The Suncor Refinery in Edmonton on April 29, 2014.JASON FRANSON/The Canadian Press
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Alberta’s corporate income taxes are sliding toward the lowest level in a generation, as weak energy prices, the coronavirus and an accelerated cut in rates combine to puncture the province’s revenue.
But there is another peril lurking in the depths of earnings announcements this week from two of the biggest players in the province’s energy sector: the long-term shift to lower-carbon energy triggering massive writedowns in the value of fossil fuel assets, that point to lower tax payments in years to come.
Already, corporate taxes are projected to fall dramatically in Alberta, largely because of the coronavirus and the resulting lockdowns across the globe deflating demand for oil and natural gas. According to the province’s estimates, corporate taxes will fall to $2.2-billion in the current fiscal year of 2020-21, and decline further to $1.7-billion in 2021-22, as the chart below shows.
That is a 20-year low, even without adjusting for inflation. But the decline is even more stark when corporate tax revenue is measured as a share of total revenue. As shown in this second chart, corporate taxes have not represented such a small share of Alberta’s revenue in decades. Based on current projections, the proportion of overall revenue coming from corporate taxes in the current fiscal year will be the lowest since 1993. And the projection for next year would leave corporate taxes accounting for their smallest share since at least 1982.
Corporate taxes are typically a volatile source of revenue, particularly in Alberta where the ups and downs of energy prices drive huge swings in profitability and taxable income, notes Trevor Tombe, an associate professor of economics at the University of Calgary. (Ottawa’s corporate tax revenues are less volatile, although the federal government is projecting that such revenues will fall to $39.2-billion in 2020-21 from $50.1-billion in 2019-20. But according to Ottawa’s projections, corporate taxes would hold relatively steady as a proportion of total revenue, dipping to 14 per cent from 15 per cent the previous year.)
Cyclical volatility is certainly a factor in the results released this week by Imperial Oil Ltd. and Suncor Energy Inc. Both companies reported significant revenue declines. Imperial turned in fourth-quarter revenue of $6-billion, down from $8.1-billion in the previous year, even with much higher production volumes. At Suncor, fourth-quarter gross revenue dropped to $3.1-billion from $4.4-billion the previous year, with production volumes down only marginally.
Both Imperial and Suncor also took large charges, stemming from decisions to write down the value of formerly key assets. Companies take such charges when their assessment of the long-term value of an asset declines. In the case of oil and gas assets, one major factor driving such decisions is the likely effect of decarbonization efforts in reducing demand for fossil fuels.
Neither Imperial nor Suncor directly cited climate change or decarbonization as a motivating factor. Internationally, however, energy giants Total SA and BP PLC have been more blunt, pointing to the shift toward green energy for their own massive writedowns last summer, which included their oil sands holdings in Alberta.
Whatever the rationale, such charges clearly signify that the companies believe those assets will produce less revenue and profit –and generate fewer taxes – in the future, said Rick Robertson, professor emeritus of accounting and finance at the University of Western Ontario’s Ivey Business School. “Alberta and the federal government are going to be worse off because of these writedowns,” he said, adding that in almost all cases, impairment charges don’t have an immediate effect on corporate taxes payable.
For Imperial, there was a $1.171-billion after-tax charge resulting from its decision to no longer develop a “significant portion” of its unconventional natural gas assets in Alberta. Such assets are generally more expensive to exploit. Suncor took a $423-million charge because of uncertainty about the future of West White Rose, the Newfoundland offshore oil project in which it is a minority shareholder. The company also took a $142-million charge related to the Keystone XL pipeline, which was cancelled by newly elected U.S. President Joe Biden, in large part owing to climate-change concerns.
Alberta’s Finance Department said in a statement that the province’s most recent forecast in late November anticipated a decline in corporate profits “due to weaker global energy prices, lower production and health measures associated with the COVID-19 pandemic weighing on economic activity.”
However, both companies announced those measures after the province issued its fiscal update on Nov. 24. And that fiscal update references the Keystone project as a going concern a number of times.
Prof. Tombe agreed that the Finance Department’s modelling would take into account the possibility of large writedowns in the current business environment, even if actions by specific companies could not be foreseen. “Whether that was enough remains to be seen,” he added.
Jack Mintz, President’s Fellow at the University of Calgary’s school of public policy, said he expects more writedowns to occur as the oil patch comes to grips with the transition to a world of lower-carbon energy. (Mr. Mintz, also a director on Imperial’s board, noted he was commenting on the broad situation and not on any matter specific to the company.)
The heaviest toll on federal and provincial revenues is yet to come, he predicted. “As we get those writedowns in the future, there will be an impact on corporate taxes.”
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Editor’s note: An earlier version of this article incorrectly said impairment charges reduce taxable income. In fact, impairment charges reduce income for accounting purposes, but generally do not do so for tax purposes.