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Alberta’s cap and trade plan may create another opportunity for the federal and provincial governments to tussle over oil revenues.

Alberta’s “Specified Gas Emitters” regulation requires Alberta’s largest emitters to reduce the intensity of their greenhouse gas emissions (if not the total). But instead of actually reducing emissions, even on an intensity basis, companies can simply pay $15 into a provincial fund. Will this payment be deductible from federal income tax, thus transferring significant tax revenues from the federal government to the province?

The federal government has already disallowed the deduction of large portions of oil and gas royalties from federal income tax, despite the protests of petroleum companies. Now, there seems to be some concern that the federal government may try to disallow the deduction of technology fund payments.

For example, Revenue Canada could make try to label technology fund payments as “fines or penalties”. Under the Income Tax Act, fines and penalties are not deductible from tax. Unfortunately for the feds, it is extremely unlikely that they will be able to characterize technology fund payments as either a “fine” or a “penalty”. These terms denote the punitive consequences of failing to comply with the law; at bottom, they are punishments. Payments into the technology fund are far from a punishment and have nothing to do with noncompliance. They are a perfectly legal method of complying with a regulatory scheme and may actually be the most popular way to comply.

Thus, if the federal government wants to disallow the deduction of technology fund payments from federal tax, it will have to do so by openly amending the Income Tax Act.

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