Unpaid oil and gas property taxes

Overview

The Unpaid Oil and Gas Property Taxes survey was launched at the end of July 2022, inviting rural municipalities to provide detailed information on tax revenue arrears, write-offs, operational impacts and the companies responsible. Final survey responses were received at the end of September 2022, with 55 out of 71 rural municipalities responding to the information request and 52 having unpaid tax data to report.

The purpose of the survey was to find out more details about unpaid taxes that are not available in the Rural Municipalities of Alberta surveys. The survey collected detailed and updated information regarding the extent of unpaid taxes and which companies have not paid these taxes. The current survey results represent information reported to the province by municipalities in fall 2022 and is based on a point in time – December 31, 2021 – with a status that has most likely changed since that date.

Methodology

After survey responses were received in September 2022, the information was combined and analyzed by Municipal Affairs and Energy using a variety of methods and data sources. Survey data was compared with previously available information, and information about the operating status of oil and gas companies was integrated into the results.

This summary of survey findings is an outcome of this process and intended to offer transparency and additional context. The following survey results help identify trends and key aspects of a broad issue.

Municipal taxation

In this survey, property taxes consist of municipal taxes that municipalities require to meet their operational needs, education property taxes that are used by the province to help pay for the cost of the kindergarten to Grade 12 education system, and penalties that are additional fees charged by municipalities for late payment of taxes. Tax arrears are taxes that remain unpaid after December 31 of the year in which the tax was issued. Penalties continue to add to the tax arrears the longer the taxes are unpaid. Tax cancellations refer to tax arrears that are considered uncollectable for various reasons and are written off by the municipality.

A significant loss of revenue for municipalities has many impacts, including added borrowing expenses, reduced staffing and service levels, using savings meant to fund other infrastructure projects, or cancelling projects altogether.

Key findings

Lost municipal revenue due to unpaid taxes on oil and gas property has been a consistent concern for rural municipalities in recent years. While the economic climate in the province has improved, some municipalities are still owed outstanding property taxes from delinquent operators. Most companies operating in Alberta’s energy sector pay their local property taxes but given the circumstances in recent years some have not, leaving municipalities with hard decisions about raising taxes for other taxpayers or reducing services.

Total unpaid taxes accumulated over several years as more companies were unable to remain viable due to the economic downturn and period of extremely low oil and gas prices. Included in the total unpaid taxes are municipal property taxes, education property taxes, and late payment penalties.

A cumulative $220 million in unpaid taxes has been reported by municipalities, with $130 million in tax arrears and the remaining $90 million in cancellations. The majority of these taxes will not be recoverable outside insolvency proceedings because they are owed by companies no longer operating, or because the taxes have already been written off by municipalities, or both.

A smaller but still significant portion of unpaid taxes, approximately $76 million, is owed by companies that are still operating and is potentially recoverable, including through repayment agreements.

Municipalities have reported they already have repayment agreements in place to help collect $48 million in unpaid taxes. There is further potential for municipalities to recoup another $28 million from companies that are still in operation.

Results

Responding municipalities have identified a cumulative $220 million in unpaid taxes since about 2014. The breakdown of the $220 million includes $130 million in arrears, or past due, and the remaining $90 million considered uncollectible and cancelled.

Of the amount in arrears, $54 million belongs to non-operating companies and repayment is not expected. The remaining $76 million belongs to 99 operating companies, 15 of which are responsible for $71 million, or 93%. Payment plans or agreements are in place with 25 companies to recoup $48 million in arrears. This leaves an estimated $28 million in arrears belonging to operating companies that do not have repayment agreements. Municipalities continue to have the ability to enforce a special lien against property belonging to these companies, along with training resources to support their efforts in recovering these taxes.

Of the $90 million in cancelled taxes, $12 million represents provincial education property taxes that may have been recovered through the Provincial Education Requisition Credit program which provides municipalities a credit on their provincial education requisition for properties that do not pay their education property taxes.

The municipal share of property taxes constitutes the largest portion of tax arrears. Of these municipal taxes (excluding penalties and education property taxes), the amounts that may potentially be recovered from operating companies consist of $31 million already under repayment agreements and $18 million without repayment agreements (see chart below).

