Tax Matters In the Frontier
Authors: Parsons Robert B. 
Published: March 2010

The risks involved in offshore oil and gas operations are almost beyond the average Canadians ability to ponder. Exploration expenditures, safety considerations, and environmental matters head the list. But, add to this the financial risks associated with the tax regime for the frontier which is in the developmental stage, as the government introduces new tax rules and strives to modify existing ones to make them more relevant to the uniqueness of the frontier.

This month, Tax Topics examines some of the tax legislation which is unfolding for oil and gas activities in the frontier region.

Introduction

In keeping with the theme of this issue of The Journal of Petroleum Technology, Tax Topics lakes a look at some of the highlights of tax matters relevant to offshore operations in Canada. Contemplating such matters, it is recognized that there are many other regulatory aspects of offshore activities that are very much interrelated with tax issues. However, in view of space and time constraints, this article will restrict itself to some of the major tax considerations of topical interest.

One of the most apparent features of oil and gas taxation in the frontier? Or in the Canada Lands as these regions are generally called in the federal government's National Energy Program, is that some taxes are of immediate concern while others are of almost academic interest because it will be so many years before they become payable. The federal royalties on Canada Lands production, for example, have received relatively little attention, largely because production is seen to be so far down the road and operators have much more pressing problems to deal with such as enormous exploration costs and finding sufficient reserves to warrant commercial production. On the other hand, tax issues relevant to exploration activities are of current interest-these include income tax deductions, federal and provincial sales tax considerations, payroll withholding requirements, and similar matters.

Generally speaking, it is presently contemplated that production from the Canada Lands will be subject to three levels of tax:income taxpetroleum and gas revenue taxCanada Lands royalties.

Although these taxes are essentially federal charges production off Nova Scotia's coastline will be subject to a federal/provincial agreement whereby inter alia, Nova Scotia will share in the federal take under certain conditions. The jurisdictional dispute concerning regions offshore Newfoundland is not yet settled: despite the Supreme Court decision confirming federal jurisdiction Over these regions, the federal and Newfoundland governments have not sorted out a revenue-sharing arrangement in connection with federal taxes to be collectedin respect of production off Newfoundland's coast.

Income Taxes

With some minor exceptions, the income tax provisions which apply to oil and gas operations in general also apply to activities in the Canada Lands. The exceptions relate to the definition of Canadian exploration expense (CEE) and the timing of the phase-out of earned depletion allowances.

In the case of CEE, the new definition of CEE which is proposed to be effective January I, 1986 would be slightly more generous to CEE incurred in the Canada Lands.