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Researchers Suggest Canada Switch to Cash-Flow Taxes From Royalties

Canada's provincial governments should redesign their tax collection systems for natural resources, including oil and natural gas, by adopting a cash-flow tax instead of relying on royalty payments, according to a report by the nonprofit C.D. Howe Institute.

In a 28-page report released Wednesday, Robin Boadway, an economics professor at Queen's University in Kingston, ON, and Benjamin Dachis, a senior policy analyst for the Toronto-based institute, said provincial governments collected about C$79 billion in tax revenue from 2009 to 2013.

But they argue that the governments could have collected more, without hurting investment in the energy sector, if they had levied cash-flow taxes instead.

"Most provincial tax systems for mining, oil and natural gas are not well designed," the authors said. "As a result, these taxes impose distortions on resource investments, dissuading companies from exploration, development and extraction. That means less potential resource revenue to collect."

According to the researchers, under a cash-flow tax system, projects that are barely profitable would pay little or no taxes, while highly profitable ones would pay more. Such systems are currently in place in Alberta for oilsands, and in Newfoundland and Labrador for offshore oil.

Last May, the Alberta New Democratic Party (NDP) won a majority of seats in the Legislative Assembly of Alberta (see Daily GPIMay 7). Since the election, the center-left NDP has embarked on a review of the province's tax regimen on natural resources and is considering changes.

The researchers also argued that there should be no special tax on liquefied natural gas (LNG) facilities, an idea under consideration by the Liberal government in British Columbia (BC) (see Daily GPIJuly 8). Such a tax, they said, "would be similar to a resource-rent tax, but firms would be allowed to carry forward losses without interest and would not have full loss-offsetting. Firms would be able to deduct the cost of natural gas they use as an input.

"That would mean the government would only tax rents from processing, not rents from extraction. It is unusual in being a standalone tax on the processing of resources alongside a separate tax on extraction."

Of the C$79 billion collected by the provincial governments from 2009 to 2013, most (C$75 billion) came from revenue from the extraction of natural gas, conventional oil and bitumen from oil sands, with mining accounting for the remaining C$4 billion. Meanwhile, BC, Alberta, Saskatchewan and Newfoundland and Labrador accounted for more than 90% of total oil and gas revenue.

Greg Stringham, vice president at the Canadian Association of Petroleum Producers (CAPP), told NGI that the organization was participating in the new Albertan government's royalty review process. He said changes like these were not usual, the regimen having been changed several times since the 1930s.

"It's important to have the certainty that comes along with framework that's in place, but certainly there is room for improvement, and some of the suggestions [C.D. Howe] has made here may get considered by the government," Stringham said Thursday. "The basic framework has been established for many years. It's gone through several reviews and is benchmarked against world systems out there, so it's not like this is an antiquated system at all. It is really a fresh system that's been looked at several times.

"Of course, there's always room for improvement. We are putting our submissions in as to what might be approved."

Stringham added that the Albertan government has agreed to complete its review before the end of the calendar year.

"They're not rushing it, but they're also not prolonging it over two or three years," he said.

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