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Canada-Newfoundland Conflict Over Offshore Oil
The Discovery
of Oil Brings New Federal-Provincial Tensions
Taxation on offshore oil and gas production revenues represents
a major potential source of income for Newfoundland & Labrador.
Considering the Province’s fiscal picture, this income
is desperately needed. Under the Canadian Constitution, however,
offshore natural resources fall under federal jurisdiction. In
this context, a major issue of contention between the Government
of Canada and the Government of Newfoundland & Labrador involves
control of offshore oil revenues.
See the Financial Crisis Facing Newfoundland & Labrador section
of this article for more information on the financial difficulties
facing the Province.
Background on Offshore Natural Resources
Under the Canadian
Constitution, the provinces have ownership over all
natural resources that lie within their provincial boundaries.
With few exceptions, the provinces have complete jurisdiction
to manage and tax the exploitation of such resources as
they deem fit. The federal government, on the other hand,
possesses ownership over the natural resources in the frontier
lands, such as those found in Canada’s north (including
the Territories), and off Canada’s coastline.
In most cases, this constitutional jurisdiction works to the benefit
of the provinces. In British Columbia, for example, the main
natural resources are timber, minerals and hydro-electricity.
As they are exploited within the geographical boundaries of the
province, each falls under provincial jurisdiction. The same
is true with oil and gas production in Alberta. The oil reserves
exist within the boundaries of Alberta and, hence, are owned
and managed by the provincial government.
However, Newfoundland & Labrador’s oil reserves exist – not
on land, but on the ocean bed off of its coast. It is outside
provincial boundaries, and is thus considered to be territory
of the federal government, not the Province. Accordingly, only
the federal government has the constitutional right to manage
and tax the exploitation of the oil and gas found off the Province’s
coastline.
With the discovery of large offshore oil reserves in Atlantic Canada,
Newfoundland & Labrador began to place pressure on the federal
government to access oil revenues.
The issue of jurisdictional control over offshore oil is a complex
one. On the one hand, “have not” provinces such as
Newfoundland & Labrador would benefit greatly from control
over, and access to, offshore oil revenues. On the other hand,
the federal government has an important interest in oil and gas.
As highly strategic commodities, the management of oil and gas
has both economic and political implications for Canada – both
domestically and internationally.
Canada-Newfoundland Atlantic Accord
In 1985, the federal Conservative government, helmed by Brian Mulroney,
signed a deal with the Government of Newfoundland & Labrador,
the Canada-Newfoundland
Atlantic Accord. Under this Accord, the federal government
retained constitutional ownership of offshore natural resources.
The Province, however, was allowed to tax offshore oil production
in the same way other provinces tax their “onshore” natural
resources. The Accord also created a joint federal-provincial
board to manage offshore oil development.
Additionally, the Accord provided transitional fiscal protection
to the Province. It was recognized that once offshore oil projects
began production, the Province’s fiscal capacity would
improve and, as a result, there would be sharp drops in provincial
entitlements under the federal Equalization
Program. To protect against drastic year-over-year Equalization
reductions, the federal government agreed to guarantee Newfoundland & Labrador
a certain threshold of Equalization payments over a 12-year period.
Why would Newfoundland & Labrador need Equalization protection
if its revenues were increasing from offshore oil? One needs
to remember that the oil industry in Newfoundland & Labrador
is still in its infancy. The Province will not realize substantial
levels of revenue from the industry for many years to come. Furthermore,
initial gains in government offshore oil revenues would be completely
offset by reductions in Equalization payments. The net result:
no overall improvement in the Province’s financial situation.
Accordingly, under the Atlantic Accord, the federal government agreed
to partially compensate the Province for reductions in Equalization
payments until its offshore oil revenues were enough to make
the Province financially self-sufficient.
Provincial Grievances Over the Accord
The 1985 agreement, however, did not end federal-provincial conflict,
as the Government of Newfoundland & Labrador has publicly
criticized the federal government for taking the majority of
its offshore oil revenues. This led to an election promise in
2004 by Prime Minister Paul Martin to revisit the issue of revenue
sharing under the Atlantic Accord.
One of the clearest statements of the Province’s position can
be found in the Final Report of the Royal
Commission on Renewing and Strengthening Our Place in Canada (2003).
The Report considers that Newfoundland & Labrador should be the
primary financial beneficiary of any oil production off its shores.
The Report also contends the federal government has benefited to a
greater extent under the Atlantic Accord than the Province.
In the Report, two issues are of particular importance: federal-provincial
levels of taxation and federal savings under the Equalization Program.
Federal-Provincial Levels of Taxation
Under the Atlantic Accord, both the federal and provincial governments
have the right to tax offshore oil production. The Province does
so through provincial sales taxes, royalty fees, and personal income
taxes on residents that work in the industry. The federal government
does so through the federal sales tax (the Goods and Services Tax,
better known as the GST), federal income taxes, and corporate taxes
on the private companies involved in the offshore oil projects.
The Report contends that the federal government collects a much higher
tax revenues than the Province. This is due, in part, to the fact
the federal government can assess corporate taxes while the provincial
government cannot. Most of the large companies involved in offshore
oil projects are headquartered outside of Newfoundland & Labrador
(mainly in Alberta and Ontario) and are thus beyond its tax jurisdictions.
Instead it is the federal government and the provinces in which the
companies are headquartered that receive this revenue.
Federal Savings Under the Equalization Program
Furthermore, the Report contends that the federal government has realized
large savings under the Equalization Program at Newfoundland & Labrador’s
expense. As provincial revenues from offshore oil have increased,
Equalization entitlements have declined. The federal government has
provided compensation to offset these declines. However, the Report
contends the compensation has been lower than the declines, netting
an overall savings for the federal government.
For more information on Provincial concerns with the 1985 Atlantic Accord:
Recent Trends in Offshore Oil Revenue Sharing
In 2005, the federal Liberal government, helmed by Paul Martin, signed
a new Canada-Newfoundland Atlantic Accord with the Government
of Newfoundland & Labrador.
Highlights of the new Accord are as follows:
- Complete compensation for any reduction in Equalization payments
between the years 2006 and 2011.
- An understanding that should Newfoundland & Labrador become
a “have” province within this period (no longer
qualifying for Equalization payments), no additional federal
compensation will be made after 2011.
- The federal government agrees to provide Newfoundland & Labrador
with $2 billion to reduce its outstanding debt.
For more information on the 2005 Atlantic Accord:
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