Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 159878
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Refund of recaptured input tax credits (RITCs) on electricity charge types
Thank you for your letter concerning the eligibility of a refund on the recapture of input tax credits (ITCs) for the provincial component of the harmonized sales tax (HST) on various electricity charge types. We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
1. […](the Registrant) has provided a third-party authorization letter to have […][the Representative] act on its behalf.
2. The Registrant is considering amending its RITC calculations based on [the Representative]’s interpretation of the RITC rules for large businesses in section 236.01 of the Excise Tax Act (ETA).
3. [The Representative] believes the Registrant should only calculate RITCs with respect to “Charge Type 101 – Net Energy”, which [the Representative] describes as the single, separate supply of electricity.
4. As of [mm/yyyy], the Registrant has been calculating RITCs with respect to the purchase and use of electricity in Ontario using a proxy of […]%.
5. The Registrant’s […] plant does not purchase its electricity from a local distribution company (e.g. Hydro One) nor does it purchase it from a retailer of electricity (e.g. Direct Energy).
6. The Registrant’s […] plant is directly linked to the “high-voltage grid” maintained by Hydro One.
7. The Registrant purchases its electricity as a registered market participant in Ontario, administered by the Independent Electricity System Operator (IESO).
8. The Registrant, as a registered market participant, receives monthly settlements from the IESO. These settlements outline various charge types including Net Energy, Global Adjustment, Debt Retirement, Network Service Charge, etc.
9. The IESO serves as a settlement broker, issuing invoices detailing the various charge types to the Registrant.
10. The Registrant deposits its monthly settlement payment into the IESO’s Settlement Clearing account. Based on the charge type, the IESO then settles the various amounts with the different electricity generators, Hydro One, Ontario Power Authority, Ontario Electricity Corporation, etc.
11. As part of its submission, [the Representative] provided the following […][information], which details the charge type number, a brief description of the charge type, the entity the charge type is paid to, and any additional details regarding the charge type:
Charge Type: 101
Description: Net Energy Market Settlement for Non-Dispatchable Load
Paid To: Generator
Details: Hourly consumption of energy
Charge Type: 146
Description: Global Adjustment Settlement Amount
Paid To: OPA then to Generator
Details: Difference between 101 and the contract price. Political decision to cap price.
Charge Type: 150
Description: Net Energy Market Settlement Uplift
Paid To: Generator
Details: Line loss on high voltage grid
Charge Type: 155
Description: Congestion Management Settlement Uplift
Paid To: Generator
Details: IESO tells generators to generate. If there is a loss, they must be compensated.
Charge Type: 163
Description: Additional Compensation for Administrative Pricing Debt
Paid To: Generator
Details: Market is suspended and prices have to be calculated manually.
Charge Type: 169
Description: Station Service Reimbursement Debit
Paid To: Generator
Details: Covers losses at generator locations to get energy onto grid
Charge Type: 170
Description: Local Market Power Rebate
Paid To: Credit to Consumer
Details: If Generator was overpaid for some reason
Charge Type: 183
Description: Generation Cost Guarantee Recovery Debit
Paid To: Generator
Details: If a gas Generator is told to start up… they may lose money.
Charge Type: 186
Description: Intertie Failure Charge Rebate
Paid To: Credit to Consumer
Details: Generators fined for not providing timely energy
Charge Type: 250
Description: 10-Minute Spinning Market Reserve Hourly Uplift
Paid To: Generator
Details: The cost a Generator has to keep operating electricity reserves
Charge Type: 252
Description: 10-Minute Non-Spinning Market Reserve Hourly Uplift
Paid To: Generator
Details: Same as above
Charge Type: 254
Description: 30-Minute Operating Reserve Market Hourly Uplift
Paid To: Generator
Details: Same as above
Charge Type: 450
Description: Black Start Capability Settlement Debt
Paid To: Generator
Details: To deliver energy immediately to grid for power failures without drawing any
Charge Type: 451
Description: Hourly Reactive Support and Voltage Control Settlement Debit
Paid To: Generator
Details: Cost of managing voltage levels on grid
Charge Type: 452
Description: Monthly Reactive Support and Voltage Control Settlement Debit
Paid To: Generator
Details: Same as above
Charge Type: 454
Description: Regulation Service Settlement Debit
Paid To: Generator
Details: Same as above
Charge Type: 650
Description: Network Service Charge
Paid To: Hydro One – typically
Details: Maintenance of transformers and lines
Charge Type: 651
Description: Line Connection Service Charge
Paid To: Hydro One – typically
Details: Maintenance of transformers and lines
Charge Type: 752
Description: Debt Retirement Charge
Paid To: OEFC
Details: Pay down debt of old Ontario Hydro
Charge Type: 753
Description: Rural Rate Settlement Charge
Paid To: Hydro One and LDC’s
Details: Fee set by OEB to get energy to remote parts of the province
Charge Type: 754
Description: OPA Administrative Charge
Paid To: OPA
Charge Type: 900
Description: GST/HST Credit
Charge Type: 950
Description: GST/HST Debit
Charge Type: 1463
Description: Renewable Generation Connection – Monthly Compensation Amount Settlement
Paid To: LDC’s
Details: Fee for those that keep embedded energy on grid from wind, solar, etc.
