The Rural Municipalities of Alberta — the organization representing Alberta’s rural counties and municipal districts — has announced it’s facing what it calls a “massive increase” in unpaid taxes owed to small rural governments by oil and gas companies.

The amount owed in taxes has more than doubled since last year, to $173 million, according to a recent survey of Rural Municipalities of Alberta members.

This loss of revenue, the Rural Municipalities of Alberta said in a press release, means “many rural municipalities will struggle to remain viable.”

You might be wondering why, and how, oil and gas companies can simply not pay their taxes. After all, the local government will certainly make sure to collect your property tax. And we’re all well aware that the Canada Revenue Agency is keeping tabs on our income tax. 

But the situation is a little different with the taxes owed by oil and gas companies to the small communities they operate in.

Read on.

What kinds of taxes are oil and gas companies supposed to pay to rural communities?

Oil and gas companies are supposed to pay property taxes, not unlike home and landowners, when they install oil and gas infrastructure. 

These taxes are assessed based on a model set by the provincial government — and there are rumblings that this model could soon be “updated” (more on that later).

Why aren’t these companies paying?

Though rural municipalities have long voiced empathy for oil and gas companies facing low energy prices, they are increasingly alleging that companies are choosing not to pay their municipal taxes because the companies know there are few consequences.

According to the Rural Municipalities of Alberta, companies are increasingly “unable or unwilling to pay.” 

The Canadian Association of Petroleum Producers has previously suggested that rural municipalities “place a disproportionate fiscal burden on industrial property.”

Ron Govenlock, mayor of Woodlands County, told The Narwhal last fall that it’s not reasonable to think that property taxes are the reason companies are struggling.

“There’s a multitude of factors that go into any business in terms of its operational cost,” he said. “So to suggest that it’s the tax burden — that’s been consistent for the past 20 years — that is now going to be targeted as the reason that their profit margin is tighter?” 

“I don’t buy that.”

Oilfield rentals in Fox Creek, Alta. Photo: Amber Bracken / The Narwhal

So, what happens if companies don’t pay these taxes?

Not a whole lot, when it comes to enforcement. 

According to the Rural Municipalities of Alberta, local governments “have no ability to take action to recover owed taxes on this type of infrastructure.”

With other types of tax debts, whether from individuals or businesses, counties may seize assets or post them for sale.

The situation gets even trickier if a company declares bankruptcy. 

Counties “have little recourse to recover unpaid taxes from companies that have declared bankruptcy,” according to the Rural Municipalities of Alberta, as they are near the bottom of the list of creditors who would receive any leftover funds following insolvency.

How much does this matter to these communities?

A lot. In some cases, rural municipalities rely on tax revenue from oil and gas companies for more than 90 per cent of their annual budgets. 

An investigation by The Narwhal last fall found that in at least 20 counties, local governments were relying on these payments for more than half of tax revenue.

Losing that cash flow has led counties to consider cutting back on road maintenance, property tax hikes for residents and hiring freezes. 

Others dipped into emergency funds to bridge what they hoped was a temporary shortfall.

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Has this happened before?

When the Rural Municipalities of Alberta announced last year that communities across the province were facing an $81-million shortfall in unpaid taxes from oil and gas companies, they labelled it “unprecedented” and noted it was “worsening at an alarming pace.”

Govenlock told The Narwhal last year that the sudden drop in income left his county “blind-sided.”

What’s the provincial government doing about this?

Last summer, the provincial government announced a program that would seek to cut the taxes paid by some gas producers, under their shallow gas relief program.

That program meant eligible companies received a 35 per cent cut on local taxes on shallow gas wells and pipelines for the 2019 tax year.

In turn, local governments received less tax revenue, so the provincial government promised to reduce the amount of another tax, the education tax, that rural municipalities have to pay by the amount forfeited in gas tax. 

When it announced the program, the provincial government estimated it would indirectly foot the bill for $20 million in taxes for eligible shallow gas companies. 

The program was estimated to only be applicable to about 15 counties, of the approximately 60 spread across the province. An estimated 70,000 wells and pipelines are eligible under the shallow gas relief program.

A campground where workers live year round in Fox Creek, Alta. on July 24, 2018. Photo: Amber Bracken / The Narwhal

Why shallow gas wells?

“Shallow gas” includes conventional wells, and associated pipelines, that are not drilled deep beneath the surface like many fracked sites. 

