Finance Committee on Feb. 27th, 2007

[Charles Caccia]

I don't think there's a dispute between the two of us. We are looking at the tax system as it exists, the Canadian development expense program, the Canadian exploration expense, the accelerated capital cost allowance for oil sands, and the one that has been now abandoned, the resource allowance. Nevertheless, these are all programs that have existed and that require a revision on the part of the legislators to determine whether they are still valid or not.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Stringham's point is that they are all either gone or long gone and the only one that still exists is a timing issue.

[Charles Caccia]

Well, to the best of my understanding, the exploration expense still exists and the Canadian development expense program still does.

The point is larger than that. The point is whether the taxation system we have in place favours greater greenhouse gas emissions or not.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I don't dispute your larger issue. I just wanted to see whether we were talking on the same page on this particular $1.4-billion, $1.5-billion issue.

[Charles Caccia]

You would have to put the question to the Deputy Minister of Finance as to the exact point we are at in the year 2007. We can only go by the existing data that are available to the public.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Okay...fair comment.

Let me go to the general issue here, which is that depreciation or capital cost allowances are supposed to reflect the economic life of an asset.

This is to the folks in Calgary. We as a committee had the opportunity to be in Fort McMurray. We saw some of the equipment. It's pretty impressive equipment, and they're going 24 hours a day, 365 days a year. For that equipment in the oil sands, does that capital cost allowance actually reflect the economic life of that particular asset, and in particular, those big shovels, those big trucks, etc.? Is the industry in fact turning over that equipment once a year?

[Marvin Romanow]

No, I think it is not turning it over once a year. The life of those assets would be, in the trucks and the shovels, in the neighbourhood of five to ten years.

What I would also point out is that tax policy and royalty policy almost always, worldwide, recognizes that the people who put up their investment first are the ones who have to get their capital first, because they have a higher cost of capital, and if you stretch out the period over which they're allowed to recover their costs, those investments may never be made.

[Greg Stringham]

Let me just add one point.

On that as well, they need to recognize that it's not just written off in one year. The accelerated capital cost allowance can only be written off to the extent of revenue from the mine, and it has to wait until you actually have production coming forward or be subject to the available-for-use rule. So there are restrictions on it. As in the example I showed, it actually doesn't all get written off in year six when you start up. It's limited, and it gets stretched out over a longer period. But it is not over the entire life of the mine, that is correct.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. McKay.

Mr. St-Cyr, you have six minutes.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thank you, Mr. Chair.

I listened carefully to the evidence and I was somewhat surprised at the seriousness of the situation that was reported by the representatives of the oil companies. The situation is serious for our environment, but definitely not for the oil companies.

They raised three main arguments for maintaining the tax benefits. The first is that the oil companies generate economic activity. However, it seems to me that, if we encouraged other industries, such as renewable industries, they would also generate economic activity.

I'd like to ask Mr. Caccia or Mr. Iterson the following question. If we developed larger numbers of renewable energy companies in Canada, would those companies also pay taxes? Wouldn't their employees also pay taxes? Lastly, wouldn't that generate as much economic activity, or perhaps even more? Would that be economically advantageous for Canada?

[Charles Caccia]

The answer is yes, but I think that the tax treatment currently given to the renewable industry isn't as generous as the incentives given to the non-renewable industry. Instead of establishing an equal playing field, as they say, we should establish a fiscal field that should be much more advantageous for renewable energy by 2012.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

All right.

The second argument presented to us concerns the fact that, ultimately, it was not really a subsidy or a genuine advantage that was given, since, ultimately, in any case, tax will be paid later.

That argument somewhat surprised me coming from representatives of the oil industry, because, if it isn't a tax benefit, why are they asking that it be preserved? It seems clear to me that, if they want to keep it, it's because it's economically profitable; it's an advantage. If it's advantageous for them, then it's necessarily a cost to government and society.

Do we have an idea of the value that benefit represents from a public finance standpoint? Do we have an idea of the cost of this benefit that we're granting the oil companies?

[Charles Caccia]

I can answer, for instance, that Mr. Drummond, when he appeared before the Standing Committee on Environment and Sustainable Development a few years ago, was talking about tax expenditures as calculated by the Department of Finance that were accorded to the oil sand industries, and they would range anywhere between 0.05% and 4%, which at that time, in his calculations, would be a tax expenditure anywhere between $75 million and $600 million, which is only a loan to the oil sands industry as a result of a tax concession that is presently given.

Perhaps Mr. Van Iterson has other points to make.

[Andrew Van Iterson]

Two points. As I mentioned, the finance department says that the cost is between $5 million and $40 million for every billion dollars invested. That's a pretty wide range, and I'm willing to bet it's near the higher end of that range.

