Canada’s oil and natural gas producers do not receive government production subsidies, nor is the industry requesting or expecting any such support.
WHAT IS A SUBSIDY?
Government support of a particular industry or company, via direct spending from the public purse and/or credit support, is deemed a subsidy.
A number of organizations who oppose oil and gas development claim that tax measures applied to industry should be called “subsidies,” often promoting that Canada’s oil and natural gas industry receives major government subsidies, and proposing that the government “must stop” such financial support to demonstrate that it’s taking climate action seriously.
Subsidies on Consumption vs. Production
One of the key tenets of the G-20 commitment was to eliminate inefficient fossil fuel subsidies that “encourage wasteful consumption, and undermine efforts to combat the threat of climate change.” It is critical to distinguish between subsidies targeted to the production of fossil fuels, versus subsidies targeted to the consumption of fossil fuels. Subsidies targeted at consumption, or reducing the cost of fossil fuels to the end user, can lead to superfluous consumption and increased GHG emissions.
This is where the majority of global fossil fuel subsidies reside. In Canada, fossil fuel consumption subsidies are not prevalent, and in fact, the consumption of fossil fuels are heavily taxed which discourages consumption, the opposite of a subsidy.
At the Pump
About 35 per cent of what we pay at the pump for gasoline in Canada is tax from the various levels of government. In addition to these taxes, Canada has further levies on end use in the form of carbon taxes. It is also critical to note that Canada is a world leader in pricing carbon. Canada’s carbon policies go across the entire value chain from producer to end user.
Canadian Tax Measures: Fair Treatment for All Industries
In Canada, all businesses can deduct certain expenses and the natural gas and oil industry is no different. Tax measures are not subsidies. A true subsidy confers a benefit on one sector or company that is not available to others.
Legitimate tax measures are available to all industries. The government’s goal is to ensure the neutrality of the tax system between sectors that differ in their capital intensity, revenue stream generation, and production lifecycle, thereby removing any tax bias against them.
For natural gas and oil companies operating in Canada, taxable income is computed in accordance with the common principles of business and accounting practice. In general, there is not a special tax regime for natural gas and oil producers. (Source: Global Oil and Gas Tax Guide 2017, Ernst and Young)
The deduction of capital costs under these tax measures does not mean the government loses revenue. In fact, the taxes paid over a project’s lifetime remain the same, whether a corporation deducts capital costs up front or expenses them over several years. Further, allowing companies to deduct costs up front means a company can immediately reinvest that capital into its business, supporting improvement and expansion that will create more jobs, provide more revenue to government, and generate general economic growth.
Under Canada’s current tax system, all businesses can deduct capital costs, so categorizing the natural gas and oil sector as subsidized implies that all industrial sectors are subsidized.
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.