PRUDENT MANAGEMENT OF PILS/TAXES

Transcription

1 EB-0-0 Exhibit H Tab Schedule Page of TAXES AND PILS 0 INTRODUCTION The revenue requirement filed at Exhibit J, Tab, Schedule of this Application reflects amounts for Payments in Lieu of Taxes ( PILs ) recovery of $., $. million, and $. million, respectively, for 0, 0 and 0. THESL has employed a model based on the model provided on the website of the Ontario Energy Board (the Board ) with some adjustments for legislated income tax rate changes to compute PILs amounts for 0 and 0. The 0, 0 and 0 PILs tax models are filed at Tab, Schedules, and, respectively, of this Exhibit. PRUDENT MANAGEMENT OF PILS/TAXES The amount of PILs paid by THESL in any given year is strongly correlated with its 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. Where it can, THESL takes advantage 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 PILs tax amounts calculated by THESL for inclusion in rates for the 0 through 0 years 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 Board s Filing Requirements for Transmission and Distribution Applications. DISCLOSURE OF PILS TAX ADMINISTRATION AND TAX RULINGS THESL has not received any specific tax rulings that are inconsistent with THESL s

2 EB-0-0 Exhibit H Tab Schedule Page of previously filed and approved tax model. TAX REASSESSMENTS The Ministry of Revenue has most recently completed its review of THESL s 00 PILs return. 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 changes to corporate tax rates and capital cost allowance rates and the elimination of the clawback of the Ontario small business tax credit. 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 CAPITAL TAX The Ontario capital tax rate was reduced to zero effective July, 00 therefore there is no provision for capital taxes in the Bridge and Test Year EDR Models. 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, 0 or 0.

3 EB-0-0 Exhibit H Tab Schedule Page of 0 UNDEPRECIATED CAPITAL COST ( UCC ) AND CAPITAL COST ALLOWANCE ( CCA ) As THESL is filing this application on a Forward Test Year basis, CCA is computed for 0 based on projections of the change in capital assets over the 0 to 0 years. A separate Schedule is prepared to compute the projected CCA for 0 and to derive the projected undepreciated capital cost balances at January, 0 (Tab, Schedule ). In doing this, maximum CCA is claimed in 0. Maximum CCA is also claimed in the 0 PILs tax model. Any projected additions are subject to the half-year rule in the year of acquisition. The same process has been used to calculate projected CCA for 0 and 0, using projections of changes in capital assets for the respective years. 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 each relevant year. A separate completed Schedule 0 for the 0 year (Tab, Schedule ) is used to derive the projected 0 opening balance of CEC (Tab, Schedule ). The maximum CEC deduction is claimed for all years. 0 INTEREST DEDUCTION Actual interest expense is greater than the deemed interest expense calculated by the 0, 0 and 0 models filed at Tab, Schedules, and. Therefore the difference between actual and deemed interest expense has been deducted in calculating taxable income in the Tax Model for those years. CAPITALIZED INTEREST Interest is not capitalized to construction work in progress for tax purposes. However, interest is capitalized for accounting purposes in the 0 through 0 projections.

4 EB-0-0 Exhibit H Tab Schedule Page of NON-DISTRIBUTION ELIMINATION THESL has included only income from the distribution of electricity in this application 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 through 0. Federal investment tax credits arising out of expenditures on qualifying Scientific Research and Experimental Development ( SRED ) projects carried on by THESL in 00 to 00 averaged approximately $. 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. The same expenditures became eligible for Ontario SRED credits beginning in 00, averaging $0. million per year. 0 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 the average benefit of 00 through 00 claims, has been included in the 0, 0 and 0 Tax Models. CAPITAL LEASES Appropriate adjustments have been made in determining taxable income in the 0, 0 and 0 Tax Models with respect to leases capitalized for accounting purposes. TAX PAYABLE FILINGS Details of actual taxes paid by THESL from 00 to 00, as well as the forecasted taxes to be paid from 0 to 0, are outlined in the table below. Explanations of the

5 EB-0-0 Exhibit H Tab Schedule Page of variances for the forecasted years are provided below. Table : Summary of PILs by Year ($ millions) Historical Historical Historical Historical Historical Historical Income Taxes Capital tax Total PILs Bridge 0 Test 0 Test 0 Test Income Taxes.... Capital tax (no longer applicable) Total PILs to 0 The decrease in PILs of approximately $. million is mainly due to changes in estimates of the useful life of assets implemented in 0, differences between the tax and book treatment of various costs, reductions in statutory tax rates and elimination of the provincial capital tax. 0 0 to 0 The decrease in PILs of approximately $. million is mainly attributable to differences between the tax and book treatment of various costs. 0 to 0 The increase in PILs of approximately $. million is mainly attributable to increased return on a larger capital base and differences between the tax and book treatment of various costs.

6 EB-0-0 Exhibit H Tab Schedule Page of 0 to 0 The increase of PILs of approximately $. million is mainly attributable to increased return on a larger capital base and differences between the tax and book treatment of various costs. PROPERTY TAX The PILs Model computes corporate income taxes. Property tax is included in Facilities Services costs discussed in Exhibit F, Tab, Schedule. 0 Table below outlines the actual property taxes paid by THESL in 00, 00 and 00; property tax amounts included in Board-Approved operating expenses for 00, 00 and 0; and forecasted property taxes to be paid in 0, 0, 0 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-0-0 Exhibit H Tab Schedule Page of Table : Summary of Property Taxes by Year ($ millions) Test 0 Test 0 Test Historical Board Historical Board Historical Bridge & Approved Approved Board Approved Municipal and PILs Property Taxes Property Tax Reassessments (0.) - (0.) - (0.) Total Property Taxes