The Rural Municipalities of Alberta conducted a similar survey in early 2022 where 67 rural municipal respondents reported a cumulative total of $253 million in oil and gas unpaid taxes. In comparison, the Municipal Affairs survey received 12 fewer responses and recorded a total of $220 million in unpaid taxes. The information collected through both surveys is based on the same timeframe – December 31, 2021, and prior – and broadly aligns.

Tax arrears

Responding municipalities reported a total of $130 million of taxes recorded in arrears from the 2021 tax year and prior, with $85 million in unpaid municipal property taxes. The total includes unpaid cumulative penalties of $30 million and unpaid provincial education tax of about $15 million.

Total tax arrears (in millions of dollars)

Tax cancellations

Responding municipalities reported a total of $90 million in cancellations, of which $63 million was reported as cancelled municipal taxes, $15 million was cumulative penalty amounts, and $12 million was cancelled education property tax that may be recovered by municipalities through the Provincial Education Requisition Credit program. About $13 million in cancelled taxes are attributed to companies that are still operational.

Municipalities cancelled or wrote off these taxes for 229 companies provincewide, with 20 companies being responsible for 80% of cancellations with total cumulative write-offs of about $1 million or higher.

Total tax cancellations (in millions of dollars)

Recovered oil and gas property taxes

Nineteen responding municipalities reported they have been successful in recovering a combined $8 million in owed oil and gas property taxes and penalties.

Eighty-one per cent of reported recoveries were made in 2021 and 2022 and are associated with 44 companies, of which 11 are associated with 95% of recoveries. While tax recovery looks to be improving, the amount will remain a small portion of total unpaid taxes, as most companies with unpaid taxes are no longer operating.

Taxes pending repayment

Twenty-eight responding municipalities indicated success negotiating repayment agreements with 25 oil and gas companies for $48 million in combined taxes and penalties. Nearly all the reported recoveries and repayment agreements were secured in 2021 and 2022 which likely reflects an improved economic climate.

Of the 99 likely operating oil and gas companies that owe taxes, 25 have entered into repayment agreements with municipalities. Eleven companies have 95% of all reported repayment agreements, with agreements valued at $1 million or more.

There may be approximately $18 million in tax arrears in municipalities that do not yet have a tax agreement with companies who have repayment agreements in other municipalities.

Impacts on municipal operations

There are 12 municipalities with a significant share of cancelled property taxes of over $1 million that are likely experiencing the greatest hardship. This is due to companies in their jurisdictions with significant tax arrears no longer operating. These municipalities are spread out across the province with the majority being located centrally, followed by 3 in the southern part of the province, and 2 in the north.

Next steps

The efforts municipalities took to collect and share information in the 2022 Municipal Affairs Survey, along with the data released by the Rural Municipalities of Alberta, and information provided by Alberta Energy, has helped form a more accurate picture of the overall situation involving unpaid property taxes from oil and gas companies.

As a result of these efforts, Alberta’s government has issued a new directive to the Alberta Energy Regulator (AER) to reduce the unpaid oil and gas taxes owed to municipalities. A Ministerial Order under the Responsible Energy Development Act will require the AER to make payment of municipal taxes a necessary and mandatory condition for approval of licence transfers or new licences. Under this directive, companies will now have to confirm that their unpaid municipal taxes across the province do not exceed the maximum threshold allowed or have a repayment agreement in force when applying for new licences and licence transfers. Companies seeking to sell their assets will also have to pay their back taxes first, or as part of the sale.

Municipal Affairs and the AER will work together to create an annual list of companies whose unpaid municipal taxes exceed the threshold amount. Companies on this list will be targeted by the AER to provide proof of tax payment, while those not on the list will proceed as normal without additional regulatory red tape. Information on the reporting process is under development and will be available soon.

Contact

Connect with the Assessment and Property Tax Policy Branch:

Hours: 8:15 am to 4:30 pm (open Monday to Friday, closed statutory holidays)
Phone: 780-422-1377
Toll free: 310-0000 before the phone number (in Alberta)
Email: [email protected]

Address:
Assessment and Property Tax Policy
15th Floor, 10155 102 Street
Edmonton, Alberta  T5J 4L4