Continuous Transmission Commodities: Importing and Exporting Electricity, Oil, Gas and Similar Tangible Property

Transcription

1 Continuous Transmission Commodities: Importing and Exporting Electricity, Oil, Gas and Similar Tangible Property By Satinder Bains (KPMG) and Daniel L. Kiselbach (Miller Thomson LLP) 1 The term Continuous Transmission Commodities ( CTCs ) describes electricity, crude oil, natural gas, and other tangible personal property transportable by wire, pipeline or conduit. 2 What Customs Act and Excise Tax Act reporting and accounting provisions apply? Have these provisions been judicially considered? What are the documentary requirements? This article will cover these questions and provides essential information for businesses importing or exporting CTCs. The General Legislative Schemes The Canada Border Services Agency (CBSA) is responsible for the administration and enforcement of CTC reporting and accounting provisions. The CBSA administers and enforces Customs Act provisions relating to customs duties. It also administers and enforces Excise Tax Act provisions in Division III, Part IX Goods and Services Tax ( GST ) which is levied on imported goods. It does so for and on behalf of the Canada Revenue Agency. The manner in which CTCs should be reported and accounted for has been the subject of debate. Duties Under the Customs Act The CBSA is responsible for determining whether or not customs duties are levied on the importation CTCs into Canada. 3 The Customs Act defines customs duties as including duties levied under the Customs Tariff; not import GST. This fact is made clear by the wording of section 2 of the Customs Act which defines the word duties as: duties means any duties or taxes levied or imposed on imported goods under the Customs Tariff, the Excise Act, 2001, the Excise Tax Act, the Special Import Measures Act or any other Act of Parliament, but, for the purposes of subsection 3(1), paragraphs 59(3)(b) and 65(1)(b), sections 69 and 73 and subsections 74(1), 75(2) and 76(1), does not include taxes imposed under Part IX of the Excise Tax Act; Section 12 of the Customs Act requires importers to report imported goods. 4 Section 17 states that imported goods are charged with duties from the time of their importation at rates applicable at the time of accounting. 5 Section 23 of the Customs Act provides that certain goods transported over territory outside of Canada shall be treated as if they had been transported entirely within Canada. Section 23 states: 23. Goods that are transported from one place in Canada to another place in Canada Section 23 of the Customs Act provides that certain goods transported over territory outside of Canada shall be treated as if they had been transported entirely within Canada. over territory or waters outside Canada in accordance with such terms and conditions and subject to such bonds or other security as may be prescribed shall be treated, with respect to their liability to or exemption from duties, as if they had been transported entirely within Canada. Import GST Under the Excise Tax Act Subsection 123(1) of the Excise Tax Act 6 defines the term continuous transmission commodity. This section is reproduced again for convenience: In section 121, this Part and Schedules V to X,... continuous transmission commodity means electricity, crude oil, natural gas, or any tangible personal property, that is transportable by means of a wire, pipeline or other conduit;... GST is levied on imported Goods pursuant to Part IX, Goods and Services Tax, Division III, Tax on Importation of Goods, of the Excise Tax Act. Section 212 imposes GST on imported goods. Imports, continued on page 4 Practical Trade & Customs Strategies Thomson Reuters/WorldTrade Executive 2013

2 CTCs transported from Canada, into the U.S., and back into Canada are the subject of separate Customs Act and the Excise Tax Act reporting and accounting requirements. ditions under which a CTC is deemed not to be exported or imported (and, therefore, not subject to import GST). It states as follows: For the purposes of this Part (other than sections 4, 15.3 and 15.4 of Part V of Schedule VI), if a continuous transmission commodity is transported by means of a wire, pipeline or other conduit (a) outside Canada in the course of, and solely for the purpose of, being delivered by that means from a place in Canada to another place in Canada, (b) in Canada in the course of, and solely for the purpose of, being delivered by that means from a place outside Canada to another place outside Canada, (c) from a place in Canada to a place outside Canada where it is stored or taken up as surplus for a period until further transported by that means to a place in Canada in the same measure and state except to the extent of any consumption or alteration necessary or incidental to its transportation, or (d) from a place outside Canada to a place in Canada where it is stored or taken up as surplus for a period until Imports from page 3 It states that: 212. Subject to this Part, every person who is liable under the Customs Act to pay duty on imported goods, or who would be so liable if the goods were subject to duty, shall pay to Her Majesty in right of Canada tax on the goods calculated at the rate of 5% on the value of the goods. Section 214 states that the import GST shall be paid and collected under the Customs Act as if the GST were a customs duty levied on goods under the Customs Tariff. 