PRUDENT MANAGEMENT OF PILS/TAXES

Transcription

1 EB-00-0 Exhibit H Tab Page of TAXES AND PILS INTRODUCTION The revenue requirement filed at Exhibit J, Tab, of this Application reflects an amount for Payments in Lieu of Taxes ( PILs ) recovery of $. million for 0. THESL has employed a model based on the Ontario Energy Board ( Board ) guidelines and the model utilized in THESL s previous EDR application (EB-00-0), with some adjustments for appropriate income tax rates to compute PILs amounts. The 0 PILs tax model is filed at Exhibit P, Tab, Schedule of this Application. 0 PRUDENT MANAGEMENT OF PILS/TAXES The amount of PILs paid by THESL in any given year is tied to net income. As such, the relative magnitude of PILs is based on the profitability of THESL. THESL manages its tax costs diligently in an effort to keep the effective rate of tax as low as possible. A dedicated group of tax personnel administers THESL s taxes and ensures that the PILs are managed prudently. THESL takes advantage, where it can, of available tax deductions and tax credits, such as research and development tax credits, to minimize its tax burden. 0 REGULATORY TAXES EXPENSE METHODOLOGY The tax amounts calculated by THESL for inclusion in rates for the 0 year represent taxes payable for the stand alone distribution-only business. The computed regulatory taxes are based upon the principles set out in Chapter of the Filing Requirements for Transmission and Distribution Applications. DISCLOSURE OF PILS TAX ADMINISTRATION AND TAX RULINGS THESL has not received any specific tax rulings or assessment policy that is inconsistent with THESL s previously filed and approved Tax Model.

2 EB-00-0 Exhibit H Tab Page of TAX RE-ASSESSMENTS The Ministry of Revenue has completed its review of THESL s 00 to 00 tax returns. The PILs amount computed includes methodologies approved by the Ministry of Revenue through its audits. 0 PRINCIPLES APPLICABLE TO SPECIFIC COMPONENTS OF THE CALCULATION THESL has followed the Board s guidelines to calculate PILs and has also incorporated appropriate legislative changes that have been enacted, such as corporate and capital tax rates and capital cost allowance rates. TAX TREATMENT OF DIVIDENDS PAID IN PRIOR YEARS Dividends were paid in preceding years. The dividends were treated as payments out of tax paid retained earnings and therefore were not treated as deductible for tax purposes. 0 NON-RECOVERABLE AND DISALLOWED EXPENSES There are no non-recoverable expenses reflected in the 0 EDR Model (Exhibit P, Tab, ). Hence, no adjustment is required in respect of non-recoverable expenses for the 0 regulatory tax calculations. CAPITAL TAX The rate for Ontario capital tax was reduced to zero effective July, 00; therefore, there is no provision for capital taxes in the test year EDR Model. LOSS CARRY-FORWARDS THESL has no non-capital or capital loss carry-forwards at the end of December 00, and does not expect to have such loss carry-forwards at the end of December 0. Accordingly, Schedule - of the PILs Model (Continuity of Loss Carry-Forwards) is

3 EB-00-0 Exhibit H Tab Page of neither applicable nor included as part of this application. 0 UNDEPRECIATED CAPITAL COST ( UCC ) AND CAPITAL COST ALLOWANCE ( CCA ) As THESL is filing this application on an FTY basis, CCA is computed for 0 based on projections of the change in capital assets over the 00 to 0 years. A separate Schedule is prepared to compute the projected CCA for 00 and to derive the projected undepreciated capital cost balances at January, 0 (Exhibit P, Tab, ). In doing this, maximum CCA is claimed in 00. Maximum CCA is also claimed in the 0 PILs tax model. As well, any additions projected for 00 and 0 are subject to the half-year rule. 0 The PILs regime came into effect on October, 00 at which time THESL was deemed to have commenced a new taxation year for purposes of determining its liability for PILs. Accordingly, THESL was deemed to have disposed of its assets at their then fair market value and to have reacquired such assets at the same amount. The difference between the financial statement carrying value and the tax basis of assets is referred to as the fair market value bump [the FMV Bump.] The effects of the 00 FMV Bump are reflected in the 00 and 0 CCA computations. Schedule - (October 00 FMV Adjustment) filed at Exhibit P, Tab, Schedule provides information relating to the fair market value bump. Also attached is a supplementary schedule to Schedule -, filed at Exhibit P, Tab, that provides information on the projected remaining dollar value of the FMV Bump at December, 0. There is a difference for accounting and tax purposes with respect to the FMV Bump as no bump was recorded for accounting purposes. Schedule - provides information on

