ENERGY TRADING IN CANADA Current Sales Tax, Customs and Fuel Tax Issues

Transcription

1 Energy trading in canada Current Sales Tax, Customs and Fuel Tax Issues Stikeman Elliott llp

2 ENERGY TRADING IN CANADA Current Sales Tax, Customs and Fuel Tax Issues Alan Kenigsberg CONTENTS Introduction... 1 Sales of CTCs... 1 GST/HST overview... 1 Domestic to Domestic Sales in Canada, not for export... 1 General GST/HST rules... 1 HST rates... 1 HST place-of-supply rules... 2 Domestic to Foreign - Sale for export... 2 GST/HST overview... 2 Goods destined for export... 2 Specific GST/HST issues... 4 GST issues if CTC is zero-rated but is not exported... 5 Issues with drop-shipment certificates... 5 North American Free Trade Agreement ( NAFTA ) considerations on exports to the United States... 7 Provincial fuel tax issues for CTCs purchased for export... 7 Domestic to Foreign Supplier exports... 8 Export overview... 8 Export declarations... 8 Sales to Crown agents... 8 Changes or Corrections to Prices... 8 Storage Fees... 9 Storing and taking up natural gas... 9 Taking up surplus electricity... 9 Purchases GST overview GST consignment issues Purchases for import Customs import requirements In-transit issues MONTRÉAL TORONTO OTTAWA CALGARY VANCOUVER NEW YORK LONDON SYDNEY

3 Issues with GST and QST on supplies in Canada prior to import New proposals to shorten the time frames for reporting and remitting AMPS penalties Voluntary disclosures Natural gas loan transactions Backhaul transactions for natural gas NAFTA considerations Documentary requirements for Input Tax Credits Exports of a CTC for Re-import Issues with exports for re-import and the Tenaska Case Issues with net reporting Swaps, Barters and Exchanges of CTCs Barter issues Straddle plants (natural gas) Cross-border exchanges with non-residents Buybacks Financial Services: Derivatives and Contracts for Future Delivery Contracts - Settled only in cash Contracts - Settled in the actual commodity Contracts carbon offsets The Independent Electricity System Operator ( IESO ) Physical bilateral contracts Transmission rights Other charges Reserve and Capacity in Electricity Contracts Tolling Agreements/Arrangements Joint-Venture Elections Fuel Taxes Federal Excise Tax Provincial fuel taxes Issues with fuel tax licences Issues with different definitions of fuel and different licensing requirements under provincial fuel tax legislation British Columbia Carbon Tax Green Fees in Quebec Natural gas and crude oil Conclusion ii

4 Introduction Every day, millions of dollars of energy products are purchased and sold in Canada. In 2010 alone, $40 billion of energy products were imported into Canada, $94 billion of energy products were exported from Canada and the energy sector accounted for approximately 6.7 per cent of the Gross Domestic Product. 1 The dollar value of the import, export and sale of energy products in Canada is so high that even small errors with tax reporting or filings can result in significant assessments. This paper outlines the Goods and Services Tax ( GST ), Harmonized Sales Tax ( HST ), Federal Excise Tax ( FET ), customs, provincial sales taxes ( PST ) and provincial fuel tax issues that can arise on the purchase and sale of continuous transmission commodities ( CTCs ) and other fuel products in Canada. It also discusses the import and export of CTCs into and out of Canada. CTCs include electricity, crude oil, natural gas and any other tangible personal property that is transportable by means of a wire, pipeline or other conduit. Due to the differences in nature between CTCs and other tangible property, the Excise Tax Act ( ETA ) contains a number of special provisions that deal specifically with the importation and exportation of CTCs. In order to provide useful examples, this paper will address the various tax and customs issues with reference to a fictional, Canadian resident corporation, Canco, which is registered for GST ( Canco ). Sales of CTCs GST/HST overview The ETA contains a number of provisions dealing with CTC sales such that whether GST/HST should be charged depends on whether the CTC is being purchased for use in Canada or for export, and whether the purchaser is a GST registrant. Under subsection 221(1) of the ETA, every GST registrant as agent of Her Majesty in right of Canada must collect the GST/HST payable on its taxable supplies made in Canada. The GST/HST collectible for a reporting period must be remitted even if it has not been paid to the GST-registered vendor. Where a GST registrant has not remitted the proper amount of GST/HST in a reporting period, an assessment may be issued for the tax that was not remitted, plus interest. While the supplier would then have a statutory right under Section 224 to recover the GST/HST from the purchaser, it would not be able to recover the interest. Under subsection 280(1), interest is calculated at the prescribed rate (which is the basic rate of interest plus four per cent). Due to the dollar value involved in many energy transactions, suppliers have a significant incentive to ensure that they collect and remit the applicable amount of GST/HST. Domestic to Domestic Sales in Canada, not for export General GST/HST rules Where a GST registrant sells a CTC in Canada (i.e., the contract between the GST -registered vendor and the purchaser states that title to the CTC transfers in Canada, or it is otherwise clear that legal delivery of the CTC will take place in Canada), the GST registrant will have made a taxable supply of the CTC in Canada for purposes of paragraph 142(1)(a) of the ETA. In these circumstances, the GST registrant must generally charge GST/HST on the sale unless the CTC is being purchased for export and the requirements listed in the section, Domestic to Foreign - Sale for export, below are met. This is the situation, regardless of whether the recipient is registered for GST. HST rates If the supply of the CTC is made in a participating province (i.e., a province that has adopted HST), the GST registrant generally must charge the applicable rate of HST. The participating provinces are currently Nova Scotia, New Brunswick, Newfoundland, Ontario and British Columbia (the Participating Provinces ). The HST includes a provincial component and the federal GST for a combined rate of 12 per cent in British Columbia, 13 1 See: National Energy Board, Energy Facts: Energy Trade (July 2011). Energy products include crude petroleum, natural gas, coal and other bituminous substances and coal products, petroleum and electricity. 1

5 per cent in Ontario, New Brunswick and Newfoundland, and 15 per cent in Nova Scotia. Please note that the Nova Scotia government announced on April 2, 2012 that it would lower the provincial component of the HST such that the combined HST rate will decrease to 14 per cent in 2014 and 13 per cent in Further, the HST will be implemented in Prince Edward Island at a rate of 14 per cent, effective on April 1, British Columbia implemented the HST on July 1, However, the B.C. government announced on Aug. 26, 2011 that it would no longer be a Participating Province and instead would reinstate its former PST after a provincial referendum voted to repeal the HST. As such, effective on April 1, 2013, the HST in British Columbia will be replaced with the five-per-cent GST and a seven-per-cent PST. HST place-of-supply rules Due to the varying rates of HST in the Participating Provinces, new place-of-supply rules were enacted under the ETA. Generally, the HST or GST rate applicable to a sale is determined by where the property is legally delivered or made available to the purchaser. This determination will depend on the specific terms of the contract of sale and delivery and the sale-of-goods laws applicable to the transaction, although some deeming rules could apply. For example, when property is transported by a common carrier or consignee to a destination that is specified in a contract, and the supplier is sufficiently involved in securing the common carrier or consignee, delivery will generally be deemed to take place in the province where the property is delivered. This should be the case even if the contract states that title will transfer to the purchaser in a different province (such as the province from which the goods are shipped). The place-of-supply rules for services are generally based on the business address of the recipient of the services that the supplier obtains in the ordinary course of its business. However, if the service is in respect of tangible personal property, the service is generally considered to be provided in the province where the tangible personal property is located. For services of transportation of CTCs or other goods, the place of supply will generally be the province where the delivery takes place. If a CTC or other good is delivered in more than one province, the proportion attributable to each province is deemed to be a separate supply. Domestic to Foreign - Sale for export GST/HST overview Where a supplier sells CTCs to a purchaser in Canada who intends to export the CTCs, they will be zero-rated (GST/HST applies at the rate of zero per cent) for the purposes of the ETA if certain conditions (discussed below) are met. However, whether a specific supply of a CTC will be zero-rated often ultimately depends on whether or not the purchaser is registered for GST. From a cash-flow perspective, it is generally preferable for the purchaser to purchase CTCs on a zero-rated or non-taxable basis to avoid any GST/HST at the time of purchase. If the CTCs are taxable, the purchaser will have to pay the GST/HST up front and will then have to claim an input tax credit ( ITC ) on one of its subsequent GST/HST returns. Goods destined for export Purchaser is registered for GST If a CTC is supplied to a GST-registered purchaser who intends to export the CTC, this supply will be zero-rated under Section 15.2 of Part V of Schedule VI of the ETA if certain rules are met. Specifically, in order for the supply to be zero-rated, it must be made to a particular recipient that is registered for GST. The recipient is the person who is legally obligated to pay for the supply. Thus, the GST-registered vendor should ensure that the purchaser is the person who is legally obligated to pay for the supply under the contract. In addition, in order to obtain the zero-rating, purchasers must provide the supplier with a declaration in writing stating that they intend to either export the commodity or re-supply it in exchange for a commodity of the same class or kind situated outside Canada. The CTC also cannot be used, consumed or supplied in Canada prior to its export. Finally, the CTC cannot be further processed, transformed or altered in Canada prior to its export unless it is reasonably necessary or incidental to its transportation. 2