Charge Type: 9990
Description: IESO Administration Charge
Paid To: IESO
RULING REQUESTED
You would like to know if the Registrant is eligible for a refund for the recapture of ITCs on various electricity charge types.
RULING GIVEN
Based on the facts set out above, we rule that the Registrant would not be eligible for a refund of the RITCs remitted with respect to the various charge types incurred as part of the supply of electricity.
EXPLANATION
From July 1, 2010 until June 30, 2018, with the introduction of the HST in Ontario, large businesses, as defined in section 27 of the New Harmonized Value-Added Tax System Regulations No.2 (the Regulations), are required to “recapture” the portion of any available input tax credits (ITCs) that is attributable to the provincial part of the HST that becomes payable, or is paid without having become payable, in respect of a specified property or service that is acquired, or brought into one of these provinces, by a large business for consumption or use by that business in those provinces.
Subsection 236.01(2), recapture of specified provincial input tax credits, provides that,
“if a sales tax harmonization agreement with the government of a participating province relating to the new harmonized value-added tax system allows for the recapture of input tax credits, in determining the net tax for the reporting period of a large business that includes a prescribed time, the large business shall add all or part, as determined in prescribed manner, of a specified provincial input tax credit of the large business.”
Subsection 236.01(1) defines, in part, “specified provincial input tax credit” to mean,
“the portion of an input tax credit of a large business in respect of a specified property or service that is attributable to tax under subsection 165(2), section 212.1 or 218.1 or Division IV.1 in respect of the acquisition, importation or bringing into a participating province of the specified property or service.”
For the purposes of the definition “specified property or service” in subsection 236.01(1), paragraph 28(1)(e) of the Regulations prescribes “specified energy that is acquired in, or brought into, a specified province” as specified property. “Specified energy” is defined in section 26 of the Regulations to include electricity and gas.
In applying the principles explained in GST/HST Policy Statement, P-077R2, Single and Multiple Supplies, where there is a single supplier providing a supply for a single consideration, it is determined that the supply in each case is a single supply of electricity or natural gas, as the case may be. Where there are separate suppliers, one for the commodity and another for delivery, this would be considered to be two separate supplies.
The tax payable for the supply of the electricity, delivery, global adjustment charge, regulatory charges, and debt retirement charge generally would be considered to be part of the single supply of electricity itself and therefore would be subject to the RITC requirement.
Please note that the CRA has previously ruled that the ‘debt retirement charge', and the ‘global adjustment charge' that are normally included in electricity bills are part of the ‘total consideration' for the supply of electricity that is subject to the GST/HST.
Furthermore, as acknowledged by the Independent Electricity System Operator (IESO) in its published guide titled “HST Guide for IESO Transactions – Issue 39.0”, released on March 7, 2018 (IESO Guide), in evaluating the GST/HST implications of the various charges under consideration, the IESO is treated as a principal involved in the buying and selling of electricity.
TRANSACTIONS
The charge type descriptions provided below can be referenced to the most current release of the IESO Guide.
Charge Type 101 - Net Energy Market Settlement for Non-Dispatchable Load
“Charge types 100 and 101 are the major categories of electricity transactions between the IESO and market participants. Charge types 100 and 101 are used for both sales and purchases of energy for market participants. Charge type 101 is only used for transactions at Ontario locations.
As noted in Section 3, these charge types are used for both sales and purchases. Consequently, the amounts in the monthly invoice for these charge types will net sales against purchases during the month.”
As this charge represents a direct charge for electricity, the entire amount would be subject to RITC.
Charge Type 146 – Global Adjustment Settlement Amount
“The Global Adjustment (GA) accounts for the difference between the market price and rates paid to regulated and contracted generators as well as conservation and demand management programs. It covers the cost of building new plants, paying regulated rates to baseload generators and greening the power system through conservation, demand response and cleaner generation sources.”
“Effective January 1, 2011, charge type 146 has been retired and replaced with the following new charge types:
- Class A Global Adjustment Settlement Amount (charge type 147)
- Class B Global Adjustment Settlement Amount (charge type 148)
The Class A and B Global Adjustment Settlement Amount (charge types 147 and 148) are an adjustment, either positive or negative, to the price charge for energy to market participants with load in Ontario.”
