As someone who works in the oil and gas industry, my fatigue at the rhetoric percolating around the country piqued when the discussion of “subsidies” once again reared its head. According to a headline in the National Post, “Canada’s billions in fossil fuel subsidies to go under the microscope”, the Government will take a step towards its promise of getting rid of fossil fuel subsidies. As someone who has the responsibility of managing the finances of my company, I can say that this sort of discussion is not only harmful through its ignorance, it is also misinformed.
So, what exactly is a subsidy? According to the Merriam Webster dictionary a subsidy is “a grant or gift of money.” On this fact let me be clear – at no time have I ever seen such a thing come to our office. Every day I check my mail, looking for one of these mystical cheques from the Government, but alas there is none. The money that comes into our business is a result of the operations we conduct, and the relationships that we maintain, whether that be in the field or with our investors. Period.
So how does the Government apparently “subsidize” our business? Through the spending of capital and the acquisition of assets, we are afforded the ability to depreciate our capital expenditures against our calculated pre-tax income. This depreciation varies between Canadian Oil and Gas Property Expense (COGPE) which can be deducted at 10% per year, to Canadian Development Expenses (CDE) which can be deducted at 30%, to Canadian Exploration Expenses (CEE) which get a 100% deduction allowance. In the days of old, the CEE tax credit was something that was easier to pursue, however with the maturation of the basin the availability of such pools is quite limited. The deduction rates afforded to these categories reflects the implicit risk of exploration and development of oil and gas assets. Land is a low risk asset, so the depreciation is 10%. An exploration well, by definition a well that has nothing nearby, is a riskier undertaking and thus afforded a 100% deduction.
When people first look at these numbers, and do not understand the details behind them, they often believe that the oil and gas company gets 30% of their money back because of the CDE deduction, therein the subsidy. Wrong. What the oil and gas company “gets” is a potential 30% reduction in their pre-tax income. In Alberta, the marginal tax rate is approximately 27%, so the reduction of the potential taxes payable on $100 of pre-tax income goes from $27 to $19. Thus, $8 of the $30 deduction is recoverable through reduced taxes, and this assumes that the company is in a profitable position to make such a deduction in the first place.
The oil and gas industry is not alone in terms of these allowances. Whether you are talking manufacturing, green power, mining, technology or any other business, this is all part of the tax code to reflect the fact that you have invested in your business and that capital has certain tax attributes. I am not here to pick on other industries, but it does not take you long to see where Government has created tax relief to encourage investment.
In my company I am proud to have 16 skillful and well-paid full time employees, who have invested their own capital alongside our major investor / supporter, to create a small and successful business in Alberta. Through this and our investments in the business, we have helped to create growth within the economy, and a growing and sustainable business going forward. The tax allowances that we are afforded allow us to reinvest in the business and undertake reclamation and remediation projects on assets as they reach the end of their economic life cycle. It is time we stopped talking of subsidies where there are none, and turn our focus back to how we attract investment capital into industries to create vibrant, meaningful and impactful opportunities for all of Canada.
William Lacey is the Chief Financial Officer of Steelhead Petroleum