6 GST/HST issues with export declarations: The Canada Revenue Agency s ( CRA ) position is that recipients cannot provide an export declaration unless they clearly intended to export the CTC that is being supplied. 2 The CRA has also determined that a purchaser is not entitled to provide an export declaration to a supplier in respect of a supply of gas if a portion of the supplied gas is intended for sale in Canada. This can cause issues where a purchaser acquires a CTC partially for use in Canada and partially for export. Consequently, if Canco sells gas to a third party who intends to export the gas and provides an export declaration, Canco should still charge GST if it knows, or ought reasonably to know, that the purchaser will not, in fact, export all of the gas. Purchaser is registered for GST blanket exemptions A GST-registered purchaser may also purchase CTCs in Canada on a zero-rated basis if it provides the supplier with a blanket exemption certificate for exports (issued under Section of the ETA), and meets certain other conditions. Generally, a GST-registered purchaser may qualify for a blanket exemption certificate if at least 90 per cent of its sales are made outside Canada and at least 90 per cent of its purchases in Canada are for export. Section 1.1 of Part V of Schedule VI of the ETA zero-rates taxable supplies of tangible personal property, including CTCs, to a GST-registered purchaser where the purchaser provides the supplier with an export certificate that certifies that the purchaser is authorized to use the certificate, that the certificate is in effect at the time the supply is made and that discloses to the supplier the number assigned to the purchaser under subsection 221.1(4) of the ETA and the expiry date of the authorization. An authorized purchaser may also file a blanket or standing certificate with its suppliers. The blanket certificate s validity must be limited to the period that the company is authorized by the Canada Border Services Agency ( CBSA ) to use certificates under the arrangement. The Business Number of the purchaser must appear on each purchase order. If these conditions are met, and the GST-registered vendor has a blanket certificate from the purchaser, then the vendor will not have to charge GST on its supplies to the person who filed the blanket certificate unless it knows, or could reasonably be expected to have known, that the certificate holder was not, in fact, exporting the goods or that the certificate was not valid. Purchaser is not registered for GST As is the case with CTCs purchased for export by a GST registrant, a purchaser that is not registered for GST can also purchase CTCs on a zero-rated basis if it meets certain conditions. However, these conditions are somewhat more onerous than those imposed on a GST-registered purchaser. Specifically, under Section 1 of Part V of Schedule VI to the ETA, a purchaser that is not registered for GST can purchase CTCs on a zero-rated basis if: the purchaser intends to export the CTC by means of a wire, pipeline or other conduit; the purchaser exports the property as soon after the property is delivered by the supplier to the purchaser as is reasonable, having regard to the circumstances surrounding the exportation and, where applicable, to the normal business practice of the purchaser; the property is not acquired for consumption, use or supply in Canada before the exportation of the property by the purchaser; after the supply is made and before the purchaser exports the property, the property is not further processed, transformed or altered in Canada, except to the extent reasonably necessary or incidental to its transportation; and the supplier maintains evidence satisfactory to the Minister of the exportation of the property by the purchaser. These are essentially the same conditions as those imposed on a GST-registered purchaser, except that the supplier must maintain evidence satisfactory to the Minister that the CTC was exported. Evidence that is satisfactory to the Minister is described in more detail below. 2 See: GST/HST Interpretation Application of GST/HST to a Supply of Natural Gas, Aug. 2,

7 Specific GST/HST issues Supplies of natural gas: One problem with the general zero-rating provision for natural gas is the requirement that CTCs not be further processed, transformed or altered in Canada except to the extent reasonably necessary or incidental to its transportation. When natural gas is transported, the natural gas liquids and/or ethane are often recovered from natural gas at straddle points and additional natural gas is provided to make up for the loss of energy content due to the recovery. This recovery technically results in the natural gas being processed, transformed or altered. As such, the ETA has certain export rules that are only applicable to natural gas. Specifically Section 15 of Part V of Schedule VI of the ETA zero-rates supplies of natural gas to non-registered purchasers where: the purchaser intends to export the commodity by means of a pipeline as soon as is reasonable after the gas is delivered to the recipient by the supplier of the gas, having regard to the circumstances surrounding the exportation and to the normal business practice of the recipient OR the purchaser stores the gas for a brief period and then subsequently exports the gas as soon as is reasonable; the natural gas is not acquired for use or consumption in Canada (other than by a carrier as fuel or compressor gas to transport the gas by pipeline) or for supply in Canada; after the supply is made and before exportation, the gas is not, except to the extent necessary to transport it, further processed, transformed or altered in Canada (other than to recover natural gas liquids or ethane from the gas at a straddle plant); and the supplier maintains evidence satisfactory to the Minister of the exportation of the gas by the purchaser. As can be seen, the provisions relating to natural gas specifically allow the natural gas to be zero-rated even in circumstances where recovery of natural gas liquids or ethane from the gas occurs at a straddle plant before the natural gas is exported. It should also be noted that under these rules, the export of natural gas can still be zero-rated even where the purchaser receives a supply of a storage service prior to export and the gas is stored in Canada. Supplies of electricity: There are also issues with electricity being processed, transformed or altered through the course of export since electricity undergoes changes during its transportation through a grid or along a line between the seller and the purchaser. Line losses (essentially the difference between the energy delivered to an electrical grid and the amount supplied to the recipient at its destination) are caused by the unavoidable resistance and leakage from electricity lines during transportation. The CRA has indicated in HQR Exportation of Electricity that it does not consider line losses to be a form of consumption and that, therefore, they do not affect the zero-rating of electrical transmission for export under paragraph 1(c) of Part V of Schedule VI of the ETA. During transportation, electricity may also undergo processing through transformers to step-up or stepdown the voltage. The CRA has indicated that the use of transformers is considered to be a process that is reasonably necessary for electricity transportation and therefore also does not affect the zero-rating provision under paragraph 1(d) of Part V of Schedule VI of the ETA. GST export documentary requirements The acceptability of the evidence of exportation (other than an export certificate) will depend on whether the entire shipment can be traced from its origin in Canada to the point where it leaves Canada on its way to a foreign destination. The list of documents that will establish evidence satisfactory to the Minister that the recipient has exported the property from Canada will vary depending on the mode of transportation used to export the CTC and the nature of the CTC. Satisfactory evidence may include the following documents: a copy of the sales invoice or purchase contract that identifies the property and the purchaser, which should be matched with the respective shipping or delivery instructions on the purchase order; a copy of the transportation document that describes the delivery service, such as a bill of lading; customs brokers or freight forwarders invoices that relate to the exported goods or shipments of exported goods; import documentation required by the country to which the goods are exported; 4

