Oil and Gas Services and Budget 2021

The Federal Government tabled its first budget more than two years on April19, 2021, a meaty 725 pages directed at managing the ongoing economic effects of COVID and transitioning to recovery.

Recovery is a hopeful word yet for Canadian oil, seeing prices creep back to $45 US per barrel plus (Western Canada Select trading), after sinking to $3.50/bbl last year. There is some optimism not seen for a while in Canada, with hopes that price will continue to sustainably climb. And while there were no major budgetary or tax changes with immediate affect the oil and gas service sector announced in the 2021 Budget, there are some targeted opportunities and challenges within the budget that may assist - or restrict - activities for some operations following spring breakup, when drilling activities traditionally increase.

Extension of Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rental Subsidy (CERS)

The Budget proposes to extend the Canada Emergency Wage Subsidy, and the Canada Emergency Rent Subsidy (including the Lockdown Support) from June to September 25, 2021. The subsidies will phase out over that period, but may still provide help to businesses trying to manage cash flow while they recapitalize. Further, the budget offers the authority for the government to add additional periods potentially extending to November 20, 2021.

Canada Recovering Hiring Benefit (CRHB)

This new subsidy would be available to certain qualifying employers as an alternative to CEWS for the periods of June 6, 2021 to November 20, 2021. The benefit would provide a subsidy of up to half of incremental increases in remuneration paid to employees in the period for qualifying employers. 

Immediate Deduction

Eligible property acquired by Canadian controlled private corporations (shares among associated groups) on or after budget day and prior to January 1, 2024, are available for an immediate deduction or tax purposes on up to the first $1.5 million of expenditure. This could include functions of equipment, vehicles, earthmoving equipment, large trucks, etc. that would be included in classes 8, 10, 16, 38, and others. 

These changes specifically exclude capital cost allowance (CCA) classes 1 to 6, 14.1, 17, 47, 49 and 51, which would exclude buildings and parking lots, goodwill, some pipelines and related facilities. While this simply accelerates a deduction that would have otherwise been available, it may offset some costs of recapitalization or expansion. There are requirements for the acquisition related to “available for use” and acquisitions must not be from persons not at arm’s length.

Other CCA Measures – Clean Energy Equipment

To modernize the classes for energy conservation and clean generation, certain classes of property are being redefined to qualify for accelerated write off of up to 50 percent. These include investment in clean energy products, but also exclude a greater selection of generating equipment that rely on fossil fuels for co-generation.

Reduced Tax Rates for Zero Emission Technology Manufacturers

Qualifying corporate taxpayers can qualify for an up to 50-percent deduction in their federal tax rate from 2022 through 2028 and then phased back to existing rates by 2032. There are measures of qualification for the activities that need to be met, and considerations to the application where a company may have had income applicable at both the small business tax rate of nine percent and the general corporate rate of 15 percent.

Interest Deduction Limitations

The Budget also proposed to introduce rules limiting the amount of interest expense deductible in a period. The limitation will be proportionate to a businesses EBIDTA, starting at a 40-percent limitation on January 1, 2023 and reducing to 30 percent for all years beginning after December 31, 2023. Generally, EBITDA is a corporation’s taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization.

This limitation will apply to corporations, trusts, partnerships and canadian branches of non-resident taxpayers. There is no grandfathering of existing loans, though there are some exceptions for CCPC’s with less than $15 million of taxable capital in the associated group, or where the aggregate net interest is less than $250,000. 

The denied interest will be available for carry forward for up to 20 years, or back for up to three years. 

There are other proposals worthy of analysis, but without obvious effect to the sector as a whole:

• Luxury tax on new cars, boats, planes, etc.;
• $15 / hour minimum wage federally.
• Consultations for proposals to mandatory tax disclosures on certain transactions or uncertain tax treatments.
• Tax on vacant properties owned by non residents;
• Updates to GST as it relates to e-Commerce;
• Updates to personal credits and expansion of disability credits application.

MNP will provide more information as proposals are released by the federal government.