Time for Provinces to Replace Royalty Systems for Resource Companies - C.D. Howe Institute

TORONTO, Sept. 23, 2015 /CNW/ - The key problem with current resource taxes in Canada is not the tax rates, but the design of the taxes, states a new report from the C.D. Howe Institute. In "Drilling Down on Royalties: How Canadian Provinces Can Improve Non-Renewable Resource Taxes," authors Robin Boadway and Benjamin Dachis suggest that a better design for many provincial resource taxes would be a cash-flow tax, rather than royalties. 

"Canadian policymakers should be looking at international best practices in resource tax design," say the authors. "For example, Norway's best-in-class resource tax is based on the cash flows of resource production, which means that resource companies pay a high tax rate on cash flows but still have a strong incentive to invest."

A cash-flow tax consists of a company's revenue, minus its expenses, and better reflects a company's cumulative costs than do existing royalties. Under a cash-flow regime, barely profitable projects would face little or no tax, while highly profitable projects would pay a heavier tax.

The authors recommend the following measures to improve provincial royalty systems:

1. Canadian governments should replace existing royalty systems with more economically efficient cash-flow taxes.
2. Those governments that do have cash-flow taxes in place – such as Alberta for the oil sands and Newfoundland and Labrador for offshore oil – should reform their regimes to better match best international practices.
3. There should be no special tax on liquefied natural gas plants, such as that proposed in BC, given that an efficient cash-flow tax can be applied on the exploration and extraction stages. These plants should be treated like other non-resource corporations.

The authors find that Canadian provinces have collected about $79 billion in resource-specific tax revenues from 2009 to 2013. "The provinces can collect more while not harming investment in mining and oil and natural gas extraction if they change their current royalty system to one based on better designed cash-flow taxes," they conclude.

For the report go to: https://www.cdhowe.org/drilling-down-royalties-how-canadian-provinces-can-improve-non-renewable-resource-taxes

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada's trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada's most influential think tank.

SOURCE C.D. Howe Institute

Robin Boadway, Emeritus Professor of Economics, Queen's University; or Benjamin Dachis, Senior Policy Analyst, C.D. Howe Institute; 416-865-1904, or email: [email protected].