8 for pipeline shipments, meter tickets or other evidence that the goods were shipped or a pipeline statement that details the movements of the goods; or other evidence (that is not generated internally by the purchaser) that is satisfactory to the CBSA, which shows that the CTC has been exported. As long as the supplier maintains at least one of the documents above that can establish that the particular CTC was exported, this should meet the Minister s requirements. The CRA also indicated at the March 4, 2010 Canadian Bar Association ( CBA ) GST Round Table with the CRA (the 2010 GST Round Table ) that it would accept invoices and/or written agreements as satisfactory proof of export in an exchange of CTCs, provided they contain the information required to determine: that the CTC exchanged is the same class or kind as the CTC purchased; the place of delivery of the CTC to the registrant inside Canada; the place of delivery of the exchanged CTC to the buyer outside Canada; and the identity of the registrant including, its business number. GST issues if CTC is zero-rated but is not exported If a CTC was initially supplied on a zero-rated basis under Sections 15.1 or 15.2 of Part V of Schedule VI of the ETA, but is ultimately neither exported nor exchanged by the registrant as described in 2(c)(ii)(A), or in subsection 7(c), the supply of the CTC to the registrant will be included in the definition of imported taxable supply, unless the registrant acquired the CTC exclusively for consumption, use or supply in the course of its commercial activities. If the CTC is an imported taxable supply, the registrant purchaser will be required to self-assess and remit tax in respect of this supply under Division IV. Thus, if a GST-registered purchaser provides Canco or a related entity with a certificate that it intends to export the commodity, and it does not in fact do so, the purchaser may have to self-assess GST on this supply. However, as most GST-registered purchasers will be using the CTCs in their commercial activities, it is unlikely that they will have to pay GST in these situations. If a GST registrant purchases a CTC on a zero-rated basis for export and then does not export the CTC, Section of the ETA adds an amount to the registrant s net tax for the reporting period in which tax on the initial supply would have become payable had that supply not been zero-rated (i.e., generally the reporting period in which consideration for the initial supply of the CTC became due). The reason for this penalty is to reflect the fact that the purchaser gained a cash-flow benefit by acquiring the commodity on a zero-rated basis. The adjustment to net tax is calculated using the prescribed rate of interest under the Interest Rates (Excise Tax Act) Regulations (the basic rate plus four per cent), accruing from the date that tax would have been payable in respect of the initial supply and ending on the day on which the return is required to be filed. It should be noted that while the adjustment to net tax is calculated in the same manner as an interest charge, it is not interest for purposes of the ETA and, therefore, would not be subject to waiver or cancellation under Section of the ETA. Finally, if the GST-registered purchaser had paid GST/HST when it acquired the CTC, it would likely have claimed an ITC for the GST/HST it paid on its next GST return. As such, the addition to net tax in Section will invariably be more costly than any interest savings from avoiding the proper payment of GST/HST by incorrectly claiming that the CTC was zero-rated as a purchase for resale. Notwithstanding the above, the zero-rated status of the supply is maintained from the supplier s perspective even if the commodity is subsequently neither exported nor exchanged, provided that the supplier did not know, and could not reasonably be expected to have known, at or before the latest time at which tax would have become payable in respect of the supply, that the recipient would neither export the CTC nor exchange it for a commodity of the same class or kind situated outside Canada. Issues with drop-shipment certificates Under Section 179 of the ETA, it may be possible for a non-resident non-registered purchaser to acquire a CTC in Canada from a GST registrant without paying any GST/HST if the GST-registered supplier causes physical possession of the CTC to be transferred in Canada to a third person (the Consignee ) who is registered for GST. However, the non-resident must not consume the CTC and the Consignee must issue a drop-shipment 5

9 certificate to the registered supplier. A drop-shipment certificate states that the Consignee is a GST registrant who agrees to assume GST liability where the tangible personal property is not used in taxable commercial activities. In these circumstances, the ETA will deem the supply to be made outside of Canada and not subject to GST/HST. Thus, neither the registered supplier, nor the non-resident non-registrant will have to charge GST/HST on their supplies. The Consignee will have to self-assess GST/HST unless it is using the supplies exclusively in its commercial activities. However, problems could occur with respect to transfers of CTCs if the Canadian Consignee is purchasing the goods for resale at the same point of purchase in the pipeline. In these circumstances, and although it defeats the whole purpose of the drop-shipment rules, the CRA may argue that physical possession was not transferred directly from the GST-registered supplier to the Consignee (as the Consignee never received physical possession of the gas since it purchased and sold it at the same location), in which case the dropshipment certificate rules may not apply. Other problems arise because Section 179 of the ETA is only available if the purchaser is both a non-resident and non-registered. In a situation where a drop-shipment certificate is issued by the Consignee and the CRA later determines that the non-resident was carrying on business in Canada for GST purposes when the earlier transaction was conducted, the CRA has argued that the non-resident was required to be registered for GST and was thus a registrant at the time of purchase such that the drop-shipment rules do not apply. At another CBA GST Round Table with the CRA, on Feb. 26, 2009 ( 2009 GST Round Table ), the CRA was asked whether the supplier would be protected from liability in such a situation since the drop-shipment certificate was valid at the time it was issued. The CRA stated that in this case the supplier would be liable to collect tax on the sale to the non-resident and could be assessed accordingly. The CRA also stated that the non-resident would have to collect tax in respect of its sale to the recipient in Canada. It should be noted that while Section 179 of the ETA requires that the initial supply be made to a non-resident that is not registered for GST. The term not registered is used in the ETA rather than not a registrant. A registrant is defined to include someone who is registered, and someone who is required to be registered, whereas not registered is not defined, so it should be given its every day meaning. Even if the non-resident was required to be registered (and thus falls within the definition of a registrant), the drop-shipment rules should still apply in circumstances where the non-resident was not, in fact, actually registered. As such, it appears that the CRA s position is not technically correct. Regardless, due to the CRA s stated position, suppliers should be wary of accepting drop-shipment certificates when selling CTCs to non-residents. At an earlier CBA GST Round Table on March 3, 2005 ( 2005 GST Round Table ), the CBA asked the CRA whether the drop-shipment rules would apply to a situation where a U.S. company, U.S. Co., a non-resident, non-registrant, buys a CTC from Canco 1, a GST registrant, when the CTC is in a pipeline within Canada. U.S. Co. then resells the CTC to Canco 2, at a different location in the pipeline, and the carrier is notified of this nomination. Specifically, the CRA was asked whether it agrees that paragraph 179(5)(d) of the ETA would deem Canco 1 to have transferred physical possession of the CTC to Canco 2 (the consignee) and that, consequently, Canco 2 could issue a drop-shipment certificate. The CRA answered that subsections 179(2) and (5) do not apply and, as a result, Canco 2 may not issue a dropshipment certificate to the supplier. The CRA explained in document Supply of Natural Gas (April 28, 2006) that the application of the drop-shipment rules is based in part on physical possession of the same tangible personal property transferring between parties, as opposed to merely acquiring physical possession of an equivalent quantity of like property. Thus, according to the CRA, parties involved in the supply of CTCs such as natural gas that is completely commingled in the pipeline are not considered to have acquired physical possession of the same tangible personal property for the purposes of the drop-shipment rules. A person to whom physical possession of natural gas that is commingled in the pipeline is transferred cannot subsequently be considered to be transferring physical possession of the same property (gas) to another person for purposes of subsection 179(5) of the ETA. In this case, the CRA concluded that it is merely physical possession of an equivalent quantity of gas that is considered to be transferred to another person, not the identical molecules of gas and, thus, the drop-shipment rules could not apply. The CRA also noted that this is typical of pipeline industry agreements relating to CTCs. 6