7 Section of the Excise Tax Act deals with property in transit. 8 Section sets out confurther transported by that means to a place outside Canada in the same measure and state except to the extent of any consumption or alteration necessary or incidental to its transportation, the commodity is deemed not to be exported or imported in the course of that transportation or further transportation. Customs and GST Treatment of CTCS CTCs transported from Canada, into the U.S., and back into Canada are the subject of separate Customs Act and the Excise Tax Act reporting and accounting requirements. These separate legislative schemes have given rise to the following issues: 1. Can CTCs be classified as Canadian goods returned upon reentry into Canada? 2. Does the fact that CTCs are fungible and may be commingled with foreign goods mean that CTCs can not be classified as Canadian goods returned? 3. Does a transfer of convenience of the CTC from a Canadian entity to a U.S. affiliated company (in order to transport the CTC across the U.S. and back into Canada) affect its value for duty? 9 4. When should the movement of CTCs back into Canada from the U.S. be treated as an importation, given section of the Excise Tax Act? The Tenaska Case Procedural History In Tenaska Marketing Canada Division of TMV Corp. v The Minister of Public Safety and Emergency Preparedness (Canada) 10 O Keefe J. disposed of an application for judicial review of two detailed adjustment statements ( DASs ) issued in connection with a CTC matter. The CBSA issued the DASs to Tenaska Canada in respect of shipments of natural gas shipped by pipeline from western Canada to eastern Canada, via pipeline passing through the US. The CBSA took the position that the natural gas was subject to import GST of almost $2.7 million on reentering Canada, and that interest was due on that amount at the prescribed rate of approximately $555,000. The Applicant took the position that provisions of the Customs Act and Excise Tax Act deemed that no importation occurred and no GST was levied on the goods. Key facts of Tenaska are outlined below. Thomson Reuters/WorldTrade Executive February 28, 2013

3 Factual Background Tenaska Marketing Canada ( Tenaska Canada ) was a division of Tenaska Marketing Ventures Corp., a Nebraska corporation ( Tenaska USA ). Tenaska Canada purchased natural gas in Western Canada in order to deliver it to customers located in Eastern Canada. The natural gas was transported from Western Canada to Eastern Canada the cheapest way; via the Great Lakes Pipeline. The Great Lakes Pipeline extends from the Manitoba-Minnesota border, across Minnesota, Wisconsin and Michigan for movement into Canada at Sault Ste. Marie or St. Clair, Ontario. See figure 1 below. In 2003, the CBSA conducted the customs compliance verification of Tenaska Canada s natural gas customs transactions for the previous year. It examined documents, including a purchase and sales contract between Tenaska Canada and its U.S. affiliate. 11 The purchase and sales contract showed that title to the natural gas was transferred to a U.S. affiliate when the gas entered the U.S. Title to the natural gas was transferred back to Tenaska Marketing Canada when re-entered Canada. Tenaska Canada described these as transfers of convenience as they were made simply in order to comply with U.S. Federal Energy Regulatory Commission (FERC) requirements. 12 Tenaska Canada took the position that 12 of the 24 import transaction which were the subject of the verification were Canadian goods returned and should be classified under tariff item Under tariff item the natural gas was exempt from GST. The CBSA verification officer did not agree, and issued the DASs. The compliance verification officer took the position that Tenaska Canada should have paid GST on the natural gas at the time it re-entered Canada. He reasoned that: (1) the natural gas entered the Great Lakes Pipeline where it was combined or commingled with gas from U.S. sources (and lost its separate identity as a Canadian good); (2) should be classified under tariff item no ; and (3) was subject to GST. The verification officer also noted that even if the in-transit gas could be verified as having originated in Canada, the transfer of ownership at the Manitoba border must be considered. The natural gas was supplied outside of Canada by way of sale to the U.S. affiliate (that is, the re-entry was a sale for export from the U.S. affiliate to Tenaska Canada). Therefore, GST must be levied on the re-entry of the natural gas into Canada. Tenaska Canada paid the assessment and later recovered the GST portion by taking an input tax credit ( ITC ). It could not, however, claim the assessed interest as an ITC. There was a casus omissus in the Customs Act and the Excise Tax Act in the sense that neither provided a right of appeal. Tenaska Canada therefore commenced a Imports, continued on page 6 Figure 1 Great Lakes Pipeline Image used with permission of Great Lakes Gas Transmission Company Source: Source: Practical Trade & Customs Strategies Thomson Reuters/WorldTrade Executive 2013