4 EB-00-0 Exhibit H Tab Page of the FMV Bump for tax purposes only. 0 REGULATORY TAX TREATMENT OF ELIGIBLE CAPITAL EXPENDITURE ( ECE ) As with the amount of CCA on depreciable capital property included in the PILs tax calculation, the amount of cumulative eligible capital [ CEC ] deduction is based on the projected balance of CEC in 0. A separate completed 0 for the 00 year (Exhibit P, Tab, ) is used to derive the projected 0 opening balance of CEC (Exhibit P, Tab, Schedule ). The maximum CEC deduction is claimed for both years. The CEC used in the computation includes the October, 00 FMV Bump. Schedule - provides details of the FMV Bump for undepreciated capital cost and eligible capital property. 0 INTEREST DEDUCTION Actual interest expense is greater than the deemed interest expense calculated by the 0 EDR Model filed at Exhibit P, Tab, Schedule. Therefore the difference between actual and deemed interest expense has been deducted in calculating taxable income in the Tax Model. CAPITALIZED INTEREST Interest is not capitalized to construction work in progress for tax purposes. However, interest is capitalized for accounting purposes in the 0 projections. A completed Schedule - (Interest Expense), filed at Exhibit P Tab, Schedule, provides details of the derivation of relevant interest calculations.

5 EB-00-0 Exhibit H Tab Page of NON-DISTRIBUTION ELIMINATION THESL s has included income solely from the distribution of electricity and thus there are no adjustments to arrive at wires only figures. 0 TAX CREDITS THESL expects a level of expenditure similar to that of prior years to qualify for research and development tax credits in 0. Estimated investment tax credits arising out of expenditures on qualifying Scientific Research and Experimental Development projects carried on by THESL in 00 to 00 average approximately $0. million per year. This represents estimated qualifying expenditures (after including a proxy for overhead) of $. million per year at an investment tax credit rate of 0 percent. In prior years, THESL has also claimed the Federal Apprenticeship Job Creation Tax Credit, the Ontario Apprenticeship Training Tax Credit and the Ontario Co-Operative Education Tax Credit. A projected tax credit of $0. million, based on an average of prior claims, has been included in the 0 Tax Model. 0 CAPITAL LEASES No capital leases capitalized for accounting purposes are deducted for tax purposes in the 0 Tax Model. TAX PAYABLE FILINGS Details of actual taxes paid by THESL from 00 to 00, as well as the forecasted taxes to be paid from 00 to 0, are outlined in the table below. Explanations of the variances for the forecasted years are provided below.

6 EB-00-0 Exhibit H Tab Page of Table : Summary of PILs by Year ($ millions) Historical Historical Historical Historical Historical Bridge Test Income Taxes Capital tax Total PILs to 00 The increase in PILs of approximately $. million is mainly due to differences between the tax and book treatment of various costs offset by a reduction in the capital tax rate. 00 to 0 The decrease in PILs of approximately $0. million is mainly attributable to differences between the tax and book treatment of various costs offset by the elimination of the provincial capital tax. 0 PROPERTY TAX The Tax Model computes corporate income and capital taxes. Property tax is included in Facilities Services costs discussed in Exhibit F, Tab,. The following table outlines the actual property taxes paid in 00 as well as the forecasted property taxes to be paid in 00 and 0. THESL pays property tax based on the assessed value of the properties it owns, as determined by Municipal Property Assessment Corporation.

7 EB-00-0 Exhibit H Tab Page of Table : Summary of Property Taxes by Year ($ millions) 00 Historical 00 Bridge 0 Test Municipal and PILs Property Taxes... Property Tax Reassessments Total Property Taxes...