10 The CRA was also asked to comment on drop-shipments at the CBA GST Round Table held on Feb. 26, 2008 ( 2008 GST Round Table ) and at the CRA and Tax Executives Institute Liaison Meeting held on Dec. 6, 2011 The CRA was asked whether the decision in Tenaska Marketing Canada v. R., [2007] G.S.T.C. 72 (Federal Court of Appeal), which is discussed in greater detail in subsection 6(a) of this paper, had affected its opinion on the use of drop-shipment certificates for CTCs. Briefly, the Court in this case recognized that Section of the ETA applies to natural gas even though it is commingled with other natural gas in a pipeline. The CRA responded that the case did not have any impact on its interpretation of drop-shipment rules because the case applied only to Section , which was not relevant to the interpretation of Section 179. At both meetings, the CRA indicated that it had not changed its opinion on drop-shipments as they relate to CTCs. It is unfortunate that the CRA has taken this approach since, based on the Tenaska case, it seems unlikely that a court would support the CRA s current position. Furthermore, the CRA s position is clearly contrary to the intentions of the ETA. North American Free Trade Agreement ( NAFTA ) considerations on exports to the United States Crude oil and natural gas benefit from a free duty when exported into the United States if they are certified as originating goods from a NAFTA country (Canada, the United States or Mexico). Without a NAFTA certificate, U.S. duty on crude oil is 5.25 cents 10.5 cents/bbl., but natural gas remains duty free (although Merchandise Processing Fees of up to $400 a day will apply to non-originating crude or natural gas pipeline entries). Under NAFTA, a good is considered to be NAFTA originating where the good is wholly obtained or produced entirely in the territory of one or more of the Parties. With oil, problems can arise when producers blend bitumen and heavy crude with condensates or diluents to transport it by pipeline. Due to the classification of certain types of diluents under NAFTA, if they have been commingled with crude oil in a pipeline, 100 per cent of the blended crude will be considered as non-originating, even though the percentage of non-originating diluents may be extremely small. Although not as common, natural gas can also lose its NAFTA duty-free status if it is commingled with natural gas that does not originate in a NAFTA country, such as foreign-sourced liquid natural gas, before it crosses into Canada or the United States. Therefore, where there is reason to believe that diluents or non-originating natural gas have been added, the seller and the exporter into the United States should take care to ensure that the certificate of origin is correctly issued. Specifically, the producer should ensure that it knows the origin of the diluents, as well as their tariff classification and whether originating and non-originating materials were commingled with the CTC in order to determine whether it can issue a valid NAFTA certificate. The exporter should also make sure it knows this information and that it has proper written representation or a certificate of origin from the producer. A party who imports goods into the United States using a NAFTA certificate that is later found to be incorrect may be assessed duty, interest and other penalties. Exporters should, therefore, ensure that contracts of sale provide the necessary written representations that the goods are originating and include indemnification provisions so they can seek reimbursement from the party who improperly certified the good. Provincial fuel tax issues for CTCs purchased for export Unlike the case for GST/HST and Quebec Sales Tax ( QST ), which have a zero-rating provision for sales of goods if they are purchased for export, the fuel-tax regimes in most provinces do not contain similar provisions. Manitoba and Saskatchewan do, however, provide for an exemption from fuel tax for a purchaser who is registered as an exporter and exports fuel in bulk from the province. An issue can arise when a vendor sells fuel within Quebec, Ontario, British Columbia or Alberta to a purchaser who exports the fuel from one of those provinces, even if the exportation occurs immediately after the purchase. This transaction will generally be zero-rated for GST/HST and QST, but the vendor will usually be required to charge the purchaser the applicable provincial fuel tax. We understand that Quebec has issued a number of assessments on this basis. In these circumstances the purchaser, who may be a non-resident, will likely have to apply for a refund from the province to recoup the provincial fuel tax it pays to the seller. Please note that where fuel is imported and exported between Ontario and Quebec, a tax reciprocity agreement between the provinces may reduce the tax remitting, refund and administrative requirements for importers and exporters as tax paid in the other jurisdiction is accounted for in the company s fuel tax returns. 7

11 Domestic to Foreign Supplier exports Export overview In circumstances where a supplier provides delivery of a CTC outside Canada (i.e., legal title transfers at a place outside of Canada), the goods will be considered to be supplied outside of Canada under paragraph 142(2)(a) of the ETA, and GST/HST will not apply to the transfer. Thus, if a GST-registered supplier sells CTCs to a third party with delivery occurring in the United States, GST/HST should not be charged. However, if the supplier exports the CTC from Canada before the CTC is delivered outside of Canada, it will have to comply with the various export requirements. Export declarations Under the Customs Act s Reporting of Exported Goods Regulations, an export declaration must be filed when goods are exported that are valued at $2,000 or more, and the final destination of the goods is a country other than the United States, Puerto Rico, or the U.S. Virgin Islands. This includes goods travelling through the United States to a foreign destination or directly to a non-u.s. destination. An export declaration is not required for goods being exported for U.S. domestic consumption or for any foreign, in-bond goods that are in transit through Canada for export to a foreign destination. As most CTC exports are likely made to the United States, an export declaration will not generally be needed. If exporting crude, electricity or natural gas, the National Energy Board Act requires the exporter to hold a valid licence, order or permit for the export. Sales to Crown agents The provincial and territorial governments are not required to pay GST/HST on their purchases. However, this applies only to direct purchases by provincial government bodies. The CRA maintains lists of provincial government departments, Crown corporations, boards, commissions and agencies that are eligible to make purchases without paying GST/HST. For instance, some entities such as Hydro Québec, are not considered to be a provincial entity exempt from GST/HST. As such, Hydro Québec is subject to GST/HST in the same manner as any other GST registrant. If making a sale of a CTC to an entity that claims to be a Crown agent exempt from GST/HST, a supplier should request proof of this tax-exempt status and attempt verification. Certain provinces or territories have agreed with the federal government to pay GST/HST. The government ministries, agencies, boards, commissions and Crown corporations of Ontario, British Columbia, Nova Scotia, New Brunswick, Newfoundland, Prince Edward Island and Nunavut pay GST/HST on their taxable purchases. In these cases, suppliers may not rely on or accept any exemption requests or certifications requesting GST/HST relief at the point of sale. Changes or Corrections to Prices Where there is a price increase after invoicing, GST/HST should be collected on the increase and reported in the supplier s GST/HST return. In these circumstances the purchaser will be entitled to claim input tax credits ( ITCs ) on the additional amount in the same way as it would for the initial charge. When there is a price decrease, e.g., a volume rebate after invoicing and after collection, no GST/HST adjustments are required where both parties are GST registrants, as the purchaser has usually already claimed an ITC. Where GST/HST is not rebated by the supplier and both parties are registrants, there are no GST/HST reporting requirements. Where the supplier makes a price adjustment decreasing the price and credits GST/HST, the purchaser must include the GST/HST in its GST/HST return if it has already claimed an ITC for this GST/HST. While it is possible to issue a credit note to refund the GST/HST on the overpayment, this is a fairly technical procedure and should only be used if no ITC can be claimed. 8