4 Imports from page 5 judicial review application respecting the interest assessment decision, pursuant to section 18.1 of the Federal Courts Act. Findings and Order O Keefe, J. disposed of the application on the basis of section of the Excise Tax Act. He found that: (1) section applies to natural gas, even though it is commingled with other natural gas; (2) the verification officer should have considered section of the Excise Tax Act in order to determine whether or not the sale of the natural gas (transfer of convenience) to the US affiliate and back to Tenaska Canada met the requirements of section ; (3) the verification officer erred in not applying section of the Excise Tax Act in the circumstances; and (4) the decision respecting the facts must be made by the verification officer and not by the court. Given his The Customs Act defines customs duties as including duties levied under the Customs Tariff; not import GST. decision and findings, he did not deal with section 23 of the Customs Act. Reasons The courts reasons for the decision included the following. There was no dispute in this case that natural gas: (1) is a CTC; and (2) is a fungible commodity, in that once it has been delivered to a pipeline for transport, it becomes commingled with, and can not be distinguished from, other natural gas in the pipeline. The verification officer s assessment did not refer to section of the Excise Tax Act or section 23 of the Customs Act, and the officer did not apply these sections to the facts. Section refers to CTCs transported by pipeline; precisely what happened in this case. If the requirements of section are met, the natural gas is deemed not to be imported or exported, and no GST is levied. The Minister took the position that section did not apply because of the commingling of the gas. However, the court noted that the Minister s Backgrounder to section contemplated that natural gas would not be identifiable from other gas in the pipeline given its fungible nature. An excerpt of the Minister s Backgrounder is reproduced below: Another important aspect of this arrangement is that Revenue Canada s administration recognizes the fungible nature of continuous transmission commodities - i.e., if gas is purchased from different suppliers during a period it may not be possible, because of the sameness of the product, to track the destination of a particular purchase. In these circumstances, Revenue Canada will compare the amount of product purchased under certificate with the amount actually exported during a period by a purchaser. (emphasis added) Further, the court referred to explanatory notes to the bill which brought in section which stated: [CTCs] may be transported across the Canadian border more than once en route to a delivery point in or outside Canada solely because of the route the pipeline or power-line must take. In this situation, the administrative position has been to base the tax treatment on the origin and ultimate destination of the commodity and not on the in-transit border crossings. In other words, tax does not apply where such a commodity crosses the border solely for the purpose of being transported by pipeline from a place outside Canada to another place outside Canada or from a place in Canada to another place in Canada. Section is added to codify the administrative practice for greater certainty. The Federal Court of Appeal upheld O Keefe, J s decision to remit this matter back to the CBSA for reconsideration. 14 CBSA s Draft Customs Memorandum 15 In 2012, the CBSA circulated a document titled Memorandum D17-1-xx, Draft, Procedures for the Importations of Continuous Transmission Commodities (the Draft D Memorandum) for review and comments. It appears to take into account the requirements of section of the Excise Tax Act. For example, it defines in-transit CTCs as CTCs that are transported from one place in Canada to another place in Canada over territory or waters outside Canada in accordance with the requirements of the Customs Act. This is similar to the section definition for property intransit. The Draft D Memorandum also indicates that in-transit CTCs under certain conditions would Thomson Reuters/WorldTrade Executive February 28, 2013

