Business Subsidies in Canada:
Comprehensive Estimates for the Government of Canada and the Four Largest Provinces

- John Lester, School of Public Policy,
University of Calgary, 2018 (excerpts) -

The federal government and the four largest provinces in Canada spend about $29 billion a year on business subsidies, delivered through program spending, the tax system, government business enterprises and direct investments by government. These subsidies represent almost half of the corporate income tax revenue collected by the five jurisdictions.

In the 2014-15 fiscal year, per person subsidies were $640 in Alberta, about $100 ahead of the next most generous jurisdiction, Québec.

These subsidies ... have to be funded, either by raising taxes or cutting program spending ...

Firms performing R&D get about 43% of their funding from governments.

Federal government business subsidies amounted to $14 billion in 2014-15. Business subsidies amounted to $14.6 billion in the four provinces. Per capita subsidies were largest in Alberta at $640 and lowest in British Columbia and the federal government, with both at $390.

Governments provide business subsidies for a number of reasons, including to address market failures, to promote high-wage, high-productivity industries and to transfer income.

In this paper, I present estimates of assistance, or subsidies, provided to private businesses by the government of Canada and the four largest provinces: BC, Alberta, Ontario and Quebec. These four provinces account for about 85 per cent of Canada's GDP and population. The estimates in this paper are comprehensive in the sense that they include measures delivered through direct spending programs, through the tax system, through direct investments in firms, through loan-guarantee programs and through the activities of government business enterprises (GBEs).

Many small businesses are unprofitable. In 2009, about two-thirds of firms eligible to claim the small business deduction did not do so because they did not have positive active business income.

Governments subsidize business through spending programs, through tax measures and by making what are typically described in the public accounts as "loans, investments and advances" to government-controlled entities and private sector firms. Most of these investments are made in government-controlled entities, and more specifically in GBEs. These GBEs may subsidize business by providing goods or services without recovering the full cost of capital employed or by purchasing goods and services at preferential prices. As a result, the activities of GBEs are considered a distinct source of subsidies, separate from other loans, investments and advances, which are described as "direct investment." In contrast to spending programs and tax measures, supplementary calculations are required to determine the subsidy arising from the activities of GBEs and direct investment in firms.

Business subsidies in this study include all measures with an economic objective. Also included are agricultural insurance programs and regional development measures, both of which have economic objectives, but which also provide income support. Subsidies supporting Canadian culture are excluded since they are not expected to contribute to better economic performance. Subsidies promoting more efficient use of energy are also excluded on the grounds that their primary objective is to protect the environment. Finally, not all of the business subsidies provided by GBEs are included in this study. In particular, any subsidy arising from GBEs providing infrastructure services, such as port management, are excluded. Some measures that support activity of a specific sector without involving payments directly to firms are included in the estimates. For example, programs promoting tourism or providing funding for marketing activities in other sectors are included in business subsidies, provided that funding comes from general revenues rather than an industry levy.

Federal business subsidies provided through departmental spending programs take two general forms: grants and contributions. Grants are unconditional subsidies; recipients are not required to report on the use of funds and are not audited. Contributions are subject to performance conditions and recipients must report on the use of funds; they are also subject to audit. Contributions may be non-repayable, or repayable with or without conditions. Non-repayable and conditionally repayable contributions are included in subsidies as they are made. Unconditionally repayable contributions are considered loans. Recoveries of conditionally repayable contributions are included in departmental revenues. In this study, these repayments are deducted from subsidies to avoid overstating subsidy payments; they represent a small share of total subsidies but are significant in several programs.

Canada's tax treatment of cross-border interest expense make it possible to obtain two interest deductions for debt incurred to finance outbound investment, one in Canada and another in the host country. An illustrative calculation suggests that the amount of tax revenue forgone as a result of this incentive is substantial, likely around $2.5 billion for the federal government and an additional $1.5 to $2 billion for provincial governments in 2014.

Most of the self-sustaining GBEs provide goods or services to private sector firms.

GBEs also provide subsidies by selling or purchasing specific goods or services at preferential prices. For example, the Ontario Independent Electricity System Operator (IESO) and Hydro-Québec make selective price reductions for large industrial users.

BC and Ontario have made commitments to increase the share of electricity generated by renewable sources: "run-of-river" hydro-electricity, solar, wind and biomass. Both governments purchase renewable-sourced electricity from independent power producers under long-term contracts. Ontario does not use a competitive process to select suppliers, which raises the concern that the price paid is higher than production costs. If so, this would amount to a subsidy to the renewable-electricity-generating sector. The auditor general of Ontario estimates that the wind and solar energy contracts signed between 2009 and 2015 cost $9.2 billion more over the 20-year life of the contracts than if a competitive bidding process had been used. In other words, the amount paid will exceed production costs by an average of $460 million a year from 2009 to 2028.

The report states that, in 2014, the IESO purchased wind-based electricity at double the market price and 3.5 times the market price for solar energy.

In 2014-15, the federal government provided approximately $14 billion in business subsidies, or about $390 per person. Subsidies in the four largest provinces amounted to $14.6 billion, averaging about $480 per capita. These measures have to be financed by higher taxes or by reduced spending on other programs. Federal and provincial subsidies combined represented almost half of corporate income tax revenue, seven per cent of total tax revenues and 5.2 per cent of program spending in the five jurisdictions.

(For the complete report click here )

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