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A proposed income tax change to crack down on cross-border tax avoidance could unintentionally hike power bills and natural gas rates for consumers, Electricity Canada is warning.

If Canada tweaks the amount of interest from debt that multinational companies can deduct from their income taxes, the advocacy group says, that could mean some private utilities face tens of millions in new taxes.

"If you're limiting how much interest can be deducted, there is also an obligation to pass those costs on to customers," said Michael Powell, the organization's vice-president of government relations.

The adjustment is part of the government's bill to implement its fall economic statement, and comes as Finance Minister Chrystia Freeland tries to bring Canada into better line with international recommendations.

The guidelines from the Organization for Economic Co-operation and Development are intended to prevent multinational corporations from shifting revenues or debt between jurisdictions to lower their overall tax bills.

The OECD says it's not an uncommon practice.

Standardizing the amount of interest that can be deducted limits the benefits of such tactics and helps prevent tax avoidance in developing countries that often depend heavily on higher corporate tax rates.

The Liberals' Bill C-59, which is being debated in the House of Commons, sets a new ratio that would restrict how much interest can be deducted by Canadian companies that do business in at least one other country.

That will also capture several privately owned utilities, said Powell.

Federal tax change could raise electricity, gas bills in some provinces. #CDNPoli #IncomeTax

He said these utilities are heavily regulated, which for the most part already prevents them from adopting major tax avoidance measures such as shifting debt.

But to keep rates down, they also are usually required to maintain high levels of debt, stretching the costs of capital investments over long periods of time.

Powell said because the utilities don't have an ability to lower their debt load, the legislation could create a significant imposition of new costs — and raise rates as a result.

"Other jurisdictions, like United States, Ireland, the U.K., have just exempted regulated utilities," he said.

"Because it's the tidiest way of making sure you're not punishing organizations that are doing sensible things. This isn't really what was trying to be caught by the rule change."

The adjustment won't affect publicly owned utilities, such as Manitoba Hydro or SaskEnergy, which also means there will be uneven impacts on power and gas rates depending on where people live.

Powell also said the change will limit the investments private utilities can make to expand the electrical grid or invest in technology to lower greenhouse-gas emissions.

Freeland's office has not yet responded to a request for comment.

At a House of Commons finance committee meeting last week, Conservative MP Philip Lawrence questioned a departmental official about what kind of consultation and study occurred before the measure was put into the bill.

Lindsay Gwyer, a director general in the tax legislation division at Finance Canada, said extensive consultation took place.

Gwyer could not immediately provide details on how the economic impacts of the change or the effect it could have on rates were studied.

Lawrence said he had concerns the idea would raise costs for consumers "in a time when many Canadians are currently experiencing energy poverty."

This report by The Canadian Press was first published March 5, 2024.

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