5 not be regarded as importations and, therefore, not subject to reporting and accounting requirements. These conditions appear to be consistent with the provisions of section of the Excise Tax Act. The Draft D Memorandum also refers to transfers of convenience which the Court in its decision in Tenaska Marketing Canada v the CBSA did not elaborate or provide adequate clarification. The Draft D Memorandum indicates that in order to establish that a transfer is a transfer of convenience the importer or exporter must provide verifiable evidence demonstrating that a change of title occurred for the purpose of facilitating the transportation of the goods. An excerpt of the Draft D memorandum is reproduced here for convenience: 16 A change of ownership contemplated in a contract between Canadian and U.S. affiliates (also referred as a transfer of convenience ) does not in itself preclude the good from being considered in-transit, as described in paragraphs 18 to 21 above. If the sole purpose of the change of ownership is used to facilitate the transportation of goods, the CBSA may accept documentary evidence as sufficient proof that a given quantity and quality of a good was in-transit. The transportation of the good at issue must demonstrate a logical connection between the two cross-border movements of goods, as determined by the CBSA. This logical connection must include the correct chronological order of border crossings for the goods at issue (i.e. a good must be transported into Canada prior to being transported out of Canada to be considered to be moving in-transit through Canada. Similarly, a good must be transported out of Canada prior to being transported into Canada to be considered to be moving in-transit through a foreign country). (emphasis added) The excerpt outlines CBSA s position that a transfer of convenience is a contract between Canadian and U.S. affiliates changing ownership for the purpose of facilitating the transportation of the goods. 17 In order to establish that change of ownership took place in order to facilitate the transportation of the goods, and to establish the nature and extent of that change in ownership, it would likely be necessary to provide the following: 1. Documentary evidence establishing the reason for the export of the CTCs from western Canada to eastern Canada. 2. The contracts between the Canadian and U.S. companies evidencing the transfer(s) of convenience necessary to move the CTCs into the US and back into Canada. 3. Documentary evidence of the quantity of the CTCs that have been transferred into the US and back into Canada (e.g. natural gas measurement meter readings with corresponding dates in chronological order) Reference to the U.S. legislation that requires a transfer of convenience to take place in order for the CTC to be transported across the U.S. The Draft D Memorandum also indicates that an importer or exporter of CTCs may be required to establish the following: 1. Evidence that that the change of ownership is a transfer of convenience (see points 1-4 above). 2. Evidence that the CTCs were not stored in the U.S., or in situations where CTCs must be stored, that the storage will not last longer than 30 days (being the period specified in the Draft D memorandum). 3. Evidence that the CTCs exported from Canada into the U.S. are of the same quantity as the natural gas being transported into Canada (that is, there is no net reporting involving the subtraction of exported quantities from imported quantities over a time period). The CBSA has not provided a time frame within which the Draft D Memorandum must be finalized. In the meantime, the Draft D Memorandum seems to provide some comfort to importers and exporters that compliance verification officers will be alive to the requirement of section of the Excise Tax Act and the considerations identified by the Federal Court in Tenaska Marketing Canada v Canada (Minister of Public Safety and Emergency Preparedness. Conclusion This article has outlined some essential information for businesses importing or exporting CTCs. The manner in which CTCs should be reported and accounted for has been the subject of debate. Section 23 of the Customs Act provides that certain goods transported over territory outside of Canada shall be treated as if they had been transported entirely within Canada. Section of the Excise Tax Act deals with property in transit. Section sets out conditions under which a CTC is deemed not to be exported or imported (and, therefore, not subject to import GST). Imports, continued on page 8 Practical Trade & Customs Strategies Thomson Reuters/WorldTrade Executive 2013

