Freeland disputes PBO report saying Volkswagen support will cost $3-billion above original estimate

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Finance Minister Chrystia Freeland is challenging the findings of a Parliamentary Budget Office report that says federal support for Volkswagen will cost nearly $3-billion more than originally announced.

Parliamentary Budget Officer Yves Giroux said in a report released Wednesday that the federal government’s deal with Volkswagen to build an electric-vehicle battery manufacturing plant in Southern Ontario will cost $16.3-billion, which is about $2.8-billion higher than the initial estimate.

Ottawa and Ontario announced a deal with Volkswagen in April to provide the company with up to $13.2-billion in federal subsidies for production support after the company builds a battery plant in St. Thomas, Ont. The deal also includes $700-million upfront from the federal government to build the plant and $500-million from Ontario.

The PBO released an analysis on Wednesday that said the initial estimate did not include $2.8-billion needed to offset taxes that Volkswagen would pay on the federal production support. The report also says the production support will only total $12.8-billion, according to figures based on the production schedule and exchange rates.

While the federal government has not published details of the deal, the PBO estimates the government would have to offer a tax adjustment to the “after-tax equivalency” offered under U.S. President Joe Biden’s Inflation Reduction Act (IRA), in order to stay competitive. The $16.3-billion estimate will also depend on the exchange rate, as well as output and sales from the Volkswagen plant.

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“This is a significant subsidy,” Mr. Giroux told reporters, noting it is six times the annual budget of the federal Environment and Climate Change Department.

After reviewing the PBO report, Ms. Freeland told reporters that some of Mr. Giroux’s assumptions are incorrect. Ms. Freeland was asked if the PBO had drawn the wrong conclusions about the tax treatment of the Volkswagen deal.

“Yes,” she replied, adding that the goal of Canada’s policy will be to align with the IRA incentives that are now in place in the United States.

“In designing our investments, we looked at the IRA tax credits and we have successfully levelled the playing field. As you see with these investments being made in Canada, the IRA tax credits are not taxable. And so for us, the clearest, simplest route, we have decided, is simply to take the same approach in Canada,” she said.

When then asked if the government will make any legal changes to further align Canada’s tax treatment of the incentives, Ms. Freeland said: “We will proceed such that that’s the case.”

Reached for comment on the minister’s remarks, Mr. Giroux said his office had confirmed with federal public servants that the production support would be taxable. He said the PBO also reviewed the government’s contract with Volkswagen. If the government were to change tax laws to waive that tax obligation, he said the PBO’s estimate would come down and would be roughly in line with the government’s.

“The only way to make this non-taxable would be to amend legislation for the Volkswagen case,” he said, adding that the government had not indicated a plan to do that prior to Ms. Freeland’s news conference Wednesday. “I wish they had told Canadians before, but that’s their choice as to when they make these kinds of details known.”

Earlier in the day, Mr. Giroux told reporters that the PBO report only looks at the economic and fiscal benefits of the construction stage of the plant, not its operation, because much of the government’s information is confidential, including the plant’s annual output and subsidies. “That limits us in our capacity to estimate the economic impacts,” he said.

He said the report took into consideration the government’s repeated, and public, aim of matching U.S. subsidies. In the U.S., production subsidies are provided through refundable tax credits, but in Canada they are direct subsidies, and in current taxation rules, they are taxable under the Income Tax Act.

According to the report, the economic impact of the construction phase of the project is “marginal,” and would increase real gross domestic product by 0.01 per cent and create 1,400 jobs by the end of 2027. Ottawa has said the plant will eventually create up to 3,000 direct jobs and 30,000 indirect jobs, and produce up to one million EVs a year.

Mr. Giroux said the construction phase should generate sufficient taxes to compensate Ottawa’s $700-million investment through the Strategic Innovation Fund and offset the government contribution.

The report does not delve into Ontario’s $500-million contribution to the project.

Ottawa and automaking giant Stellantis NV are currently in negotiations about the future of a $5-billion EV battery plant in Windsor, Ont., with the company asking for Canada to match billions in subsidies being offered in the U.S. after plant construction was halted last month.