12 Storage Fees Storing and taking up natural gas Generally, the provision of storage fees and the taking up of natural gas in Canada are taxable supplies. However, certain exemptions may exist if the gas or other CTCs are intended for export. Specifically, Section 4 of Part V of Schedule VI of the ETA zero-rates a service acquired by a GST registrant in respect of tangible personal property that is ordinarily situated outside of Canada, is temporarily imported for the sole purpose of having the service performed and is subsequently exported. This provision would zero-rate supplies of storage fees on CTCs that were temporarily brought into Canada to have a service performed (such as where oil is imported in order to be processed and is subsequently exported). However, this provision only exempts storage services in relation to CTCs that were acquired outside Canada and are temporarily imported into Canada and will not apply to CTCs purchased inside Canada. In addition to the rule above, Section 15.3 of Part V of Schedule VI of the ETA zero-rates a service of storing natural gas for a period and returning equivalent gas at the end of the period where the recipient of the supply is a non-resident person who is not registered for GST/HST purposes. In order for this section to apply, the National Energy Board ( NEB ) must have issued a licence to the recipient to export the natural gas. Finally, as is the case with many of the other zero-rating provisions, the supplier must not have known and could not reasonably have been expected to have known, at or before the latest time at which tax in respect of the supply of the service would have become payable if the supply were not a zero-rated supply, that the recipient would not export the gas within a reasonable period of time or that the gas would be used, consumed or further processed beyond what is contemplated by the zero-rating conditions. In order for this provision to apply, it is not necessary that the gas be physically maintained in storage. The critical factor is that the service provider returns natural gas to the non-resident at the end of the period that is equivalent to that which was owned by the non-resident, non-registrant at the beginning of the period. Due to the fungible nature of the commodity, it is not necessary that the same molecules of gas that were stored be returned to the non-resident at the end of the period, as a restriction along those lines would make it impossible to ever use this exemption. However, the natural gas that is returned must be in the same measure (usually marked in terms of energy content) and state (i.e., extent of processing). As discussed generally for CTCs above, when natural gas is stored in Canada before it is exported to a nonresident, the seller must maintain evidence satisfactory to the Minister of the exportation of the gas. At the 2010 GST Round Table, the CRA indicated that it would accept as evidence of exportation by the third party who stores the natural gas that it has contracted with the non-resident to ship the gas, provided the documentation establishes that the gas shipped is or includes the gas supplied by the seller. As is the case with certain export provisions described above, the consumption or use of some of the gas as fuel or compressor gas for transportation purposes, or processing of the gas at a straddle plant to recover natural gas liquids or ethane from the gas, does not disqualify the supply of the service from being zero-rated. However, Section 15 of Part V of Schedule VI of the ETA does not universally make a supply of fuel or compressor gas zero-rated. The CRA has concluded that if the gas owner makes a separate charge to the pipeline carrier for fuel gas or the pipeline carrier makes a separate charge for the gas consumed during transportation, it could be considered a separate supply and subject to GST/HST. The CRA confirmed this opinion on fuel and compressor gas in Headquarters Letter (Jan, 26, 2011) after reviewing a pipeline operator s example contract and invoice that did not charge or delineate the consumption of fuel or compressor gas. If the recipient is resident in Canada or registered for GST, then the supply of storage services of natural gas will be considered to be made in Canada under paragraph 142(1)(g) of the ETA and will be subject to GST/HST unless the services are provided wholly outside of Canada. Taking up surplus electricity Generally, if the recipient is registered for GST, the taking up of surplus electricity (which is equivalent to a storage service) will be a taxable supply unless the service is provided wholly outside of Canada. However, if the recipient is a non-resident who is not registered for GST, Section 15.4 of Part V of Schedule VI zero-rates 9

13 taking up surplus electricity for a period and returning the electricity if certain other conditions are met. Specifically, the electricity must be exported as soon as is reasonable after the period, and the NEB must have issued a licence. As with natural gas above, the electricity that is delivered at the end of the period does not have to be the exact same electricity, but rather must be in the same measure and state as that which was taken up or supplied at the beginning of the period. However, as most Canadian electricity dealers are registrants, they will be unable to benefit from this provision. Purchases GST overview The general rule is that a GST registrant should charge GST/HST on virtually all supplies of goods and services made in Canada. Exceptions to this rule include zero-rated supplies (such as prescription drugs, medical devices, basic groceries and many types of exports) and exempt supplies (which include financial services, many services in the MUSH sector [Municipalities, Universities, Schools and Hospitals], healthcare services and used residential property). Subject to a few exceptions, which are described in this paper (e.g., exported CTCs which are zero-rated and supplies that are considered to be exempt financial services [see section below on, Financial Services: Derivatives and Contracts for Future Delivery ]), supplies of CTCs made in Canada will generally be subject to GST/HST. Section 143 of the ETA contains a deeming rule such that purchases of CTCs from a non-resident who is not a GST registrant and is not required to be registered (i.e., because it is not carrying on business in Canada) are deemed to be made outside Canada and no GST/HST needs to be paid or reported. As such, non-registrants who are not resident in Canada should generally not be collecting GST/HST. However, the recipient of the supply may have to self-assess GST/HST if the CTC is not used exclusively in its commercial activities. The reason for these rules is that the Canadian government does not want people to pay GST/HST to entities that are not registered for GST and are not located in Canada, as it is difficult to force these entities to remit the GST/HST. GST consignment issues Sales of commodities on a consignment basis by a non-resident, non-gst registrant can present particular problems. In a typical cross-border sale by consignment, a non-resident, non-registrant will agree to sell a commodity to a Canco, who takes delivery at a Canadian port before customs clearance, acts as the importer of record, and pays GST/HST and any customs duty on importation if applicable. Canco will take physical possession of the commodities, but the non-resident retains title for the time that the commodities are stored either by Canco or by a third-party storage operator. The non-resident pays all costs of storing the commodity and incurs the cost of financing until Canco locates a customer in Canada. When Canco locates a customer, there is a flash sale of the commodity from the non-resident to Canco, followed by an immediate resale by Canco to its customer. Non-residents may prefer this arrangement because it protects them from credit default risks, while Canco may prefer this approach, as it does not have to finance the commodities until they are sold. The CRA was asked about these types of consignment arrangements at the 2008 GST Round Table and most recently at the CBA GST Round Table with the CRA held on Feb. 22, 2012 ( 2012 GST Round Table ). Although the official answers from the CRA from the 2012 GST Round Table were not available at the time of writing, the discussions indicated that the CRA had not changed its opinion from that offered at the 2008 GST Round Table. At that Round Table, the CRA indicated that in this factual scenario, the non-resident would be considered to be carrying on business in Canada because it holds an inventory of goods in Canada and sold the goods in Canada and, thus, would be required to register for GST and charge the GST/HST on the sale to Canco. In consignments, Canco may not have an obligation to purchase the goods and, therefore, would not be a recipient of a supply of the commodities unless and until it sells them to a customer. Since Canco did not own the commodities at the time of import, the non-resident would be considered to be the de facto importer. In these circumstances, the CRA has stated that Canco would not be able to claim ITCs for the GST paid on importation. 10