According to the Government of Alberta, shallow gas wells are “defined as wells less than 1,500 metres in depth, producing only gas … [and draw] from formations that are younger than 98.5 million years.” 

“There’s many of these wells but they don’t produce a lot,” Tristan Goodman, president and CEO of the Explorers and Producers Association of Canada, told the Calgary Herald last summer.

At the same time, natural gas prices have been low for some time.

“Some days we are almost giving this product away for free,” associate natural gas minister Dale Nally said last summer. Government officials have said they are concerned shallow gas producers are paying too much in property taxes.

Not everyone agrees, including Rural Municipalities of Alberta president Al Kemmere, who said in a press release that the “taxation model for shallow gas infrastructure is not the cause of” the industry’s challenges.

Did the shallow gas relief program solve the problem?

Not according to the Rural Municipalities of Alberta, which said in a press release that the government’s program “is not solving the problem of unpaid taxes and industry struggles, but is rather providing many companies with 35 per cent forgiveness on their taxes while the rest remain unpaid.”

That program didn’t sit well with the local government officials The Narwhal spoke to last fall, either.

Bruce Beattie, the reeve of Mountain View, told The Narwhal it didn’t seem fair to give a tax break to some companies while still expecting local governments to maintain the same services.

Under the shallow gas relief program, he said, “everyone else will pay and the shallow gas guys won’t. They’ll get the services but they’ll be paying less.”

The Fox Creek Greenview Multiplex in Fox Creek, Alta, is sponsored in part by Shell. The Fox Creek Greenview Multiplex in Fox Creek, Alta, is sponsored in part by Shell. Funds from industry taxes are also relied upon to provide services to the public in many rural municipalities in Alberta, creating a string of social consequences if companies do not pay their bills. Photo: Amber Bracken / The Narwhal

Is the provincial government continuing its support for municipalities?

Nope.

Despite the fact that the Rural Municipalities of Alberta found that some municipalities attributed up to 98 per cent of unpaid taxes to the shallow gas industry, the provincial government is not continuing its credits for the shallow gas relief program in 2020.

In 2020, according to the Rural Municipalities of Alberta, “municipalities will no longer receive a corresponding credit, and instead must absorb the 35 per cent loss in assessment on these properties.”

What’s next?

There are indications the Government of Alberta is looking to “update” the way property taxes are assessed for oil and gas companies.

The current assessment model, according to a government publication, “does not reflect the circumstances faced by many shallow gas producers with older, lower productivity assets.”

Essentially, the government appears concerned that companies are being taxed too much, in an environment where they’re reaping less profits from their wells.

This, the government says, “has required the province take action.”

This has led to speculation the government will move to reduce the amount of property tax owed to local governments — at least on some types of wells — meaning counties could find themselves struggling even more.  

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According to a new International Monetary Fund (IMF) report, Canada subsidized the fossil fuel industry to the tune of almost $60 billion in 2015 — approximately $1,650 per Canadian.  

Yet subsidizing one of the world’s wealthiest industries is folly.

Such subsidies not only hurt Canadian taxpayers and the economy — they also exacerbate the climate emergency.

Indeed, the G20 countries have already agreed that subsidizing fossil fuels is irrational in a warming world — and have called for action to eliminate inefficient fossil fuel subsidies that distort markets.

The problem is that subsidies encourage the production and wasteful consumption of fossil fuels all while impeding the shift to cleaner renewables. 

For these reasons, during the last election campaign Justin Trudeau sensibly committed to “phase out inefficient fossil fuel subsidies.”   

The problem is that government has not yet delivered on this promise.  

A new 2019 report by Canada’s Auditor General reveals government’s review of such subsidies is “incomplete and not rigorous,” is “not based on all relevant and reliable information” and “did not consider economic, social and environmental sustainability over the long term.”

Canada continues to subsidize the fossil fuel industry in myriad ways. First, it provides tax breaks under the federal Income Tax Act. For example, in 2015 the federal government introduced a new accelerated depreciation rate for equipment used in LNG facilities, which was a change proposed by the Canadian Association of Petroleum Producers.

A natural gas well pad with numerous wells for fracking near Farmington, B.C. The LNG industry in British Columbia is the recipient of numerous tax breaks and exemptions. Photo: Garth Lenz / The Narwhal

Second, government provides funding to the fossil fuel industry at favourable rates through direct financing and loan guarantees. A recent example is Export Development Canada’s administration of a nearly $5 billion loan to support the government’s controversial purchase and operation of the Trans Mountain pipeline.  

