province of Alberta employs its own SR&ED program. Alberta's Scientific Research and Experimental Development Tax Credit program that provides a refundable tax credit to corporations for SR&ED expenditures incurred in Alberta by the corporations. Many provinces have their provincial programs administered by the Canadian Revenue Agency (CRA); however, Alberta remains one of the only jurisdictions to have its program administered by a provincial department of finance.
Due to the importance of the SR&ED program to the upstream oil and natural gas industry, as part of our 2015 pre-budget submission to the government of Alberta, CAPP has advocated that the government:
- Remove the annual SR&ED expenditure limit in Alberta, similar to the approach in British Columbia
- Allow corporate partners of a partnership to claim their respective share of the Alberta SR&ED tax credits
- Conduct a review of the Alberta SR&ED program as it pertains to competitiveness with other provincial R&D programs, the economic and productivity benefits of the program, and its administrative efficiency
LNG Income Tax Act
On October 21, 2014, the British Columbia provincial government released final details of an income tax for proposed Liquefied Natural Gas (LNG) projects in the Liquefied Natural Gas Income Tax Act. The Act applies for taxation years that begin on or after January 1, 2017.
The LNG Income Tax applies to the net income from liquefaction activities at LNG facilities in B.C. and has two tiers. The two tiers will operate as follows:
- Tier One: tax rate of 1.5% applies to net operating income (revenue less expenses) after commercial production begins
- Tier Two: tax rate of 3.5% applies to operators' net income once the capital investment account is being depleted
The rate is effective for taxation years beginning on or after January 1, 2017. The tier-two rate goes to five per cent beginning Jan. 1, 2037.
The province of British Columbia is developing a regulation that will address the LNG natural gas feedstock valuation methodology. Our primary area of concern is understanding the implications of the feedstock valuation methodology under the LNG Income Tax Act on the upstream segment of the LNG value chain and to ensure that that the regulation provides flexibility to address future market changes. It will be important to ensure the feedstock valuation methodology does not impact the existing methodology for calculating the price to establish the basis for Crown royalties.