Federal Finance Minister Bill Morneau says a tax deduction for early-stage oil and gas exploration is being phased out to make tax rules less complex and more efficient, and to reduce fossil fuel “subsidies.”
The federal budget Morneau introduced last Wednesday removes a tax preference that allowed some exploration costs to be immediately deductible as Canadian exploration expenses.
The move disappointed the industry, particularly as companies struggle to attract investment following the prolonged slump in oil and natural gas prices. The deduction enabled producers to offset some of the costs of early exploration.
During a question period with the Calgary Chamber of Commerce on Monday, the federal finance minister was asked about the rationale for the decision.
He cited two reasons.
“We, last year in our budget, identified that we wanted to work to make sure that our tax code was more efficient, that it was less complex and that it was fair,” he said, adding that a “significant number” of tax measures were reviewed, but not all were acted upon.
Secondly, he cited Canada’s long-term international commitment to “deal with fossil fuel subsidies.”
“In looking at those two things we were trying to make sure we dealt with things that created the ability to make our system less complex, more efficient.”
He noted Ottawa also changed a public transit tax credit because “we didn’t see it making the impact that we thought it should be making.”
As for the Canadian exploration expense deduction, he said: “We didn’t think that it was targeted appropriately, and believe there are other things we are doing that are having a very positive impact on the industry. And we’re going to be committed to continuing to have [a] positive impact on the industry—but not through that kind of tax credit.”
Morneau was asked what Canada can do to remain competitive with the U.S., particularly considering that some of the policy changes expected out of Washington have yet to take shape.
Noting he often gets this question, Morneau said: “We obviously are going to see changes around the world that we can’t possibly know about in advance...
“We need to think about where can Canada win, so that we can make investments in those places. How [do we] ensure that people have the skills in order to be successful in those places? So you start by saying: How do we make our economy as strong and as resilient as possible? That’s what we’re trying to achieve.”
Regarding the United States specifically, the Liberal finance minister said Ottawa’s approach has been to be “deeply engaged” with the administration of President Donald Trump.
“We were down there on a regular basis talking to them. I’ve been there three times this month,” Morneau said, including meeting with U.S. Treasury Secretary Steven Mnuchin last weekend.
He said Ottawa is continuously working to ensure Americans know the magnitude of their trade with Canada.
“It’s an effort in Washington [and] it’s a state-by-state-by-state effort,” Morneau said, noting that his post-budget tour will include U.S. cities next week. “I’m meeting with governments and mayors to talk about the importance of Canada/U.S. trade. How many U.S. jobs rely on trade with Canada? It’s nine million.”
He cited Trump’s approval last Friday of the proposed U.S. leg of TransCanada Corporation’s Keystone XL pipeline as a positive outcome of the new administration.
Asked whether the new people in Washington, including Trump and Mnuchin, understand the importance of the trade relationship with Canada, Morneau said: “I believe the Trump administration has a very clear understanding of the importance of Canada, [including] in specific sectors. So that’s positive.”
However, the Canadian finance minister urged his business audience to continue to stress to their American counterparts the importance of Canada/U.S. trade.
“I think all of us who have business relationships with United States organizations, who are perhaps part of a U.S. organization, have a responsibility.... I think that’s just a healthy thing for us to be doing in order to maintain what is already a positive relationship.”