Ottawa has no plan to recoup that principal cost from industry — and is also subsidizing half the interest expense with taxpayer dollars.

Third, Canada provides direct funding to the fossil fuel industry through research, development and other services provided by federal agencies. 

For example, the federal government is paying $1.5 billion for the Oceans Protection Plan, an initiative to safeguard bitumen transport through the Port of Vancouver. This plan was necessitated by new oil tanker traffic — and should be paid for by oil shippers. 

Prime Minister Justin Trudeau visited Victoria in April of 2018 to reiterate the federal government’s support for the Trans Mountain pipeline and commitment to the Oceans Protection Plan. Photo: Carol Linnitt / The Narwhal

Yet now, taxpayers will pay up to $6 billion for the plan over the next 20 years.

Finally, there is the $60 billion subsidy that the IMF focused on — the “social costs” of carbon that governments pay, instead of fuel producers. 

Lacking adequate carbon taxes, governments continue to pick up the tab for the impacts of climate change — for example, repairing damage from extreme weather events, building new levees, sea walls and storm sewers and paying for wildfire control and increased health costs. 

The Fort McMurray wildfire in northern Alberta. MacEwan University estimated the cost of the 2016 wildfire, nicknamed “the beast” for its unpredictability, to be around $9 billion. Photo: pilotbiologist / Flickr

Fortunately, implementing carbon taxes and eliminating fossil fuel subsidies will pay off in the long run. 

The IMF estimates that elimination of global fossil fuel subsidies would reduce CO2 emissions by 28 per cent and reduce premature air pollution deaths by 46 per cent.

Equally important, the IMF concluded that elimination of subsidies would actually result in a net economic gain. Eliminating fossil fuel subsidies will be a win for the environment and for the economy.

In sum, Canada needs to implement robust carbon taxes to pay for the massive climate change costs that society now confronts.

Just as important, Canada must finally follow through on its specific promise to phase out inefficient fossil fuel subsidies.  

After all, claiming to fight climate change while subsidizing fossil fuels is as crazy as brushing your teeth while eating Oreos. It may make you feel virtuous, but it isn’t going to work.

Erin Gray and Calvin Sandborn QC are lawyers with the University of Victoria Environmental Law Centre, where Emilie Benoit and Sydney Hamilton are both law students.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.

Canada’s fossil fuel industries are the recipients of $2.7 billion US ($3.6 billion CDN)  in handouts each year, despite a promise from all G20 nations, including Canada, to eliminate subsidies in 2009.

About $1.6 billion US of those subsidies came from the federal government with the rest distributed by the provinces, according to a new report from Oil Change International.

The report finds G20 countries spend about $452 billion US each year to prop up their oil, gas and coal industries.

The Liberals promised to “fulfill Canada’s G20 commitment to phase out subsidies for the fossil fuel industry,” in their election platform. The party singled out the Canadian Exploration Expenses tax deduction as too generous to industry, saying the tax break should only kick in if companies are completely unsuccessful in their resource exploration.

“The saving will be redirected to investments in new and clean technologies,” the party platform says.

But the Canadian Exploration Expenses tax deduction isn’t the only place where companies can take advantage of a generous subsidy system.

So were else is the money coming from and going to?

Direct Handouts to Fossil Fuel Industry

The Canadian government has heavily invested in fossil fuel projects, research and development in recent years.

Perhaps most notably, the government poured millions of dollars into the development of carbon capture and storage (CCS) technology.

Between 2011 and 2014, $226 million US was handed over to SaskPower, Saskatchewan’s main energy provider to develop CCS infrastructure at the Boundary Dam coal power plant. SaskPower, owned by the province, invested an additional $1.2 million US into the project over four years.

An additional $18 million US was paid into CCS research at the Saskatchewan Petroleum Technology Research Centre in a joint project funded by Canada, Saskatchewan, the University of Regina and the Saskatchewan Research Council.

Two CCS projects in Alberta received $156 million US from the federal government and an annual supplement of roughly $103 million US from the province for several years.

The development of CCS has been extremely controversial because it is an expensive, risky and unproved technology that, while ostensibly removing carbon from the atmosphere, is also used to facilitate enhanced oil and gas extraction, thereby releasing more carbon into the atmosphere.

