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October 2005

Backgrounder
Oil and Gas Prices, Taxes and Consumers

As a result of the recent spike in world oil prices, the Department of Finance Canada has been receiving numerous enquiries about taxes on gasoline.

As a service to the media and the general public, the Department has prepared this overview of key facts on:

1. World oil prices.
2. Federal and provincial gas tax rates.
3. Federal and provincial gas tax revenues.
4. Gasoline tax components by province/territory.
5. International price and tax comparisons.
6. The Government of Canada’s position on current fuel tax issues.

1. World Oil Prices

The price of West Texas Intermediate (WTI) oil reached daily highs of nearly US$70 in both August and September 2005—an increase of almost 60 per cent since the beginning of the year.

Even after adjusting for inflation, oil prices are now nearing the record highs reached in the late 1970s. The doubling of prices witnessed over the past two years mirrors the price increases recorded in both the 1973 and 1979 oil price shocks.

The graph below demonstrates the link between gas prices and world oil prices over the last three decades.

Gasoline and Oil Prices (Adjusted for Inflation)

2. Federal and Provincial Gas Tax Rates and Application

Gasoline and diesel fuel are taxed by the federal, provincial and territorial governments.

At the federal level:

• The excise tax on gasoline is 10 cents per litre while the excise tax on diesel fuel and aviation fuel is 4 cents per litre. Since these amounts are charged at flat rates per litre rather than on a percentage basis, the amount of excise revenue the Government receives does not vary with price changes at the pump.

• The goods and services tax (GST) is 7 per cent of the final price paid for fuel, including federal and provincial excise taxes levied at the producer/wholesaler level, and is embedded in the retail price. The GST does not apply to provincial sales taxes levied at the pump as a percentage of the final price.

• Companies and self-employed people can claim full refunds of GST paid on any business-related expense, including gasoline and other kinds of fuel. These refunds are called input tax credits.

At the provincial/territorial level:

• Tax rates on gasoline range from 6.2 cents per litre in the Yukon to around 21 cents per litre in Prince Edward Island (see table in Section 4 for all provincial/territorial rates).

• As a national average, the provincial tax rates on gasoline are about 14.5 cents per litre.

• Tax rates on diesel range from 7.2 cents per litre in the Yukon to around 20 cents per litre in Prince Edward Island—again averaging about 14.5 cents per litre.

• Special fuel surtaxes are levied in Victoria, Vancouver and Montréal.

• In New Brunswick, Nova Scotia, and Newfoundland and Labrador, the provincial portion of the harmonized sales tax (HST) is levied on the final price of fuel at the pump (excluding GST).

• In Quebec, the Quebec Sales Tax is levied on the final price of fuel at the pump (including GST).

The diagram below illustrates how the cost of a typical litre of gasoline (assuming a retail price of $1 per litre) is affected by federal and provincial taxes, as well as costs for crude oil, marketing and refining.

3. Federal and Provincial Gas Tax Revenues (2005 data)

• The Government of Canada raises about $5 billion per year from excise taxes on fuel, consisting of $4 billion from the gasoline excise tax and $1 billion from the excise tax on diesel and aviation fuel.

• While the GST is not reported on a commodity-by-commodity basis, GST revenues from gasoline and diesel fuel are estimated to be about $2 billion per year (2005 estimate).

• Collectively, the provinces and territories raise about $7.8 billion per year from excise taxes on gasoline and diesel fuel.

4. Gasoline Tax Components by Province/Territory

The table below provides a provincial-territorial breakdown of tax components of gasoline at one dollar per litre. The cities of Montréal, Vancouver and Victoria are shown on separate lines because regional surtaxes are levied in those cities that do not apply elsewhere in the province.

Tax Components of Gasoline at $1 per Litre

5. International Price and Tax Comparisons

At about one-third, the average tax component of gas prices in Canada is lower than in all other G7 countries except the United States. The graph below illustrates this comparison.

6. The Government of Canada’s Position on Current Fuel Tax Issues

Fuel Tax Reductions

Some have argued that reducing fuel taxes would help consumers cope with high fuel costs. The Government’s position has been that the personal income tax system is a more effective way to deliver tax relief to those who need it most.

Moreover, even a substantial reduction in federal taxes on fuel would have only a small impact on pump prices. This is due to the fact that high gas prices are less a result of taxes than of recent substantial increases in the world price of crude oil.

Another consideration is that gasoline tax revenues are used to support a broad range of programs that are valued by all Canadians, including health care, education and programs for seniors. In fact, Budget 2005 committed $5 billion in gas tax revenues over the next five years to support environmentally sustainable infrastructure for cities and communities (see table below for funding breakdown by year).

Funding Profile for Gas Tax Sharing Over Five Years

"Tax on Tax" Issue (i.e., Application of GST on Top of Other Taxes)

Some people question the way the GST is applied—i.e., as a "tax on tax" that includes provincial levies and federal excise taxes. However, this is inherent in the structure of the GST itself. Specifically, it applies to a broad base of goods and services and is calculated on the final amount charged for a good or service—including any federal, provincial or municipal taxes, levies or charges.

This long-standing approach greatly simplifies vendor compliance, and maintains the broad-based nature of the tax so that it can be maintained at a relatively low rate.

With regard to the GST on gasoline, the typical impact of tax on tax is less than 2 cents per litre (as shown in the table in Section 4) and does not vary with price changes at the pump.