Interest deductibility limit puts the squeeze on energy consumers

October 31, 2022

Generally speaking, tax legislation doesn’t grab much interest. It’s not exciting enough and not sexy enough for most news outlets, until it impacts hardworking Canadians and the money in their pockets. Here is some tax legislation news that might just cause people to stand up and take notice.

But before we get to that news, let’s back up a bit for some important context. This past July, Statistics Canada reported an inflation rate of 7.6 per cent—a record high that many Canadians have not seen in their lifetimes. The resulting increases in food and fuel costs have left many Canadians struggling to afford the most basic necessities. This prospective legislative change might make it even worse.

That change is called the interest deductibility limit. It sounds like the most boring piece of accountant-speak, but it could mean big trouble for Canadians. Interest deductibility limit will impact companies with huge capital costs—but its consequences could be felt much closer to home.

It works like this: many companies that deduct interest from their incurred debt will now see that tax deduction reduced, initially to 40 per cent in 2023 and then to 30 per cent starting in 2024. For a company with a lot of capital projects, every dollar of denied interest deduction will have to come from somewhere.

The problem is, how this might affect, say, a construction firm, is very different than how it might affect a utility. Any capital project by a utility will have to recoup the interest they can no longer deduct from the consumer. Which means an increase in rates. And an increase in rates will only put the squeeze on working Canadian families even more.

Complicating matters more, is that energy companies are being federally mandated to engage in some big capital projects over the next 25 years. Under the government’s net zero plan, electricity companies are being asked to make Canada’s electrical grid completely carbon-free by 2035, and to triple its output to help make Canada carbon-neutral by 2050.

Net zero is critical to Canada’s success in fighting climate change. But net zero will also require a lot of building, which means a lot of incurred debt and a lot of interest that can no longer be deducted. And in the end, the money still has to come from somewhere.

The result is a dilemma where one part of the federal government is signalling the need for huge capital projects to reduce climate change and create a better future for our planet while another is closing off the means to make such huge projects feasible and affordable. One hand robs from the other. And caught in the middle of all this is the Canadian consumer.

Electricity and natural gas providers need to be considered exempt from interest deductibility limit. When the Organisation for Economic Co-operation proposed an interest deductibility limit, it identified the need to exclude projects that benefitted the public to prevent this very problem from happening. And other jurisdictions, such as the United States, have done just that.

Canadian families deserve to continue to have access to clean, safe and affordable electricity. There is so much that needs to happen for Canada to achieve its goal of reaching net zero carbon emissions by 2050. Thoughtlessly applied tax legislation should not be one of them.