B.C. also invested $19 million US directly in oil and gas extraction activities under the banner of  ‘transportation investment’ objectives.

Screenshot from Oil Change International.

Public Finance of Fossil Fuel Activities

The OCI report found Export Development Canada, the country’s main public finance institution, mostly funds projects that involve oil and gas production. The institution, however, doesn’t keep precise records on how much money is provided per transaction (records only provide a range, i.e. $250-$500 million US).

But OCI estimates that the institution provides an average of $2.5 billion US per year to fossil fuel production for companies like TransCanada, Enbridge, Encana, Devon Energy and Chevron.

Fossil Fuel Industry Tax Breaks

One of the main ways the federal and provincial government subsidizes the fossil fuel industry is through major tax breaks.

Canada has no shortage of generous tax deductibles and expenses for industry when it comes to expensive upstream development, which can include high resource exploration and infrastructure costs.

Here are some highlights:

The Canadian Development Expense

Under the Canadian Development Expense, oil and gas companies can claim up to 30 per cent of their field development costs when starting up a new project.

In 2013 oil and gas companies claimed an estimated $981 million US in tax deductions for drilling or completing an oil field or sinking a new mine shaft, according to OCI.

Canadian Exploration Expense

Companies exploring for new resources can claim up to 100 per cent of their expenses for exploratory drilling or seismic testing. This cost the federal government an estimated $159 million US in 2013.

Until January 2015, all pre-production expenses for development of the oilsands were eligible under this tax break, although now operators can only make those claims under the CDE (where they can only recoup 30 per cent, rather than 100 per cent, of their expenses).

Canadian Oil and Gas Property Expense

This tax break, which allows companies to claim a 10 per cent deduction on the cost of purchasing new oil and gas wells, has amounted to $35 million US in subsidies since 2011.

This expense did bring the benefit of reclassifying oilsands property and leases, which were previously eligible for 30 per cent deductions under the Canadian Development Expense. This change is estimated to save Canada $69 million US each year by 2015/2016, according to the report.

Atlantic Investment Tax Credit

This tax credit cost subsidized the oil and gas industry to the tune of $136 million US between 2013 and 2014 by providing tax deductions for developing mature or non-conventional resource fields in Atlantic Canada.

This credit mechanism is currently being phased out but companies can claim past expenses until 2017.

Foreign Tax Breaks

The Foreign Resource Expense and the Foreign Exploration and Development Expense allow Canadian companies to deduct 30 per cent of their overseas exploration costs.

OCI notes a lack of disclosure for deductions claimed under these foreign operations tax brackets means no one knows exactly how much these breaks cost for 2013 or 2014.

Alberta Crown Royalty Reductions

In 2013, companies were spared from paying an estimated $631 million US in taxes and royalties under this provincial subsidy. In 2014, the estimated total was $578 million US.

B.C. Deep Drilling Credit

B.C. gave $260 million US worth of royalty relief to gas developers in 2013 and an additional $238 million US in 2014.

In its primer on Canada, Oil Change International, along with the Overseas Development Institute and International Institute for Sustainable Development, outlines how these tax breaks work in more detail.

Why Stopping Fossil Fuel Subsidies Matters

Global subsidies for the fossil fuel industry are four time the global subsidies for renewable energy.

Clean energy analysts say the lack of tax breaks and subsidies for clean energy is holding the sector (which is still booming, by the way) back from reaching its potential.

Many countries in the developed world have already promised a long or medium-term phase out of fossil fuels as a pathway to lowering their emissions.

This year more than 190 countries are convening in Paris for the UNFCCC COP21 climate talks in the hopes of singing an international climate treaty.

“Axing $1.7 billion US in handouts to fossil fuel producers is a critical step that Canada needs to take towards tackling climate change, and it would be very welcome in the lead-up to major climate talks in Paris next month,” Alex Doukas, co-author of the report for Oil Change International, said.

“This is a unique opportunity for the new Canadian government to hit the ground running at the G20, live up to election promises, and push other G20 leaders to phase out subsidies as they first committed to doing six long years ago,” Doukas added.

“Continuing to fund the fossil fuel industry today is like accelerating towards a wall that we can clearly see,” Stephen Kretzmann, director of Oil Change International, said.

“G20 leaders need to slow down and turn us around before we hit climate disaster.”

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.