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Auteur:
Canada | Publication | October 23, 2020
One of the challenges facing Alberta’s struggling oil and gas industry is high municipal property taxes. The October 19 announcement from the Alberta government is a first step in responding to this challenge.
Alberta assesses oil and gas wells on a replacement cost, rather than market value basis. Petroleum producers believe this system is inequitable and does not accurately reflect what their assets are worth. Plummeting oil and gas prices mean cash flows have sunk, share prices have tumbled and access to capital has dried up, creating a corresponding drop in the assets’ market valuation. Moreover, oil and gas assets inherently decline in value over time as production declines, equipment depreciates and abandonment and reclamation obligations crystalize.
The Canadian Association of Petroleum Producers argues there is also a competitiveness problem with taxation levels in Alberta. Its analysis shows a typical well pad in the Montney formation in Alberta pays up to 20 times more in property taxes than a comparable well pad in British Columbia.
In July 2020, the Alberta government outlined four potential models to address industry concerns, and change how it assesses wells and pipelines. While municipal property tax revenues grew from $3.8 billion in 2008 to $7.4 billion in 2018, the Rural Municipalities of Alberta (RMA) strongly opposed these models. It argued the changes may have “potentially devastating impacts on rural Alberta,” as current tax revenue from oil and gas producers makes up a substantial portion of rural municipal budgets. To address the lost revenues, the RMA’s members would have to dramatically cut services, pass the tax burden to other taxpayers, or both.
Extensive unpaid taxes add to the RMA’s concerns. A January 20, 2020, RMA member survey identified about $173 million owed to municipalities from oil and gas companies, up 114% from $81 million in March 2019. Some oil and gas companies are currently unable or unwilling to pay outstanding municipal property taxes due to the ongoing commodity price challenges. Rural municipalities also have little recourse to recover unpaid taxes from companies that have declared bankruptcy since municipalities rank below some other creditors in priority for seizing the assets of a bankrupt company.
The announcement provides some incentive for drilling new wells in Alberta through eliminating the well drilling equipment tax and implementing the three-year property tax exemption. However, it remains unclear whether these changes will meaningfully influence industry investment decisions.
Under the Well Drilling Equipment Tax Rate Regulation, municipalities may tax well drilling equipment on a sliding scale, with tax payable increasing with well depth. The elimination of the well drilling equipment tax for new drilling eliminates the ability of municipalities to collect revenues in this way. At this time, it is unclear if this change is permanent, or will be another factor under consideration as part of the broader changes to the property taxation regime.
The three-year property tax exemption for new wells and pipelines delays any assessment of their value for property tax purposes until a final decision is made on the well and pipeline assessment system. While this provides industry with short-term cost savings, it is unknown if the exemption will be enough to materially impact decisions to drill new wells in the current commodity price environment.
The effects of the announcement on existing wells (other than shallow gas wells) are largely unclear at this time.
Both how the reductions to assessment values will work, and when they will occur remain unclear. While the announcement says that “assessments for less productive oil and gas wells will be lowered,” what “less productive” means, how much assessments “will be lowered,” and when industry will be notified if their wells are impacted is unclear. The changes will be reflected on the 2021 assessed values, so the latest industry will have answers to these questions is when the 2021 assessments are provided.
The 35% assessment reduction on qualifying shallow gas wells and gathering pipeline systems will continue for three years. Qualifying shallow gas wells are wells less than 1,500 metres in depth, producing only gas, and drawing from formations younger than 98.5 million years. Qualifying gathering pipeline systems are pipelines that transport gas from the well to the first downstream processing facility and have an outside diameter of six inches or less. Under this program, municipalities will reduce the property tax on qualifying shallow gas properties. The Alberta government will then reimburse municipalities for this reduction through a corresponding reduction in the education property tax payable by the municipality.
The government noted consultations conveyed that now is not the time to make comprehensive changes to the way oil and gas wells and pipelines are assessed. That said, addressing the ongoing concerns of industry and the RMA requires comprehensive changes and the government is planning a longer-term review of the regulated assessment system in consultations with industry and the RMA.
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