As I mentioned, at the higher range, that would be about $1.5 billion over the last ten years that has been deferred. The Commissioner of the Environment and Sustainable Development said that it's a significant tax concession--not that it's money deferred, but that it's a tax concession and tax benefit.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

We were told about changing oil prices in the future. It was said that this investment would not be more profitable if they no longer had these tax benefits.

First, do we really think that the price of oil will go back down? Second, is it up to government to bear the risk that the oil companies take by investing in this field? Third, are the oil companies in such a poor financial position that they can't do without this tax benefit?

[Charles Caccia]

The risk existed when the price of oil was about $20 a barrel. That risk has now disappeared, and it's most unlikely, to say the least, that the price of oil will go down. The demand is increasing and the supply is decreasing, so why on earth do we need to talk about the risk? The people in Calgary are not talking all the way to the poorhouse; they're doing extremely well. So let's face the reality of today, not yesterday, as Mr. Stringham was trying to do earlier, and see whether we really have reached a point where the tax system needs to be brought into this century, because it currently belongs to a time when the price of oil was one-third of what it is today. That reality is gone, but people are still trying to make us believe that reality is still with us. This is an anachronism, and our backward taxation system is why we are laughed at in international bodies.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. St-Cyr.

Mr. Dykstra, you have six minutes.

[Rick Dykstra, Conservative, St. Catharines, ON]

Merci.

This question is for you, Mr. Stringham.

Mr. St-Cyr alluded to the fact that very few are actually benefiting financially from the industry itself and that CEOs are lining their pockets, where all the benefits lie.

You commented on the $123 billion in income tax generated from the industry. Could you expand a little bit on that in terms of the impact it has across the country, and obviously expand on the types of numbers we're talking about in terms of those employed?

[Greg Stringham]

Absolutely. Thank you very much.

The number I put forward was from the Canadian Energy Research Institute study that looked at oil sands alone, not the entire industry, over the period 2000 to 2020. Those oil sands generated revenue of $123 billion to governments, including the federal government and relevant provincial governments, and the other provinces as well, and associated municipalities.

We have seen this dramatically affecting Canada all the way across. We have had the Canadian Manufacturers' Association say this has been a lifeline to them as they look for opportunities to supply goods and services to the oil sands, which then generate wealth throughout all of Canada.

Everyone is very familiar with the labour issues we are struggling with in the oil sands area, which have actually turned out to be an economic boon for many people coming from Atlantic Canada, who are bringing their skills and providing services to us and returning that revenue back to those provinces.

So it is very widespread across Canada.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you.

One of the other things you spoke about was the example in the chart of exactly how the accelerated capital cost allowance works.

Mr. McKay alluded to being down in Fort McMurray and having had opportunity to tour one of the facilities, and one of the things we saw were a couple of huge trucks that go 24 hours a day to move materials in and out.

One of the things that would certainly be helpful to me would be if you broke it down and took me through exactly what happens to a vehicle like that after it has been purchased, or how the accelerated capital cost actually works for one of those vehicles.

[Greg Stringham]

Absolutely. And whether it's a vehicle or the opening up of a mine, it really depends on when they are actually purchasing that vehicle.

Let's take a vehicle that is put on order when they're planning to open up a mine. They begin to go through the regulatory process five to six years in advance and begin spending in year one or two or three. The trucks would probably be purchased in year four, but they wouldn't be available for use until two years later, when the mine was open, in year six. At that point in time, the trucks would then be part of the normal tax deduction. So you're only going to deduct the cost of that truck once. What will happen is you'll deduct it on a declining balance basis to start with, until you get revenue from the mine, and then you'll be able to deduct the remainder of that cost over the number of years it is eligible for the amount of revenue coming from the mine.

But you have to realize that if you opened up a 100,000-barrel-a-day mine, you may not have enough revenue in the early years to write off the entire amount of that truck, so it would get written off over the two, three, or four subsequent years, once the mine started production.

[Rick Dykstra, Conservative, St. Catharines, ON]

So the accelerated capital cost allowance--I'll speak from my own perspective--gives the company the opportunity to write off the vehicle we're speaking about in 12 months. That isn't actually the case.

[Greg Stringham]

Unless you have substantial revenue from the mine, you have to write everything off equally, so you can't just pick that truck and write it off. It is limited by how much revenue is coming out of the mine. That is a strict limitation put on ACCA that is not put on other capital cost allowances. For other capital cost allowances, if you have enough revenue within your company, you can take that cost and write it back off on a declining-balance basis against that revenue. Here it is restricted, and all mining sectors--oil sands, as well as iron and diamonds and coal and potash and all the others--are treated equally in this respect.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you.

Mr. Peeling, one of the comments you made, and I put a question mark behind this, was about the sort of post-payout royalty stage. I probably don't have a lot of time left, but could you expand just briefly on what you meant by that?