Ottawa EV subsidies show tax-free fairy tales do come true for some

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Let’s pretend you see a newspaper ad for government grants. The federal government is offering $30,000 if you simply agree to be a nice person. You make the application and, voila, you’re approved. The $30,000 appears electronically in your bank account. Is that amount taxable? More than likely, it is under existing Income Tax Act laws.

If your marginal personal tax rate is, say, 35 per cent, you’ll end up with $19,500 after tax. Still, not a bad deal for simply being a nice person.

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But what if Ottawa granted you a special exemption from the applicable provisions of the act to remove the taxation on the $30,000? Alternatively, it could give you $46,500 and tax it back at the same 35 per cent marginal personal rate to ensure you receive $30,000. Either way, the government is giving you both $30,000 of “free” money and special tax treatment.

If you think the above is a fairy tale, it is a reality for politically connected corporations. The above story is almost bang on what happened with subsidies given to Volkswagen AG and Stellantis NV to build manufacturing plants to produce electric-vehicle batteries.

Here’s the fairy-tale-to-policy-reality story. Last summer and fall, the federal government announced subsidies of more than $30 billion for VW and Stellantis. But the government had also negotiated with them to make such subsidies free from corporate tax by changing Canada’s existing laws. And earlier this month, that is exactly what happened.

To get to that same result, the government could have simply grossed up the subsidies to the amount that would net VW and Stellantis the same roughly $30 billion after tax, but that’s not what happened here.

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Normally, such a change in tax law would need Parliamentary approval by bringing a bill to the House of Commons to be debated and ratified. But this particular change was done without a new bill brought to Parliament due to a quirk in how certain specific amounts/issues can get implemented under the act. Of course, this type of process when changing tax law is less visible (and quicker) than a bill appearing before Parliament that can at least be debated.

If we assume the federal corporate tax rate is 15 per cent and the Ontario (the home of the new plants) rate is 11.5 per cent for a combined rate of 26.5 per cent, that means the governments have foregone almost $8 billion in tax revenue (assuming Ontario follows suit, which it may not).

But it gets even more interesting. In the 2021 federal budget, the government announced that “green manufacturing” companies’ profits would be subject to only half the normal federal corporate tax rates. The provinces did not follow the federal lead of this proposal. I was part of a small group of tax practitioners that opposed such a move, but, of course, such opposition fell on deaf ears since good politics is always more powerful than sound policy.

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Given the resulting federal tax rate bonanza, VW and Stellantis (assuming the subsidy amounts will be subject to those lower rates) would have paid significantly less than $8 billion in tax on the $30 billion in subsidies.

But now the federal government has gone one step further and made the $30 billion of subsidies completely tax free. The Parliamentary Budget Officer (PBO) estimated the foregone tax revenue to be $5.8 billion using the halved federal tax rate and applicable provincial rates.

Why would the federal government offer to make these subsidies tax free? Well, the government was apparently concerned about the subsidy/tax-credit competition from the United States. Without making the subsidies tax neutral, it would have made such subsidies less attractive compared to the U.S. Let’s just say I’m not buying this shallow logic and reasoning.

The simple mathematics provided above don’t tell the whole story. To calculate the actual cost of the subsidy grants is complex, but the PBO has done a good job of providing estimates. As mentioned above, the PBO estimates the foregone tax revenue to be $5.8 billion, but the overall cost of the subsidy handouts (including another $7 billion provided to Northvolt AB) to be approximately $44 billion.

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I’m guessing the above numbers are simply glossed over and quickly dismissed by the average Canadian, so let’s try to put that in a bit of perspective. I’m no costing expert, but here are some quick examples of what $44 billion can buy today:

• 587 schools (assuming construction cost per school of $75 million);
• 22 hospitals (assuming construction cost per hospital of $2 billion);
• 11,000 kilometres of new two-lane road construction, or sufficient repairs of existing roads (assuming construction costs of $4 million per kilometre);
• 88,000 modest single-family homes (assuming a construction cost of $500,000 per home);
• 1,467,000 average families of four (that’s about 5.9 million people) having their grocery bills paid for an entire year (assuming an average annual grocery bill of $30,000 per family).

You see the point. The amount of tax paid on money earned by Canadians that is then handed out on a tax-free basis to VW and Stellantis is staggering. The investment income alone — assuming a five per cent rate of return on the funds — would be more than $2 billion. Again, enough to build another hospital, or another 27 schools.

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The lack of transparency, the tax-free handouts and the dollar amount that Canadian taxpayers are on the hook for is shocking and staggering.

Canadians need to be better informed about how their tax dollars are being foolishly thrown away. The lack of fiscal responsibility in how special-interest fairy tales do come true for select corporations at the expense of taxpayers puts all our futures at risk.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.

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