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Policy Experts Express Concerns that U.S. Tax Reforms Could Affect Canadian Oil Sector

Corporate Tax Planning
September 15, 2017

In a recent report, the director of the University of Calgary’s School of Public Policy has stated that Canada’s oil sector may be about to lose the tax competitive advantage that it currently enjoys.

In the report, Jack Mintz, notes that both President Trump’s recent tax-reform proposals and those made by the Republican-controlled House of Representative last year, could make investments in the U.S oil industry much more attractive. These reforms, combined with the current lack of any plans for a U.S. carbon tax, the general loosening of the regulatory environment south of the border, and the eventual rise in oil prices, may make Canadian oil seem like a less attractive proposition to investors.

“Investing in American Oil Might Soon Look More Compelling”

The report notes that Canada’s popularity as an investment destination has “already been fading”, and key indices show that the U.S. has remained at the top, whereas Canada has slipped from third to fifth place, behind Britain, despite fears and uncertainties stemming from Brexit.

To date, Canada’s oil producing provinces have been able to maintain a competitive advantage against oil producing U.S. states, primarily due to the lower corporate tax rates here, the use of competitive royalty regimes, and the absence of retail sales tax on capital equipment in places such as Alberta. As an example, of all Canadian provinces, Alberta currently offers the lowest marginal effective tax and royalty rate (METRR) on conventional oil investments based on a $50/barrel West Texas Intermediate Price, and also offers a lower METRR than nearly all comparable U.S states measured (except for Pennsylvania). However, if the Republicans are successful in passing a version of their tax-reform proposals, Alberta will slide from their current position as one of the best destinations in North America for oil investment. In that situation, Saskatchewan would be poised to become one of the highest-taxed oil producing jurisdictions.

The proposed tax changes in the U.S. would see a lowering of corporate income tax rates, bringing the American METRR rates closer to Canadian rates, which would have a significant impact here. Trump’s plan proposed a federal income tax cut of 20%, bringing the rate from the current 35% down to 15%. The House of Representative’s earlier plan proposed to lower the rate from 35% to 20%, but ialso introduced a 100% write off for all capital expenditures.

The report notes, specifically, that:

While the prospect of the two countries ending up with roughly equal METRRs might sound less than worrisome, if it happens, Canada will lose the most significant advantages it has over the U.S. in attracting investment to its oil sector. The U.S. already enjoys the advantage of being a much larger market, and having a faster-growing economy, which is why it ranks as the most-preferred destination for foreign investment intentions.

Additional Factors Affecting Investment

Above and beyond any changes to corporate tax rates, investors into the U.S. oil sector already enjoy more regulatory certainty as the sector is being “aggressively deregulated”, whereas in Canada the introduction of new regulatory schemes and plans are becoming more and more common.

In addition, the U.S. has no plan to implement a national carbon tax, whereas Canadian carbon taxes are expected to escalate in the coming years. We will continue to follow developments in this matter and will blog if further updates become available. In the interim, if you have questions about corporate tax planning contact Feigenbaum Law. We provide full tax services with respect to your cross-border business initiatives and serve clients in the US, Canada and around the world. Contact us at mark@feigenbaumlaw.com, or call us at (905) 695-1269 or toll free at (877) 275-4792 to learn more about how we can help.


Tagged: Alberta, METRR, oil, tax reforms