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By Shawna Burke-Martin & Steven Eady, Senior Directors in Property Tax | December 24, 2020

Dealing with a double whammy: commodity crash + COVID crisis

This year has been a quagmire for Canada’s oil and gas companies. Coinciding with the ongoing price collapse, the energy industry was also hit with an unprecedented drop in demand as the COVID-19 pandemic gained traction in March.

The sector’s historically winning performance seems to be a distant memory, especially when this combo crisis accelerated disruptive trends including intensifying competition, technology transformation, and an intensifying public and government focus on climate change and the environment.

As oil and gas companies struggle to manage pandemic issues while also struggling with low commodity prices, property tax is a turbulent issue – both for producers and for municipalities.

Property tax is typically a top three operating cost for oil and gas companies. Any investment of time in proactively mitigating this expense will produce a return on that investment.

Steven Eady

Senior Director, Property Tax, Altus Group

Since 2008, when the price of natural gas began declining, followed by plummeting oil prices, energy companies have grappled with falling cash flow, plunging share prices and loss of access to capital.

With property tax representing a major operating cost for these companies, many have struggled with the tax burden. In Alberta, outstanding property tax bills in the industry have reached $173 million and continue to grow. Property assessments for oil and gas properties no longer reflect the true value of these assets.4

Recognizing this, the Alberta government is currently reviewing options to modernize the municipal property tax assessment system to realign assessments with the real value of properties in the energy sector. This is intended to update values from the 2005 base year and align assessments of improvements with current technology and practices. Municipalities have the ability to adjust tax rates to offset some of these potential assessment base reductions.

Across the country, there are similar dilemmas. Never before have proactive property tax strategies for oil and gas assets been so critical for achieving solutions that are mutually beneficial for local economies and the energy companies that contribute to them.

We’ve seen great results from advocacy and relationship building between oil and gas companies and the municipalities in which they operate.

Shawna Burke-Martin

Senior Director, Property Tax, Altus Group

Property tax imperatives

Engage in discussions with local municipalities

Given the high stakes represented by property taxes in the oil and gas industry, effective advocacy – built on trusting, strategic relationships with elected officials and their staff – is of crucial importance. Should an oil and gas company fall into bankruptcy, the municipality receives zero revenue. It is in both parties’ best interests to facilitate a better understanding of the financial pressures facing local governments, residents and local energy businesses.

In Alberta, to help municipalities retain and attract businesses, the government introduced the Municipal Government Amendment Act last year. This enables municipalities to apply commercial property tax exemptions to industrial sites, including oil and gas
properties, to encourage economic development and redevelop brownfield properties.

  • Property Tax Incentives5 allow municipalities to decide whether to offer incentives to reduce, exempt or defer the collection of property taxes for non-residential properties for up to 15 years, with the option for renewal
  • Machinery and Equipment Tax Incentives allow municipalities to reduce or eliminate property taxes for up to 15 years on machinery and equipment.

This legislation presents another opportunity for the industry to work closely with municipalities to discuss mutual challenges and plans – and deliver solutions that benefit all stakeholders.

Take a proactive approach with next year’s property assessment value

With so much upheaval in the energy sector, it’s vital to anticipate and prepare for the coming year’s property tax bill. Carefully monitor time frames and review procedures.

Since the energy industry has a regulated assessment system, market value changes have little direct impact on assessments – so condition dates are particularly important because they reflect the state of a property for assessment purposes. Analysis of site operations can identify opportunities for physical or functional obsolescence.

By analyzing new information about a property and determining the potential tax implications before assessments are finalized, property owners can pursue assessment reductions in advance of formal appeal periods.

Secure a second opinion

Given the high stakes of property tax assessments, an expert opinion can be invaluable. Property tax professionals with experience in the oil and gas sector have access to current issues impacting the industry, assessed values of comparable properties and opportunities for allowances – all of which can be instructive in determining whether your assessment is fair and equitable.

Property tax reduction opportunities related to mergers and acquisitions

As commodity prices slowly stabilize and struggling energy companies contend with mounting debt, merger and acquisition activity is increasing.

When structuring a merger or acquisition, allocate special attention to outstanding property tax liabilities of distressed energy assets. Comprehensive tax due diligence of a target company is necessary to identify any significant property tax exposure that must be addressed in advance of a purchase or merger. There are typically opportunities to structure deals to reduce this exposure. As well, some municipalities may be amenable to negotiating outstanding property tax obligations when energy companies demonstrate their intent to invest in the community and future development.

Looking forward: property tax should not inhibit transformation

Canada’s economic growth and energy security depend on a productive oil and gas sector. As the COVID-19 pandemic spurs radical transformation in the industry, mergers and acquisitions will remake operating models and drive economies of scale, greater efficiencies and stronger balance sheets. By strategically managing property taxes, owners of oil and gas properties will have an opportunity to leverage this transformation, investing cash back into your assets and reinforcing future profit potential.

Shawna Burke-Martin & Steven Eady

Senior Directors in Property Tax, Altus Group

Managing Property Taxes Through a Pandemic report cover

Manage property taxes for all of your assets, through the pandemic

To help you closely align property tax mitigation strategies with the current marketplace, this white paper presents a current picture of the challenges facing nine distinct asset classes in the time of COVID-19, along with steps to mitigate the impact of this consequential expense.

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