“Charge types 147 and 148 are an adjustment, either positive or negative, to the price of electricity sold to Ontario market participants. Consequently, they are subject to HST.”
As this charge represents an adjustment to the price of electricity sold to Ontario market participants, the charge would be considered a charge in respect of electricity. The GA would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Charge Type 150 – Net Energy Market Settlement Uplift
“This is the most prominent surcharge added to the amount charged for electricity sold to purchasers. It is calculated to offset costs borne by the IESO, such as line losses, and is allocated to market participants based on their withdrawals of energy from the IESO-controlled grid. Although it will commonly be a positive surcharge, it is possible that in circumstances, a negative surcharge will arise (in effect, reducing the cost of the electricity).”
“This charge is considered to be a surcharge to the price of electricity and accordingly, the HST treatment will mirror the treatment of the basic charge for the electricity to purchaser – subject to HST if the energy is for use in Canada and zero-rated if the energy is sold to a market participant for export out of Canada.”
As this charge represents a surcharge to the price of electricity sold to Ontario market participants, the charge would be considered a charge in respect of electricity. The Net Energy Market Settlement Uplift would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Charge Type 155 – Congestion Management Settlement Uplift
Charge Type 169 – Station Service Reimbursement Debit
Charge Type 183 – Generation Cost Guarantee Recovery Debit
Charge Type 250 – 10 Minute Spinning Market Reserve Hourly Uplift
Charge Type 252 – 10 Minute Non-spinning Market Reserve Hourly Uplift
Charge Type 254 – 30 Minute Operating Reserve Market Hourly Uplift
Charge Type 450 – Black Start Capability Settlement Debit
Charge Type 451 – Hourly Reactive Support and Voltage Control Settlement Debit
Charge Type 452 – Monthly Reactive Support and Voltage Control Settlement Debit
Charge Type 454 – Regulation Service Settlement Debit
“The IESO also levies a variety of surcharges on the purchases of electricity by market participants to recover the cost of its payments to suppliers for ancillary services and other supplies (as set out in 5.3) and Guarantees (as set out in 5.8).
The following are the transaction items and charge types for these uplifts to the charges for electricity:
- Congestion Management Settlement Uplift (charge type 155);”
- Station Service Reimbursement Debit (charge type 169)
- Generation Cost Guarantee Recovery Debit (charge type 183)
- 10 Minute Spinning Market Reserve Hourly Uplift (charge type 250)
- 10 Minute Non-spinning Market Reserve Hourly Uplift (charge type 252)
- 30 Minute Operating Reserve Market Hourly Uplift (charge type 254)
- Black Start Capability Settlement Debit (charge type 450)
- Hourly Reactive Support and Voltage Control Settlement Debit (charge type 451)
- Monthly Reactive Support and Voltage Control Settlement Debit (charge type 452)
- Regulation Service Settlement Debit (charge type 454)
“These charges are considered to be surcharges to the price of electricity and accordingly, their HST treatment will mirror the treatment of the basic charge of electricity to purchasers”
As these charges represent a surcharge to the price of electricity sold to Ontario market participants, each individual charge would be considered a charge in respect of electricity. Each individual charge would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Charge Type 163 – Additional Compensation for Administrative Pricing Debt
“This surcharge on market participants’ purchases of electricity is to recover the payment of Additional Compensation for Administrative Pricing Settlement Credit (charge type 113).”
“These charges are considered adjustments to the original price of electricity, and accordingly their HST treatment will mirror the treatment of the basic charge/payment for the electricity”
As this charge represents an adjustment to the price of electricity sold to Ontario market participants, the charge would be considered a charge in respect of electricity. The charge would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Charge Type 170 – Local Market Power Rebate
“Where the IESO collects an amount from a market participant under charge type 120 (Local Market Power Debit), it will distribute the proceeds collected to market participants as a rebate, based on their purchases in the previous month. The tax status of this rebate is the same as the market participants’ original purchases of energy”:
As this charge represents an adjustment to the price of electricity sold to Ontario market participants, the charge would be considered a charge in respect of electricity. The charge would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Charge Type 186 – Intertie Failure Charge Rebate
“As noted in Section 5.5, to recover the cost of payments for ancillary services and other supplies, the IESO levies a variety of surcharges on the purchases of electricity by market participants. However, where the IESO recoups some of its costs through adjustments to payments to suppliers (as described in Section 5.6), the IESO will pass on the savings to purchasers through rebates.”
“These rebates are considered to be downward adjustments to the amounts previously charged to the purchasers of electricity.”
