The Increasing Burden of Motor Fuel Taxes in Canada

Posted on: Wednesday, June 22nd, 2016

Tax Increase

By Jason Parent, Vice President Consulting of Kent Group Ltd.

The recent enactment of legislation doubling the provincial excise tax on gasoline in Newfoundland has brought attention to the topic of motor fuel taxation across Canada. Combined with a patchwork of planned or proposed taxation measures in other provinces, the motor fuel tax burden for the average Canadian driver in 2017 is expected to rise 20 percent above 2010 levels.

According to a recent Kent Group analysis, Canadians paid nearly $20.5 billion in motor fuel taxes in 2015, of which roughly $15 billion was generated from the sale of motor gasoline. This equates to just under $420 per capita and $676 for every registered ‘on-road’ gasoline powered vehicle in Canada. Stated another way, the typical driver of a Toyota Corolla travelling 24,000 kilometres in 2015 would have spent an average of $670 on gasoline taxes in Canada.

There is, however, a range of tax paid per vehicle by province (Figure 1): in 2015, Alberta paid the lowest gasoline tax per registered vehicle at $450, while Newfoundland had the highest at $1,100.  This gap is expected to grow, and by 2017 – the first full year of Newfoundland’s recent tax amendments – that province’s gasoline tax per vehicle is expected to rise to $1,650 or nearly 2.5 times the projected national average.

Figure 1

The breakdown of 2015 gasoline taxes by level of government (Figure 2) shows that on average 50 percent came from provincial and municipal excise taxes, while 27 percent came from the federal excise tax. These taxes are generally fixed, meaning they are applied on a cent-per-litre basis and are unaffected by changes in gasoline prices.  This fixed portion of gasoline taxes increased 9 percent between 2010 and 2015.

This high proportion of fixed motor fuel taxes has increased the percentage of the pump price linked to taxation. As pump prices fell throughout much of 2015 and early 2016, the share representing taxes grew to over 40 percent of the average retail price – its highest level in over a decade. Since 2015, taxes represent the largest component of the average retail gasoline price in Canada (Figure 3).Figure 2

The remaining taxes are variable: predominantly GST/HST, which are applied as a percentage of the underlying product price plus fixed taxes.  Despite retail gasoline prices rising only 5 percent between 2010 and 2015, the GST/HST portion of gasoline taxes grew 25 percent over that same period. This is a result of GST/HST rate increases in several provinces, and an amplification effect on higher gasoline prices and the “tax-on-tax” impact of increases in provincial excise taxes.

Several planned or proposed tax amendments are expected to raise considerably the motor fuel tax burden for Canadians over the next couple of years. The introduction of carbon levies in Ontario and Alberta are expected to add over a billion dollars annually to motor fuel taxes, and planned increases to provincial excise taxes and GST/HST rates in several provinces are expected to raise the tax expense for the average Canadian driver by nearly 8 percent between 2015 and 2017. On a per vehicle basis, this amounts to roughly $50 in additional costs, but provincially these costs can range from virtually no change in the Prairies, to as much as a $550 increase for drivers in Newfoundland.

Figure 3
Ultimately Canadian drivers, despite relatively stagnant gasoline consumption, will take on an increased motor fuel tax load in the near future. Considering the stability of the extended outlook for crude prices, it is likely that governments will continue to be the primary beneficiary of Canadians’ motor fuel purchases over the next couple of years.

 

About the Author: Jason Parent is the Vice President, Consulting of Kent Group Ltd.  His career in the downstream petroleum industry has spanned nearly 15 years, and he has worked with wide range industry and government clients from across North America. Mr. Parent’s functional expertise includes petroleum marketing economics, downstream operations, as well as petroleum markets and pricing.  Click here to Email.