14 Purchases for import Customs import requirements When a GST-registered company purchases a CTC in the United States for importation into Canada, it must file customs accounting declarations in prescribed form in its capacity as the importer of record. The tariff items for electricity, natural gas and crude provide for a free rate of duty. However, while no duties are payable on these items (assuming that they are imported from a country with most-favoured nation status) under Section 212 of the ETA, GST at the rate of five per cent is payable on the importation of the CTCs based on their value for customs purposes. Under the Customs Act, the transaction value is the primary method of customs valuation in arm s length situations and is generally based on the price paid or payable in a sale for export to Canada to a purchaser in Canada subject to certain adjustments. There are a large number of reporting issues that arise from the importation of CTCs into Canada. The current procedures for the importation of CTCs can be found in Customs Notice 438 ( CN-438 ) where the CBSA states that reporting and accounting are not required for: CTCs sourced domestically in Canada and transported through the United States for re-importation at a destination in Canada; CTCs exported for storage and reimported at a later date; and CTCs originating in the United States and travelling in transit through Canada for export (for example, natural gas sent from New York to Seattle, where the natural gas is shipped, at least in part, through pipelines located in Canada). These exemptions from reporting and accounting are found in Section 6 of the Reporting of Exported Goods Regulations under the Customs Act. It should be noted that the rules dealing with importation of electricity differ between the United States and Canada. While, as noted above, Canada has a number of importation requirements, the United States does not. Specifically, note 6(b) to Chapter 27 of the U.S. Harmonized Tariff Schedules provides that electricity shall not be subject to the general entry requirements for imported merchandise. In-transit issues We understand that the CBSA is currently working on a Memorandum D17-1-xx to deal with procedures for the importation of CTCs. A draft of this memorandum ( Draft D17-1-xx ) sets out when CTCs are considered to be imported into Canada (subject to certain exceptions). Included on this list are CTCs exported from Canada and subsequently imported at a destination in Canada at a later date and CTCs that originate in a foreign country and travel through Canada for subsequent exportation. In Draft D17-1-xx, the CBSA states that in-transit CTCs many not be considered imported (and, thus, not subject to accounting and reporting requirements) if certain conditions are met. Specifically, a CTC that starts in Canada may not be considered imported if: it is transported in the same measure and state from one place in Canada to another place in Canada via a route over foreign territory or waters; the CTC is not diverted for consumption in the foreign territory; and adequate books and records are maintained by the importer to allow the in-transit CTC shipment to be reconciled with the reporting submitted by the carrier and the accounting submitted by the importer. Similar rules (in reverse) apply to CTCs that originate in the United States and are transported through Canada to a place outside Canada. Physical losses can occur from natural gas or oil pipelines during their transportation. In Draft D17-1-xx, the CBSA makes it clear that any losses that occur during transportation, and any gas/oil consumed during transportation will still be considered to have travelled in-transit and will not be considered to be separately imported or exported. However, if gas/oil is provided to a carrier as a transportation cost to move the natural gas/oil, this should be included in the value of the natural gas/oil. 11

15 Storage and Park transaction issues: Although the CBSA mentions in Draft D17-1-xx that CTCs may be considered to be in-transit (and not imported as set out above) if the transportation is temporarily halted to store the CTC (e.g., natural gas in the line or in a geological formation), the CBSA also states that this will only be the case where the storage operation is necessary because of and/or is incidental to the transportation of the CTC. In many cases, it will be difficult to demonstrate that the storage operation was necessary or incidental to its transportation. Another issue is that the CBSA states that if a CTC is stored for an indefinite period inside or outside Canada, it will not be considered in-transit. The CBSA does not provide details on what length of storage time will be considered acceptable, although it does state that long-term storage (which it defines as periods exceeding 30-days) may be able to be accommodated under Bonded Warehouse provisions. This implies that if the CTC is stored for more than 30 days (and possibly some amounts less than 30 days), the CBSA will not consider the supply to be in-transit. In Draft D17-1-xx, the CBSA states that park transactions (where natural gas belonging to a person other than the carrier is stored in the pipeline) should be treated the same way as storage transactions described above. Issues with GST and QST on supplies in Canada prior to import Many CTCs, such as fuel, are sold under the shipping term Delivered Ex Ship ( DES ) or Delivery Duty Unpaid ( DDU ). Under both of these shipping terms, the seller will deliver the goods at an agreed port of arrival. The buyer is responsible for importing the goods into Canada and paying the applicable GST and duties. If the supplier is a non-resident who is not a GST registrant, it should not be required to collect GST from the buyer. However, where the supplier is a GST registrant, situations have arisen where the CRA has required the supplier to collect GST/HST on the supply to the buyer, even where the buyer is importing the product and paying Division III GST on importation. This effectively means that the buyer may have to pay tax twice on the same amount. This can create a significant burden on the buyer, notwithstanding the fact that a registered buyer should be able to claim ITCs for both amounts. This can be even more exacerbated if the supply is in a participating province such that instead of only paying a five-per-cent-gst on importation, the buyer may now have to pay an additional 13 per cent HST to the GST registered seller. Section 144 of the ETA deems a supply of goods that has been imported but not yet released for customs purposes to have been made outside Canada. Historically, when customs entries were done by paper entry, release would not occur until a ship was unloaded and the B3 import form was stamped. In such a case, the seller would not be required to charge GST/HST because the delivery occurred prior to release, and the buyer would only pay GST on importation. However, now with electronic releases, importers can get release privileges in advance of the arrival of the vessel in Canadian waters. In these circumstances, delivery will occur after release, and Section 144 will no longer deem the supply to be made outside Canada. GST registrants making sales in Canada should ensure that they are charging the applicable sales taxes if they make supplies in Canada, even in circumstances where the CTC is delivered under the DES or DDU delivery terms and the buyer is acting as the importer of record. Please note that there is currently no comparable provision to Section 144 of the ETA in the Act Respecting the Quebec Sales Tax ( QSTA ). As such, Quebec currently takes the position that QST registrants are required to collect QST on sales that are made on a DES or DDU basis. This has resulted in a number of unwary QST registrants being assessed for failing to collect QST where the goods are delivered in Quebec under the DES or DDU delivery terms in circumstances where the supply is deemed to be made outside of Canada for the purposes of the ETA and not subject to GST/HST. As part of the harmonization effort between the ETA and the QSTA for QST purposes, Quebec has proposed to adopt a rule similar to ETA Section 144 such that the current difference between the two Acts on this point should not be an issue in the future. New proposals to shorten the time frames for reporting and remitting Under CN-438, importers have the option of accounting for CTCs on either a transaction-by-transaction basis or under the procedures set out in the notice. The notice sets out both reporting and accounting procedures. Generally, people importing CTCs into Canada through a pipeline (or other conduit) are allowed to report their imports of CTCs (including electricity) on a monthly basis. The importers must present a consolidated V type Form B3, Canada Customs Coding Form to account for the previous month s importations. Currently, where broker security is not used, the accounting documents must be presented on the 25 th of the month for CTCs imported during the preceding month and must be accompanied by the applicable payment. 12

16 If broker security is used, the accounting documents must generally be presented on the 24 th of the month (or the last business day prior to the 24 th if the 24 th day is a weekend or holiday) for CTCs imported during the preceding month, and the amount will generally be payable by the last business day of the month of filing. The CBSA has recently announced that, as part of its CBSA Assessment and Revenue Management initiative, it is proposing to change the time frames for accounting for CTCs as set out in CN-438 described above. Specifically, the CBSA has proposed in Draft D17-1-xx that accounting documents will be due on the ninth day of the month for CTCs imported during the preceding month, and that the payments will be due by the 15 th of the month of filing. As we understand that the industry generally does not have its invoicing finalized until after the 15 th day, the proposed dates by the CBSA could cause significant issues for companies dealing in CTCs. In many cases, these companies will have to file monthly adjustments to change the amounts filed to the actual amounts imported. This issue has been raised with the CBSA, and it is hoped that the CBSA will keep the current time frames as set out in CN-438. AMPS penalties A number of issues can arise for customs purposes that may give rise to penalties. For example, problems may occur when an importer claimed an incorrect value for duty on imported goods that was lower than the amount that should have been declared, found out about the error, but did not correct the importation documents within the prescribed time. The CBSA has implemented an Administrative Monetary Penalty System ( AMPS ) to help ensure that taxpayers file the correct customs documents and notify the CBSA of any relevant changes. Where an importer makes improper accounting declarations, the importer may be liable for AMPS in addition to duties, taxes and interest otherwise payable. AMPS penalties apply to incorrect declarations of tariff classification, value for duty, origin, quantity, as well as failure to report as required or to maintain books and records. There are currently approximately 150 potential contraventions. Most AMPS penalties increase as more contraventions of the same type are found; e.g., the first penalty may be $150, but this will increase to $225 per instance if the same issue arises on a subsequent audit and $450 per instance on the third audit. These penalties may apply even if no additional taxes are owing. Voluntary disclosures If faced with the situation where the correct GST/HST amount was not remitted, the GST-registered supplier can minimize penalties and interest by making a voluntary disclosure (this can only be done before an assessment or audit occurs and if other conditions are met). Effective April 1, 2007, penalties were eliminated and a new prescribed interest rate is charged on overdue amounts. A voluntary disclosure will eliminate penalties, but it will not eliminate the interest payments except in wash transactions. A wash transaction takes place when the purchaser who should have paid GST/HST could have claimed an ITC on the transaction and, thus, the government has not lost any revenue. Wash transactions reduce the interest to four per cent on the tax that should have been charged. On a voluntary disclosure of a wash transaction, the CRA will generally waive the four-per-cent-interest payment. Please note, however, that it is not clear that the CRA s published policy on the reduction and waiver of interest on wash transactions will apply to tax paid on the importation of goods. As CTCs are generally imported into Canada on a duty-free basis, and as importers of CTCs are usually GST registered, the importer will underpay the GST if the CTCs are undervalued when imported, but the government is not really losing any revenue as the GST-registered importer would claim an ITC for any GST paid. However, an issue could occur with respect to voluntary disclosures for interest on GST underpaid on imported goods. At the 2005 GST Round Table, it was understood that the CBSA was on the verge of finalizing its position that interest will be waived in circumstances where the importer makes a voluntary disclosure and is a GST registrant entitled to ITCs. While we understand that the CBSA will generally provide relief from interest in those circumstances, the CBSA has not yet published a policy on this issue. It is hoped that the CBSA will publish its policy in the near future. Natural gas loan transactions In loan transactions, an importer may borrow natural gas and then import it into Canada. In Draft D17-1-xx, the CBSA states that the borrowed natural gas will be considered to be imported into Canada, and the importer will have to report the importation and pay any applicable taxes and duties. It should be noted that since there 13

