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Canadian provinces should scrap their resource royalty regimes and replace them with “cash flow” taxes, according to a new study.
The report by the C.D. Howe Institute, released Wednesday, argues that a cash flow tax is a much fairer way to tax mining and oil and gas companies than a gross-revenue royalty, because it is based entirely on the profitability of their operations.
As C.D. Howe sees it, the cash flow tax would be based simply on a company’s revenue minus its expenses on a given project. Operations that are barely profitable would pay little-to-no tax, while highly profitable operations would have a much bigger tax burden. It thinks this system would allow provinces to collect more money without harming investment.
“The cash flow tax makes the government a silent partner, because the government shares in both costs and revenues,” said Robin Boadway, emeritus professor of economics at Queen’s University and a co-author of the report.
Royalty systems vary across provinces, but they often take commodity prices, productivity and other factors into account. Some of these regimes have become increasingly complex and convoluted over time; for example, Saskatchewan has come under criticism for having a byzantine royalty system on potash mining.
The biggest problem with gross-revenue royalties is that they do not take costs into consideration. Boadway said some firms could be pushed out of business because they are paying royalties even when they are generating very little profit.
“Royalties don’t treat profits very well, and that discourages investment,” he said.
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