Toronto Hydro sell-off could cost city millions in 'departure tax'

theglobeandmail.com
By Adrian Morrow and Marcus Gee
Sept. 23, 2016

Toronto would be on the hook for a hefty provincial tax bill if city council moves forward with a plan to privatize Toronto Hydro - giving Queen’s Park a key role in deciding how lucrative the sell-off would be for the city.

Under current rules, any municipality that wants to sell more than 10 per cent of a local distribution company must pay a “departure tax” to the province. The tax could be around $200-million in the case of Toronto Hydro, estimated one energy industry source who spoke on condition of anonymity. The sum could sway council support for a sale.

Premier Kathleen Wynne’s government could be interested in a Toronto Hydro sell-off, insiders say, because it would give her Liberals political cover for their own privatization of Hydro One. That sell-off has proven unpopular in polls, and having the city follow the province’s lead could help deflect some public anger away from the Liberals.

One Liberal source suggested the province believes that privatizing Toronto Hydro to raise money for transit, housing and other infrastructure - as Mr. Tory is contemplating - is a good idea and Queen’s Park is interested in helping make it happen. There have so far been no formal discussions between the city and the province over taxes, the source said, but those will likely happen.

A senior official from the city said he had met with both federal and provincial officials to have “very, very preliminary” talks. He said he got no assurances the city would receive a break on the tax penalties of a Hydro sale, but he argued that helping Toronto with its Hydro move could help the Wynne government politically.

“It always helps when you’re not isolated, when you’re part of a bigger group,” he said. “Is there some benefit that accrues to them because they’re not the only party pursuing this course? I don’t think you have to be a public opinion expert to say the answer is yes.”

The official said that, whatever happens, Mayor John Tory would not be comfortable selling more than 50 per cent of Hydro and losing effective control.

Energy Minister Glenn Thibeault kept his cards close to his vest Thursday, but left the door open to a tax deal. “It’s a wait-and-see approach for me. The decision on what Toronto Hydro will do is based on what Toronto council will do,” he said.

On Thursday, Mr. Tory told reporters that he has not discussed a tax break with other governments in any detail. The tax issue came up just once, in passing, in a meeting he had with Ms. Wynne after city council voted in June to study the idea of asset sales, he said. The mayor said he received no assurances the city would get a tax break because the idea is only in early development.

Selling 50 per cent of Hydro would give the city a large upfront payment – likely more than $1-billion - to spend on infrastructure. It would also bring private investment into the company to help upgrade and repair the electricity grid. The downside, however, is that the city would lose a portion of the company’s $60-million annual dividend.

The province has shown some willingness to give the electricity sector tax breaks to encourage share sales. Last year, the province cut a different tax on electricity company privatizations, called the “transfer tax,” from 33 per cent to 22 per cent and exempted small utilities with fewer than 30,000 customers from paying it. This tax holiday will be in place until the end of 2018.

The industry source, however, said Toronto Hydro would likely not have to pay much transfer tax anyway, since its tax payments to government over the last 15 years count against the transfer tax bill and have been high enough to reduce it nearly to zero for a 50-per-cent share sale.

The source said the departure tax would be Toronto’s main concern, since there are no credits against it for previous tax payments. The tax is calculated based on the total market value of the company, and will be the same no matter how much of Toronto Hydro is sold.