There are several measures in this year’s Canadian Federal Budget that directly affect the energy industry. This is a highlight of these proposed changes.
Canadian Exploration Expense: oil and gas discovery wells
Prior to the 2017 Federal Budget, expenses relating to drilling and completing a discovery well (including expenses incurred to build temporary access roads and prepare a site in respect of such a well) were classified as Canadian Exploration Expenses (CEE) and eligible for a 100% deduction in the year incurred. The 2017 Federal Budget proposes to reclassify these expenses as Canadian Development Expense (CDE), deductible at a rate of 30% per year on a declining balance basis. This measure applies to expenses incurred after 2018 (including expenses incurred in 2019 which are deemed to be incurred in 2018 under the “look-back” rules for flow-through shares).
There are two exceptions from the application of this measure. First, this reclassification from CEE to CDE does not apply to expenses incurred before 2021 if the taxpayer has entered into a written agreement, prior to March 22, 2017, to incur those expenses. Second, this does not apply to drilling expenses in situations where
- the well was abandoned,
- the well has not produced within 24 months, or
- the Minister of Natural Resources has certified that the costs associated with drilling the well are expected to exceed $5 million and it will not produce within 24 months.
Reclassification of expenses renounced to flow-through share investors
The 2017 Federal Budget proposes to eliminate the ability of eligible small oil and gas corporations (taxable capital of less than $15 million) to treat the first $1 million of CDE as CEE for expenditures incurred after 2018. This measure will affect the ability for these corporations to finance through the issuance of flow-through shares. The proposal applies to expenses incurred after 2018 (including expenses incurred in 2019 which are deemed to be incurred in 2018 under the “look-back” rules).
The proposal will not apply to expenses incurred after 2018 but before April of 2019 that are renounced under a flow-through share agreement entered before March 22, 2017.
Clean energy generation equipment: geothermal energy
The 2017 Federal Budget proposes to change the deduction of expenses to promote the geothermal industry. It proposes to expand Classes 43.1 and 43.2 of the capital cost allowance rules to include geothermal equipment that is used for the purpose of generating heat or a combination of heat and electricity. Class 43.1 and 43.2 properties are depreciable at a rate of 30% and 50% per year, respectively. Previously, geothermal equipment related to electricity received preferential treatment to geothermal equipment related to heat or heat and electricity.
In addition, expenses incurred for the purposes of determining the extent and quality of a geothermal resource and the cost of all geothermal drilling for heating and electricity projects will qualify as a Canadian renewable and conservation expense. This measure will permit certain start-up expenses to be deducted in full in the year or transferred to investors by the issuance of flow-through shares.