Stelmach's office says that there will be no blowback from the Feds over the Province effectively taking hundreds of millions of dollars a year from federal coffers in the proposed royalty increase. Do you believe him? I don't.
Note that the term "resource allowance" is not mentioned once in the Royalty Review's final report.
Ottawa faces hit on higher royalties
Sep 24, 2007
The Globe and Mail
By Norval Scott and Steven Chase
CALGARY and OTTAWA — Proposed changes to Alberta's oil and gas royalty regime could substantially reduce Ottawa's federal income tax take by hundreds of millions of dollars, potentially setting the stage for a renewed struggle between federal and provincial governments over how revenues from energy projects are allocated in Canada.
Last week, a report commissioned by the Alberta government said the province hasn't been getting its "fair share" from its energy resources and advocated wholesale changes to its royalty structure, including substantial hikes to oil sands taxes and a new so-called "severance tax" that would recoup proportionally higher rates as commodity prices rise.
If the recommendations are implemented in full, energy firms would end up paying an estimated extra $2-billion a year in royalties and new taxes to Alberta.Companies paying federal income tax can make deductions to account for royalties paid, so any increase in Alberta's royalty receipts would reduce how much income tax is taken in by Ottawa.
Len Farber, a former senior federal tax official now at Ogilvy Renault in Ottawa, predicted the Department of Finance will now be closely monitoring the royalty report and mulling its implications for the Canadian government's tax take.
"It's something that is going to go on their radar screen," Mr. Farber said.
A federal Finance department official declined to comment on tax revenue losses resulting from higher royalty bills for oil patch companies, saying the central agency was not comfortable discussing the implications of the report.
Elsewhere, Industry Minister Jim Prentice said the issue was "in the hands of the provincial government.... They will work out the details."
The Finance department could not say how much tax revenue it currently gives up by allowing the Crown royalty deduction against federal corporate taxes. The department also refused to speculate on whether it might change the tax rules to forestall any revenue losses from hiked Alberta royalties.
The issue of provinces increasing their royalty take at the expense of the federal budget is nothing new, with a spat in mid-1970s between then-Alberta premier Peter Lougheed and prime minister Pierre Trudeau resulting in Ottawa implementing in 1976 the "resource allowance" scheme that imposed a ceiling on the amount of royalties that were tax-deductible.
The system - criticized for creating distortion for investment decisions - remained in place until 2002, when it was phased out over a five-year period and disappeared on Jan. 1, 2007."What we are seeing here is exactly what happened 30 years ago. It's history repeating itself," said Rick Edwards, a Calgary-based tax specialist with accountancy firm Deloitte.
One factor that might spare a renewal of tensions is the new severance tax proposed by the royalty review. The report recommends thesliding-scale tax not be considered eligible for corporate income tax purposes, meaning that not all of the $2-billion a year of extra revenues proposed would be tax deductible for firms.
As yet, it's unclear how much new revenue would be raised through extra royalties and how much by the severance tax.The possibility of blowback from Ottawa if Alberta raises royalties is "no factor" in the province's decision-making process, according to Paul Stanway, director of communications for Premier Ed Stelmach. "We have excellent relations with the federal government," Mr. Stanway said.
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