6 Imports from page 7 In Tenaska Marketing Canada Division of TMV Corp. v The Minister of Public Safety and Emergency Preparedness (Canada), O Keefe J. disposed of an application for judicial review of two detailed adjustment statements ( DASs ) issued in connection with a CTC matter. O Keefe, J. disposed of the application on the basis of section of the Excise Tax Act. He found amongst other things that: (1) section applies to natural gas, even though it is commingled with other natural gas; and (2) the verification officer should have considered section of the Excise Tax Act in order to determine whether or not the sale of the natural gas (transfer of convenience) to the US affiliate and back to Tenaska Canada met the requirements of section In 2012, the CBSA circulated a document titled Memorandum D17-1-xx, Draft, Procedures for the Importations of Continuous Transmission Commodities (the Draft D Memorandum) for review and comments. It appears to take into account the requirements of section of the Excise Tax Act. Going forward, the result should be fewer disputed GST assessments respecting CTCs. o 1 The authors welcome comments to this article. Please see end of article for contact information. 2 Excise Tax Act, RSC, 1985, c. E-15, Part IX, Goods And Services Tax, Division I Interpretation section 123 defines continuous transmission commodity to mean: electricity, crude oil, natural gas, or any tangible personal property, that is transportable by means of a wire, pipeline or other conduit 3 Canada Customs Notice (N-438) Procedures for the Importation of Continuous Transmission Commodities defines the term continuous transmission commodity to mean: crude oil, natural gas and their derivatives and other liquids and gases transported through a pipeline, and electricity transported over an electric transmission line. 4 Subsection 12(1) states: Subject to this section, all goods that are imported shall, except in such circumstances and subject to such conditions as may be prescribed, be reported at the nearest customs office designated for that purpose that is open for business. 5 Section 17 states: 17. (1) Imported goods are charged with duties thereon from the time of importation thereof until such time as the duties are paid or the charge is otherwise removed. Marginal note: Rates of duties (2) Subject to this Act, the rates of duties on imported goods shall be the rates applicable to the goods at the time they are accounted for under subsection 32(1), (2) or (5) or, where goods have been released in the circumstances set out in paragraph 32(2)(b), at the time of release. 6 This section is set out in Part IX, Goods and Services Tax, Division I, Interpretation. 7 Section 214 states: Tax on goods under this Division shall be paid and collected under the Customs Act, and interest and penalties shall be imposed, calculated, paid and collected under that Act, as if the tax were a customs duty levied on the goods under the Customs Tariff and, for those purposes, the Customs Act, with such modifications as the circumstances require, applies subject to this Division. 8 This section is set out in Part IX, Goods and Services tax, Division I, Interpretation. 9 Transfers of convenience are discussed in detail below FC The CBSA noted that the U.S. affiliate was a genuine gas marketing company and the transfer was conducted in a manner to make the natural gas potentially available for sale in the U.S USC 717 Regulation of Natural Gas Companies describes the persons that are to be engaged in the interstate transportation, importation and exportation of natural gas. 13 Schedule to the Customs Tariff. For the remaining 12 entries, Tenaska Canada conceded that the importations originated from the U.S. and should be subject to GST. 14 See paragraph 34 of the Federal Court of Appeal s decision. 15 Appendix A provides the CBSA s Draft Customs Memorandum. 16 See paragraph 22 of the Draft D Memorandum 17 The change of ownership would have implications in regards to customs valuation (section 48, Customs Act). However, the policy stated in the draft customs memorandum appears to indicate that customs legislation (i.e. sale for export to a purchaser in Canada) in regards to in-transit CTCs would not be enforced. 18 Appendix D of the Draft D-memo defines Release point for Natural Gas to mean: The release point for the deemed release of natural gas is the interconnect point in Canada nearest to the border. The shipper at that physical location is considered to be the importer of the good at issue. The CBSA auditor, to establish chronological order, may request documentation regarding the measurements taken at the release points (export and import). Santinder Bains (satinderbains@kpmg.ca) is a Senior Manager in the Trade & Customs group at KPMG in Vancouver. Mr. Bains joined KPMG in 2006, after spending five years with CBSA as a Trade & Customs Verification Officer. He is well versed and experienced in the administration of the CBSA s customs programs for tariff classification, valuation and origin of good imported into Canada as well as customs programs for controlled goods and exports. Dan Kiselbach (dkiselbach@millerthomson.com) is a Partner in the Litigation group of Miller Thomson LLP in Vancouver, Canada. He has provided advice and representation to corporations, individuals and government agencies in customs, excise, trade and taxation matters. Thomson Reuters/WorldTrade Executive February 28, 2013