A marine shipping dispute is challenging the country's constitutional obligation to its youngest province, as a newly released report finds federal subsidies for Marine Atlantic ferries are pricing private carriers out of the market.

We're not looking for a special deal. We just want a level playing field. - Oceanex executive chairman Cpt. Sid Hynes

Marine Atlantic, a Crown corporation operating ferries between Newfoundland and Nova Scotia, uses federal tax dollars to provide shipping at less than half its true cost, according to a Transport Canada report prepared by CPCS Transcom.

The subsidies create a "market distortion and entry barrier" for private-sector players, the report said, noting that Marine Atlantic would have to double its prices or cut its operating costs in half to level the playing field.

"In dollar terms the government of Canada provides live loads (driver-accompanied trucks) and drop trailers travelling on the Port Aux Basques routes with a subsidy of roughly $800 per direction," the CPCS report said.

The report was obtained by Oceanex., a private marine shipper fighting Marine Atlantic in court, through an Access to Information request.

"We're not looking for a special deal. We just want a level playing field," Oceanex executive chairman Capt. Sid Hynes said in an interview. "They've got a lot of money to play with, and we're saying that's not fair."

Oceanex is going to Federal Court over the subsidy Ottawa provides to Marine Atlantic. (CBC)

When Newfoundland joined Confederation in 1949, Ottawa promised a freight and passenger service between Port Aux Basques, N.L., and North Sydney, N.S.

The CPCS report said the obligation is to provide a service that is priced "fairly and reasonably," but Marine Atlantic rates are some of the lowest among Canadian operators.

While Ottawa has an obligation to ensure affordable freight and ferry service, Hynes said the terms of union under the Newfoundland Act don't say the service must be heavily discounted.

Marine Atlantic's 2015-2016 annual report said it received a subsidy of $337.9 million that year. (Marine Atlantic)

Marine Atlantic has roughly 55 per cent of Newfoundland's surface freight transportation market share, while Oceanex, which provides intermodal freight transportation between Newfoundland and terminals in Halifax and Montreal, has about 45 per cent, according to the report.

The Crown corporation "doesn't even cover 50 per cent of its full economic costs with its current pricing" an internal Oceanex briefing summary said.

"With the aid of the subsidy, (Marine Atlantic) is pricing Oceanex out of the market, threatening Oceanex's operational sustainability and affecting the livelihood of our close to 1,000 employees throughout Eastern Canada," the briefing said.

Subsidies

Marine Atlantic's 2015-2016 annual report said the federal Crown corporation "receives a significant annual subsidy" that totalled $337.9 million that year, three-quarters of its $444.9 million in spending.

In addition to sizable capital and operating subsidies, the Oceanex briefing noted that Marine Atlantic also receives aid in the form of waived taxes, wharfage fees, and harbour duties.

Oceanex has filed an application for judicial review of Marine Atlantic's rates for commercial freight services. A judge is expected to hear the case on Oct. 23 in St. John's.