David Clinton

We’ve discussed the housing crisis before. That would include the destabilizing combination of housing availability – in particular a weak supply of new construction – and the immigration-driven population growth.

Parsing all the data can be fun, but we shouldn’t forget the human costs of the crisis. There’s the significant financial strain caused by rising ownership and rental costs, the stress so many experience when desperately searching for somewhere decent to live, and the pressure on businesses struggling to pay workers enough to survive in madly expensive cities.

If Canada doesn’t have the resources to house Canadians, should there be fewer of us?

Well we’ve also discussed the real problems caused by low fertility rates. As they’ve already discovered in low-immigration countries like Japan and South Korea, there’s the issue of who will care for the growing numbers of childless elderly. And who – as working-age populations sharply decline – will sign up for the jobs that are necessary to keep things running.

The odds are that we’re only a decade or so behind Japan. Remember how a population’s replacement-level fertility rate is around 2.1 percent? Here’s how Canadian “fertility rates per female” have dropped since 1991:

Put differently, Canada’s crude birth rate per 1,000 population dropped from 14.4 in 1991, to 8.8 in 2023.

As a nation, we face very difficult constraints.

But there’s another cost to our problems that’s both powerful and personal, and it exists at a place that overlaps both crises. A recent analysis by the Parliamentary Budget Officer (PBO) frames it in terms of suppressed household formation.

Household formation happens when two more more people choose to share a home. As I’ve written previously, there are enormous economic benefits to such arrangements, and the more permanent and stable the better. There’s also plenty of evidence that children raised within stable families have statistically improved economic, educational, and social outcomes.

But if households can’t form, there won’t be a lot of children.

In fact, the PBO projects that population and housing availability numbers point to the suppression of nearly a half a million households in 2030. And that’s incorporating the government’s optimistic assumptions about their new Immigration Levels Plan (ILP) to reduce targets for both permanent and  temporary residents. It also assumes that all 2.8 million non-permanent residents will leave the country when their visas expire. Things will be much worse if either of those assumptions doesn’t work out according to plan.

Think about a half a million suppressed households. That number represents the dreams and life’s goals of at least a million people. Hundreds of thousands of 30-somethings still living in their parents basements. Hundreds of thousands of stable, successful, and socially integrated families that will never exist.

And all that will be largely (although not exclusively) the result of dumb-as-dirt political decisions.

Who says policy doesn’t matter?

How much are the insights you discover in The Audit worth to you?

Consider becoming a paid subscriber.

For the full experience, upgrade your subscription.

 David Clinton

A look at Strathcona Resources Ltd.

Does the Canadian government subsidize companies operating in our oil and gas sector? According to research by science and technology journalist Emily Chung, between $4.5 billion and $81 billion of public funds are spent each year for assistance to the industry. But Chung notes how ambiguous definitions (what exactly is a subsidy?) mean that those numbers come with serious caveats.

I thought I’d make this discussion a bit more manageable by focusing on just one industry player: Strathcona Resources Ltd.

Strathcona is big. They produce around 185,000 barrels of oil equivalent each day and the company is currently ranked 98th among publicly traded companies in Canada in terms of market cap ($5 billion) and 88th for operating margin (21.59%).

What Is a Subsidy?

In the context of their report on the fossil fuel industry, the Department of Finance Canada asserts that “subsidies” can include:

• tax expenditures,
• grants and contributions,
• government loans or loan guarantees at favourable rates,
• resources sold by government at below-market rates
• research and development funding
• government intervention in markets to lower prices

The report defines tax expenditures as:

A type of tax measure, such as a preferential tax rate, exemption, deduction, deferral, or credit, with which the government aims to achieve public policy objectives through the tax system.

In the specific context of Strathcona, I could find no evidence that they’d received any direct public funding or “bailouts”. The government did recently announce a billion dollar partnership with the Canada Growth Fund (CGF) to build carbon capture and sequestration infrastructure, but that’s clearly an investment and not a subsidy. CGF is a Canadian arm’s-length crown corporation whose investments are managed by the Public Sector Pension Investment Board.

Strathcona’s 2023 Annual Report includes a reference to only one loan liability, but that had already been paid off and, in any case, wasn’t guaranteed by any level of government.

What Tax Benefits Does Strathcona Receive?

Many. The company’s annual report discusses its $6.1 billion “tax pool”. The pool is made up of deductions and credits that it can’t use this year, but that can be deferred for use in future years. Here’s how those break down:

The “Other Tax Deductions” item includes the Scientific Research and Experimental Development (SRED) deduction. That represents amounts spent on SRED-eligible research that companies can deduct from their payable taxes.

What Grant Funding Does Strathcona Receive?

Open Government data reports that only two federal grants were awarded to Strathcona, both in 2023. The first, worth $3.2 million, came from Natural Resources Canada as part of their Energy Innovation Program. Its purpose was development of Lindbergh Semi-Closed Cycle Flue Gas Recirculation and Carbon Capture.

The second grant was worth $12.5 million. It involved Environment and Climate Change Canada looking for an Orion Organic Rankine Cycle Waste Heat Recovery and Power Generation Project.

What Benefits Do Governments Receive From Strathcona?

Government subsidies don’t exist in a vacuum. As a rule, it’s assumed that subsidies to the private sector work as an investment whose primary payback is in profitable economic activity. Governments can also enjoy direct benefits.

In 2023, for example, Strathcona paid more than $405 million in crown royalties to provincial governments. They also spent $2.4 billion as operating expenses that included labor, energy costs, transportation, processing, and facility maintenance. Most of that money was spent in Canada.

A very rough estimate would suggest that total annual personal income taxes generated by people employed by Strathcona would be somewhere around $14 million. Vendors might pay another $13 million in corporate taxes.

There are also indirect benefits. For instance, those with jobs around the oil patch are, obviously, not unemployed and receiving EI benefits.

We could also take into account the larger impact Strathcona has on the general economy. Think about the food, shelter, clothing, and entertainment spending done by the families of Strathcona (and their vendors’) employees. That money, too, performs important social and economic service.

So does Strathcona receive more from government subsidies than the money they feed back into government accounts? Well, the $405 million in crown royalties are likely annual payments, as are the $27 million paid as income taxes. That’s what governments get. On the other side of the balance sheet, there is the $6.1 billion in deferred taxes and $16 million in grants. Those will probably be amortized over multiple years.

But does the word “subsidy” really describe tax benefits in any useful way? After all, there’s no company in all Canada – my own company included – that doesn’t deduct legitimate business expenses. And each and every Canadian receives similar benefits whenever they file their T1. For illustration, a Canadian whose total income happened to match the national average ($55,600) pays around $5,600 less in taxes each year due to various deductions and credits – including the basic personal amount.

Does that mean we’re all receiving government subsidies? There’s nothing wrong with thinking about it that way, but it does kind of strip the word of any real meaning.

Now you could reasonably argue that $6 billion is an awful lot of deferred tax, especially for a company with a 22% operating margin. And you could look to the tax code’s complexity for answers as to how this could have happened. But that’s not a subsidy in any coherent sense.

Think the tax code should be reformed? The line forms right behind me. However, the problem with playing around with the tax code is that changes apply to everyone, not just Strathcona or some other preferred target. Successfully anticipating how that might play out in dark and unanticipated ways isn’t the kind of thing for which governments are famous.

Give a gift subscription