17 was no sale for export to Canada (the importer did not actually purchase the natural gas), the transaction value method cannot be used to determine the value for duty of the natural gas, and another method must be used. Backhaul transactions for natural gas In a backhaul transaction, the parties agree that natural gas will be transported in a direction opposite to the physical flow of gas in the pipeline. This typically happens when a pipeline responsible for transporting gas delivers it at a point upstream from where it received the gas. Notwithstanding that the natural gas was almost certainly not physically imported into Canada (the natural gas contractually delivered at the upstream point is likely not the same natural gas which was delivered to the pipeline downstream), the CBSA has stated in Draft D17-1-xx that the natural gas will be considered to be imported into Canada regardless of the physical flow of natural gas. Similarly, backhaul transactions where the gas is contractually exported from Canada will be considered to be an export regardless of the physical flow. NAFTA considerations Electricity, crude oil and natural gas benefit from a free duty when imported into Canada, even without a NAFTA certificate of origin. As discussed above with regard to exports to the United States, there are potential issues that may arise when the origin of diluents in crude oil pipelines is unknown or in question, or when foreign-sourced liquid natural gas may be commingled with Mexican or U.S. gas in a pipeline. Due to the potential issues and penalties for incorrectly claiming NAFTA, the additional documentary requirements and the absence of any duty benefits, importers should generally not claim NAFTA on CTCs imported into Canada unless there is a good reason for doing so. Documentary requirements for Input Tax Credits In addition to meeting the test for claiming ITCs, registrants may not make such a claim unless they have also fulfilled the documentary requirements as set out in the Input Tax Credit Information (GST/HST) Regulations. Documentary requirements for domestic supplies include: the name of the supplier, the date of the supply, the total amount paid, the amount of tax paid or payable (or a statement that tax is included), the GST registration number of the supplier, the terms of payment and a description of each supply sufficient to identify it. For GST paid on imported goods, the customs declarations will generally be enough to meet the documentary requirements. The documentary requirements can cause issues in situations where there is no invoice (i.e., sales under longterm supply agreements). When invoices are not issued, the contract for the CTC should include a recitation of the supplier s GST registration number. The contract should also specify whether GST is payable in addition to the purchase price or is included in the price. Finally, periodic documentation should be made available to confirm the amount of GST collected and paid. Issues can also arise where the CTC recipient receives a certain amount of the product from a pipeline at an agreed upon price, and the recipient issues a reverse invoice (i.e., the recipient issues an invoice to itself). However, as long as all of the documentary requirements for claiming ITCs are met and both parties agree to allow the recipient to reverse invoice, the CRA stated at the 2005 GST Round Table that the recipient should still be able to claim ITCs. Exports of a CTC for Re-import Issues with exports for re-import and the Tenaska Case One issue that arises with supplies of CTCs is that the pipelines for transmitting these goods cross back and forth across the Canada-U.S. border. In order to deal with this reality, Section of the ETA provides that where a CTC is transported by means of a wire, pipeline or other conduit outside Canada solely for the purpose of being delivered from one place in Canada to another place in Canada, the CTC is deemed not to be exported or imported. As well, paragraph (c) provides that where a CTC is transported from a place in Canada to a place outside Canada where it is stored or taken up as surplus until further transported to a place in Canada in the same measure and state, the CTC is also deemed to be neither exported nor imported. As a consequence of these provisions, no GST will apply when the CTCs are reimported into Canada. As mentioned above, CN-438 states that in these circumstances reporting and accounting are not required. 14

18 In the 2005 GST Round Table, the CRA was presented with the situation where a GST-registered Canco transported natural gas by pipeline from one place in Canada to another place in Canada via the United States. For insurance and regulatory purposes, Canco sold the natural gas to its U.S. parent company at the Canada- U.S. border, and the gas was sold back to Canco upon importation into Canada. The CRA was asked whether Section of the ETA would apply so that no GST would be payable upon re-importation into Canada. According to the CRA s response, the intended purpose of Section of the ETA was to address crossborder, in-transit pipeline shipments of CTCs, taking into account the fungible nature of such commodities. Although the CRA did not answer the question, it noted that as a result of various assessments that had been raised, it had just recently become aware that Section and other provisions may or may not apply to fully reflect the practical aspects of cross-border, in-transit pipeline shipments of CTCs such as natural gas, and that they were looking into the issue. This issue was ultimately resolved in Tenaska Marketing Canada v. R., [2007] G.S.T.C. 72 (Federal Court of Appeal, on appeal from [2006] G.S.T.C. 66) ( Tenaska ). Tenaska was a corporation that bought natural gas in western Canada and shipped it to eastern Canada via a pipeline that went through the United States. Tenaska transferred title to the gas to a U.S. affiliate when the gas crossed the border into the United States, and acquired title again when the gas re-entered Canada. It took the position that no GST applied on reimporting the gas from the United States into Canada. However, the CBSA assessed Tenaska for GST not paid on its importation of the gas into Canada. The federal Court of Appeal concluded that the change of ownership of the Canadian natural gas during its transit through the United States and the commingling of Canadian and American gas on the American part of the pipeline are not relevant to determine the purpose of the delivery from one place in Canada to another place in Canada. Thus, the Court of Appeal directed the CBSA to apply Section in Tenaska s favour. At the 2009 GST Round Table, the CRA was asked about the status of a written policy for the application of Section of the ETA since experience indicated that the CRA and CBSA were reticent to apply the Tenaska decision. The CRA responded that it was going to await further determination by the courts before it developed any written policy. More recently, in paragraph 22 of Draft D17-1-xx, the CBSA stated that a CTC may still be considered to be in-transit (and not imported into Canada) in circumstances where there is a change of ownership contemplated in the contract between a Canadian and U.S. affiliate as long as the sole purpose of the change of ownership is used to facilitate the transportation of goods, and documentary evidence is provided to the CBSA. However, the CBSA only states that they may accept documentary evidence as sufficient proof that a given quantity and quality of CTC was in-transit, and further states that the transportation of the CTC must demonstrate a logical connection between the two cross-border movements of goods, as determined by the CBSA. Thus, parties should ensure that all of the documents demonstrate that title was transferred merely for convenience, and that they have significant amounts of paperwork as evidence before relying on the Tenaska case to argue that CTCs were not imported into Canada. Issues with net reporting In certain cases, similar quantities of CTCs may be imported and exported from Canada during the same period. For instance, a Canco could import natural gas into Canada one day and export the same amount the next day. Assuming that the natural gas was not in-transit (as discussed elsewhere in the paper), the CBSA specifically states in Draft D17-1-xx that the imports and the exports cannot be offset against each other. Each import and export must be treated as a separate transaction, and each must be reported separately. The CBSA will not allow the reporting of net quantities. Swaps, Barters and Exchanges of CTCs Barter issues Section 153 of the ETA contains rules dealing with barter transactions, such that most barter transactions will be subject to GST/HST. If a GST registrant (Canco) agrees to supply a CTC to another GST registrant in Canada and, in exchange for the CTC, the second GST registrant agrees to supply Canco with goods or services, the GST/HST implication of such a transaction is that both Canco and the other GST registrant will be required to charge each other GST/HST. Assuming no other consideration is paid, the GST/HST amounts should generally 15

