Mr. Chairman and members of the committee, thank you for hearing from me on this day. I'm a program director with the Pembina Institute, which is pleased to have the opportunity to appear before you today.
I am here to recommend that the Minister of Finance eliminate the accelerated capital cost allowance for oil sands. This measure would put the oil sands on a level playing field with natural gas and conventional oil.
In 2000 the Commissioner of the Environment and Sustainable Development undertook a study on the level of federal government support for energy investments in Canada. One of the key objectives of this study was to determine whether this support favoured the non-renewable energy sector relative to the renewable energy sector.
The commissioner was particularly interested in support provided through the federal tax system, as this type of support is less transparent and more difficult to track and quantify. The commissioner found that in most cases federal government support for energy investments, including support through the tax system, did not particularly favour the non-renewable sector. He found oil sands to be an exception.
His analysis revealed that oil sands receive a significant tax break. More specifically, with respect to the income tax, oil sands projects qualify for a 100% accelerated capital cost allowance—the ACCA. With this generous provision in place, a company only pays federal income tax on the income from an oil sands project once it has written off all eligible costs.
These tax rules make oil sands projects much more attractive than they would otherwise be. According to the Commissioner of the Environment and Sustainable Development, this situation results in a significant tax concession. Conventional oil and natural gas, for example, qualify for a 25% capital cost allowance, significantly lower than that provided to the oil sands.
In 2001 the Department of Finance estimated that the benefit of this tax concession was between $5 million and $40 million for every $1 billion invested by oil sands, and that between 1996 and 2002 expenditures on the accelerated capital cost allowance amounted to $41 million.
Since the time of that study, capital expenditures in the oil sands have continued to skyrocket, exceeding previous predictions. Between 1996 and 2005, capital expenditures increased 677%, from $1.3 billion in 1996 to $10 billion in 2005. This means potentially billions in deferred tax revenue up to today.
To put the oil sands on a level playing field with conventional oil and natural gas, the Pembina Institute recommends that the Department of Finance eliminate the 100% accelerated capital cost allowance for oil sands. This can be done by creating a new capital cost allowance class within the Income Tax Act for oil sands and setting the capital cost allowance at 25%, the same rate received by conventional oil and natural gas.
The 100% accelerated capital cost allowance for oil sands is a waste of taxpayers' money. The money saved by eliminating this preferential tax treatment could help facilitate the transition to a sustainable energy future by providing funds for investment in renewable energy and energy efficiency.
Implementing this recommendation will result in a wise use of public funds, because of the elimination of an unmerited tax benefit to the oil sands projects; an increasingly fair tax regime, by levelling the playing field between oil sands and other energy sources, including conventional oil and natural gas; and an opportunity to invest in Canada's energy future, owing to the availability of significant funds for investment elsewhere.
Prime Minister Stephen Harper recently said that Alberta must become a world leader in environmentally responsible energy production. By eliminating the accelerated capital cost allowance for oil sands, the Government of Canada will be making available significant funds that could be used to facilitate Canada's transition from energy superpower to environmentally responsible energy superpower.
Thank you.