EV battery deals to cost $5.8B more due to lost corporate tax on subsidies, budget officer says

Provincial and federal financial support for electric vehicle battery production will cost $5.8 billion more than government projections due to tax treatment of subsidies, the Parliamentary Budget Office said Friday morning.

The PBO report says the shortfall of $5.8 billion over 10 years can be attributed to lost corporate income because the Canadian deal has to keep pace with the Advanced Manufacturing Production Credit (AMPC) in the United States. 

Under the U.S. deal, manufacturers get a tax credit, based on a calculation of per kilowatt-hour of energy, but in Canada that financial support per kilowatt-hour is delivered through a taxable subsidy. 

"Therefore, under existing law in Canada, these payments would be subject to applicable federal and provincial corporate income tax," the report said.

The PBO report makes the assumption that to stay on par with the U.S. AMPC, the subsidies will be exempt from federal and provincial taxes, which would cost about $5.8 billion in tax revenue.

An analysis of government support for the EV battery deals with Northvolt, Volkswagen and Stellantis-LGES said that over the next 10 years, that support will amount to $43.6 billion, rather than the announced costs of $37.7 billion. 

The deals with the three manufacturers amount to production subsidies of $32.8 billion, with an additional $4.9 billion in support to build the facilities.

"Of the $43.6 billion in total costs, we estimate that $26.9 billion (62 per cent) in costs will be incurred by the federal government and $16.7 billion (38 per cent) will fall on the provincial governments of Ontario and Quebec," the report said.

Break-even estimates

The report, which also looked at how long it will take for governments to break even on their investments, found that the Northvolt deal has a break-even time of 11 years, two years longer than the federal government's estimate. 

The break-even time for the $13.2-billion Volkswagen deal is 15 years, while the break-even time for the $15-billion Stellantis-LGES deal was pegged at 23 years, the report said.

In the PBO's September report, Yves Giroux, the parliamentary budget officer, said the government's shorter break-even timeline estimate relied on modelling from the Trillium Network for Advanced Manufacturing and Clean Energy Canada, which included investments and assumed production increases in other areas of the EV supply chain.

Giroux's reports only looked at cell and module manufacturing and not the expected revenue from spillover impacts on the economy as a whole.

The report also assumes that government investments will be debt-financed and therefore will incur public debt charges over the next decade that could amount to $6.6 billion.

Pros and cons

Ian Lee, a professor at Carleton University's Sprott School of Business, told CBC news the PBO was right to exclude calculations estimating the economic benefits of strengthened supply chains because they can be misleading. 

"This is political spin masquerading as serious econometric analysis. This is why the PBO rejected it," he said. "Anyone can provide any number to produce the number they want … It is not evidence based but pure speculation that appears credible."

Lee described the possible economic advantages of developing EV battery and car manufacturing as "investor hype" and said that Canada's auto sector is in decline and the investment "will ultimately fail."

Economist Jim Stanford, director of the B.C. based Centre for Future Work, told CBC News the PBO report misses the point of the subsidies by choosing to evaluate them as an investment, rather than an attempt to ensure the economy is well-placed to capitalize on the green transition.

"The government is supporting these plants because that is what's required to maintain the auto industry, and all of the economic and social benefits that it generates, as it transitions to EVs," he told CBC. 

The PBO's "cost benefit lens for all of these reports is ridiculously narrow, and misses the point of why governments are doing this," he added.

Stanford said that without government subsidies to draw in foreign investment, Canada's auto industry would disappear within 15 years. To get better value for the EV investment program, the PBO should compare the subsidy programs to doing nothing and allowing the industry to fail, he said.

Stanford also said that ignoring the economic impacts to the overall economy of the EV subsidy program is the "fatal flaw" in the PBO report.

The 3 big deals

The new manufacturing facility to be built by Northvolt, a Swedish battery giant, will occupy 170 hectares — an area the size of more than 300 football fields — on Montreal's South Shore, in a parcel of land spanning two communities.

The combined production and construction incentives total up to $4.6 billion for the project — one-third of which will come from Quebec — as long as similar incentives remain in place in the U.S.

In the spring, the federal government announced $13.2 billion in production subsidies over the next 10 years to build a battery plant in St. Thomas, Ont. That plant will be the size of 391 football fields and bring auto jobs to the region.

Stellantis-LGES halted construction on a Windsor, Ont., battery plant this summer, saying the provincial and federal governments would need to come through with more than the initial investment of $500 million. Construction resumed after the governments announced up to $15 billion in subsidies.

That plant is expected to open in 2024 and employ about 2,500 people.