19 set-off against each other, and no GST/HST should actually have to be collected or remitted. The GST/HST will nevertheless have to be reported in Canco s GST/HST returns although it will likely be able to claim an offsetting input tax credit. The ETA provides for certain exceptions to the barter rule in subsection 153(3) for barters of property of a particular class or kind. For example, if Canco has excess inventory of a CTC in Western Canada but needs inventory in Eastern Canada and another Canadian energy company, which is a GST registrant, is in the opposite position and agrees to a swap of the CTC, the value of the consideration paid for the CTC for GST/HST purposes is deemed to be nil. As a consequence, no GST/HST has to be charged or reported in Canco s or the other company s GST/HST returns. The CRA has indicated in CRA GST/HST Notice 269 Draft GST/HST Memorandum 3.7 Natural Resources (February 2012) that the determination of whether the properties are of a particular class or kind is a question of fact and is based on the following criteria: they are similar in their constituent materials and general appearance; they have the same primary end use; they have been subject to a similar level of processing or refining where applicable; and they are capable of performing the same primary functions. Parties to a barter should ensure that the materials on both sides of the transaction meet this definition. Straddle plants (natural gas) Natural gas liquids ( NGLs ) are extracted from natural gas in a pipeline at straddle plants. Make-up gas is returned to the pipeline to make up for the loss of energy content. No money is paid by either party for the exchange. The GST implications of such a transaction are that the value of the consideration is deemed to be nil under subsection 153(6) of the ETA. Thus, there are no GST collection or reporting requirements. This deeming provision may also apply to intermediary transactions where a third party acquires the rights to the NGLs from the owner of the gas and promises to provide the make-up gas after processing by the straddle plant. Subsection 153(6) of the ETA would apply to the transaction between the gas owner and the third party, as well as between the third party and the straddle plant operator. Cross-border exchanges with non-residents In certain circumstances, a GST registrant, say Canco, may agree to purchase in Canada a CTC from a nonresident who is not a GST registrant in exchange for the delivery by Canco of a CTC of the same type to the nonresident outside Canada. The ETA contains provisions dealing with these supplies such that no GST/HST should apply to the purchase of the CTC from the non-resident, and the supply of the CTC to the non-resident should be zero-rated under Section 15.1 of Part V of Schedule VI of the ETA. Buybacks In certain circumstances, a GST registrant such as Canco may enter into an agreement to sell a fixed quantity of CTCs to another GST registrant who does not want the entire quantity. If Canco agrees to buy back the excess, there is an issue whether the GST-registered purchaser has to charge GST/HST on the buy-back. The answer will depend on the invoicing between the parties. However, GST/HST will generally apply on the buyback if GST/HST was charged on the original sale. Financial Services: Derivatives and Contracts for Future Delivery If a derivative transaction is classified as a financial service, it will be exempt from GST/HST under Part VII of Schedule V of the ETA (unless it is exported, in which case it will be zero-rated in certain circumstances described in Part IX of Schedule VI). If the derivative transaction is not a financial service, it will be a taxable supply. Whether or not a particular instrument is considered a financial instrument is a question of fact and can be fairly complicated. In order to deal with these types of issues, we have provided some general guidelines below. 16

20 It should be noted that if a GST-registered supplier sells exempt financial instruments, it will generally not be able to claim ITCs in relation to GST/HST paid on goods and services used in its business of selling these financial instruments. Contracts - Settled only in cash Over-the-counter derivatives where the agreement only provides for the payment of money calculated with reference to movements in the price of a CTC should fit with the definition of a financial instrument in subsection 123(1) of the ETA since they represent a right to be paid money, which is included in the statutory definition of a debt security, also in subsection 123(1) of the ETA. The transfer of a financial instrument will be an exempt transaction for GST/HST purposes under Part VII of Schedule V to the ETA (unless made to a non-resident, in which case it could be zero-rated). Thus, no GST/HST should apply to the purchase or sale of a contract that can only be settled in cash. The CRA has stated that swap transactions (financial transactions in which two counterparties agree to exchange streams of payments over time according to a predetermined rule) that are settled only in cash are generally exempt financial services. 3 It should be noted that even though the CRA in GST ruling ; clearly recognized that some swaps may not be settled in cash, it still held that swap transactions were exempt debt securities. Thus, an argument could be made that even swaps that can be settled in a commodity will also be considered to be exempt debt securities. Contracts - Settled in the actual commodity Options or contracts for the future supply of a commodity, where the option or contract is traded on a recognized commodity exchange, fit within paragraph (f) of the definition of financial instrument in subsection 123(1) of the ETA. As such, the transfers of these financial instruments are generally exempt from GST/HST (or possibly zero-rated if transferred to a non-resident), and no GST/HST should be charged or paid on the sale or purchase of a contract or option to purchase a CTC if the contract or option is traded on a recognized exchange. However, in order to be a financial instrument, the option must be traded on a recognized commodity exchange. However, the CRA does not have a list of such exchanges. When the matter of what is considered to be a recognized commodity exchange was discussed at the 2005 GST Round Table, the CRA stated that, given the difficulty of creating and maintaining a complete and accurate list of this nature, it is unlikely that it will ever have such a list of recognized commodity exchanges. Nonetheless, the CRA stated that a commodity exchange would generally be recognized where the exchange is recognized by the applicable regulatory authority, whether or not the commodity exchange is resident in Canada. The CRA provided the example of the Winnipeg Commodity Exchange, which is recognized by the Manitoba Securities Commission and is thus an example of a recognized commodity exchange. It is not clear what the CRA s current position is with respect to derivatives that can be settled by either cash or delivery of a commodity. In Application of GST/HST to brokering of physical commodities 5 ( ), the CRA noted that a contract for the future supply of a commodity that contemplates settlement by provision of the physical commodity could not conclusively be characterized as a debt security or an option or a contract for the future supply of a commodity for purposes of the definition of a financial instrument. Although the matter is not certain, the CRA appears to take the view that the supply of an over-the-counter derivative (i.e., not sold on a recognized commodity exchange) that provides for the delivery of the underlying CTC will be taxable as if the parties were selling the CTC directly. The CRA has also remarked that in a forward contract (an agreement to buy or sell a financial asset or commodity at a certain time in the future for a certain price which is not normally traded on an exchange), the main variable in the contract is the market price of the financial asset or commodity. One party agrees to buy the underlying asset on a specified date for a specified price; the other party agrees to sell the underlying asset on the same date for the same price. The CRA stated that: If the contract only contemplates settlement by the 3 See: GST ruling ; , Sept. 3, 1997; and GST ruling ; , Aug. 6, August 6, February 1,