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Large machinery at the oil sands north of Fort McMurray, Alta. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
Large machinery at the oil sands north of Fort McMurray, Alta. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

Oil sands tax incentives targeted Add to ...

The Harper government is aiming to knock down a pair of tax incentives designed to spur spending in the oil sands, a sector that once relied on government support but is now awash in corporate investment.

The changes are a sign of the dramatic change in prospects for northeastern Alberta's great wealth of oil sands, which has evolved from a challenging science project to one of the country's most vibrant economic drivers.

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The probability of a federal election makes it uncertain if and when the changes will be brought into force - although other parties are unlikely to take a more lenient approach to an industry that figures prominently in carbon-emissions issues.

The Conservatives are pushing to close a popular corporate loophole - which could boost federal revenues by nearly $3-billion in half a decade - and, for the oil sands, slow writeoffs of lease expenses and mine investments. It's a shift intended to boost the tax load on energy companies that have seen profits surge on triple-digit crude oil prices.

"The government is of the view that with oil prices where they are, the industry is quite healthy. And it would appear to be their view that corporations don't need the same rapid writeoffs they've had in the past," said Brian Carr, a tax partner with KPMG and an expert in resource taxation. Oil and gas companies "won't like" the changes, he said.

The Alberta government immediately slammed the tax changes and expects energy companies to do the same.

"We have some concerns the way they've changed some of the tax measures that will very negatively affect our oil and gas sector," Finance and Enterprise Minister Lloyd Snelgrove said in a press conference. "We have been advocating on behalf of the oil sands for many years to accelerate the depreciation, not reduce."

The oil sands, he said, should be treated differently than other industries because it is an extremely expensive industry and the equipment necessary to operate projects is under intense stress. "The stuff normally doesn't last as long as, for example, a factory that produces cars year after year in a controlled environment."

The Canadian Association of Petroleum Producers, an industry lobby group, said oil sands companies should be lumped in with other mining outfits when it comes to tax.

"Oil sands mining should be treated in a manner consistent with other mining industrial activity in Canada, and they've taken a couple of rather targeted measures and steps to move oil sands mining toward the same tax treatment that the rest of the oil and gas sector gets," David Collyer, CAPP's president, said in an interview.

Oil sands mining is extremely expensive compared to conventional oil and gas production, and this is part of the reason why it should be treated differently, Mr. Collyer said. Oil sands mining projects are also more expensive than steam-assisted gravity drainage (SAGD) projects, where bitumen is extracted using wells rather than strip-mining. SAGD projects, which are developed in smaller chunks, will not be hit as hard by the new tax measures.

Under the current policy, the cost of an oil sands lease can be written off at a rate of 30 per cent a year; the budget proposes narrowing that to 10 per cent. The change on mining expenses is more dramatic. Instead of writing off the entire cost of developing a mine in the years the costs were incurred, the budget calls for forcing those costs to be written off at 30 per cent per year. That will align oil sands mines with other sectors of the energy industry.

By allowing industries to write off their expenses more quickly, governments effectively allow companies to defer the date at which they're taxed - a business-friendly move that is often used to spur spending. Slowing down those writeoffs effectively speeds government's ability to recoup taxes.

"Tax deferred is always tax savings. That's the first lesson you learn in tax," Mr. Carr said. "If I can pay it … years from now, I have the use of the money now."

Another major corporate budget move achieves a similar effect by barring corporate partners from deliberately mis-matching fiscal calendars to push off paying taxes. Ottawa estimates the measure will boost federal revenues by an estimated $2.85-billion in the next five years.

The reason stems from a tax quirk in which corporate partnerships are not taxable. Rather, the owners of a partnership pay tax. But if the owners have their year-end in, say, August, 2010, but the partnership year-end is declared for September, 2010, the owners don't have to pay tax on the partnership's 2010 income until they file in 2011.

Although such moves were barred for individuals in 1995, exploiting that discrepancy has become a popular "tax planning" strategy for companies, according to Albert Baker, a Vancouver-based partner at accounting firm Deloitte.

"It's [loss]will be painful for those that are doing it," Mr. Baker said.

A declining corporate tax rate is also a major lure because companies can push the taxes they pay to a year when the rate is lower, said a finance official, who faulted resource companies for particularly "aggressive tax planning."

"We're confident that our new rules will be able to stop it," the official said.

All of the measures will be eased in over a period of years. For oil sands operators, however, it's unclear exactly how substantially the impact will be felt, especially since industry is shifting away from spending in the two areas that are targeted. Few companies, for example, are contemplating new mines - Suncor Energy Inc., Total SA, Royal Dutch Shell PLC and SilverBirch Energy Corp. are exceptions.

And the bulk of oil sands leases have already been bought. Companies are, instead, working to develop land they've already secured.

"We're not trying to purchase a whole lot of new leases. So that wouldn't affect us as much," said Rhona DelFrari, a spokeswoman for Cenovus Energy Inc.

Others said the changes are unlikely to affect the pace of their investment in a massive resource that continues to draw global attention.

"Certainly the tax regime was helpful, but not the driving force behind [our forecasted]returns," said John Rogers, vice-president of investor relations for MEG Energy Corp., an oil sands producer. "The government isn't really taking away money from [producers] What it is doing is [changing]the timing of getting the money back."

MEG, Mr. Rogers said, would rather the government left the current tax framework untouched, but hopes the changes mark the end of any fiscal tinkering.

"The industry continues to look to the federal and provincial governments to put in place long-term, stable fiscal regimes so that, particularly in the oil sands, we know exactly what environment we're making those investments in," Mr. Rogers said.

With files from reporters Shawn McCarthy and Barrie McKenna

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