Charge Type 650 – Network Service Charge
Charge Type 651 – Line Connection Service Charge
“There are four transaction/ charge types relating to payments to the IESO from energy purchasers corresponding to the four charge types described above:
- Network Service Charge (charge type 650)
- Line Connection Service Charge (charge type 651)
- Transformation Connection Service Charge (charge type 652); and
- Export Transmission Service Charge (charge type 653).
Based on the Market Rules, these payments to the IESO by purchasers of energy are for transmission services.”
“The first three of these charges relate to transmission services exclusively within Ontario, and are therefore subject to HST.”
As the charges for transmission services form part of the consideration for the overall supply of electricity, the charges would be subject to the RITC recapture provisions.
Charge Type 752 – Debt Retirement Charge
“The Debt Retirement Charge is a legislated charge, which is to pay off the standard debt associated with Ontario Hydro. It is imposed on Ontario-resident market participants purchasing electricity in Ontario. The IESO will add this as a surcharge to the price charged for electricity to Ontario market part6icipants. The IESO will remit the amount collected to the Ontario Government (Debt Retirement Credit).”
“The CRA has ruled that the Debt Retirement Charge forms part of the consideration for the supply of electricity, and would therefore be subject to HST according to the place of supply rules. The Debt Retirement Credit is not subject to HST as it is not a consideration for a supply.”
As the Debt Retirement Charge forms part of the consideration for the supply of electricity, the charge would be subject to RITC recapture provisions.
Charge Type 753 – Rural Rate Settlement Charge
There are two charge types relating to these transactions:
- Rural and Remote Settlement Debit (charge type 753); and
- Rural and Remote Settlement Credit (charge type 703).
The Rural and Remote Settlement Debit is a surcharge on all electricity purchasers in Ontario. It is used to fund the Rural and Remote Settlement Credit, which is paid to distributors in rural and remote areas to subsidize their purchases of electricity. Hence, the price of electricity sold to these distributors will be reduced from that which it would otherwise have been.
The CRA has ruled that the Rural and Remote Settlement Debit is a surcharge on the price of electricity and is subject to HST. The Rural and Remote Settlement Credit reduces the price of electricity on which the HST is charged. Consequently, the credit will also be treated as being subject to HST.
As this charge represents an adjustment to the price of electricity sold to Ontario market participants, the charge would be considered a charge in respect of electricity. The charge would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Charge Type 754 – OPA Administrative Charge
Pursuant to the Ontario Government’s legislative amendments in Bill 100, the following charge types were added for settlement of the OPA administration fee:
- OPA Administration Credit (charge type 704); and
- OPA Administration Charge (charge type 754).
The OPA Administration Credit is the total of all amounts collected under charge type 754 which is payable to the Ontario Power Authority.
The OPA Administration Charge is a surcharge to the price of energy charged to Ontario market participants based on their purchases of electricity. It is an amount determined by the OEB estimated to cover the costs of operation of the OPA.
Charge type 754 is a surcharge on the price of electricity to IESO market participants and is subject to HST. The credit paid to OPA under charge type 704 is a payment for a supply of administrative services by the OPA and is subject to HST.
As this charge represents an adjustment to the price of electricity sold to Ontario market participants, the charge would be considered a charge in respect of electricity. The charge would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Charge Type 1463 – Renewable Generation Connection – Monthly Compensation Amount Settlement
Pursuant to the implementation of a new cost recovery framework established by the Green Energy Act, as set out in Ontario Regulation 330/09, the following charge types were added for settlement of costs associated with the connection of new renewable generation to local distribution systems from all electricity consumers in Ontario:
- Renewable Generation Connection – Monthly Compensation Settlement Credit (charge type 1413); and
- Renewable Generation Connection – Monthly Compensation Settlement Debit (charge type 1463).
The Renewable Generation Connection – Monthly Compensation Amount Settlement Debit is collected under charge type 1463 which is a surcharge on all electricity purchasers in Ontario.
The Renewable Generation Connection – Monthly Compensation Amount Settlement Credit allows LDCs to recover certain costs associated with the connection of new renewable generation to their local distribution system.
Charge type 1463 is a surcharge on the price of electricity to IESO market participants and is subject to HST. The credit paid to LDCs under charge type 1413 is a payment for the supply of distribution services by the LDCs and is subject to HST.
As this charge represents an adjustment to the price of electricity sold to Ontario market participants, the charge would be considered a charge in respect of electricity. The charge would therefore be treated as consideration for electricity and would be subject to RITC recapture provisions.
Given the above analysis, we find that all of the charge types under consideration represent adjustments to the price of electricity. As such, the Registrant would not be eligible for a refund of RITC amounts previously reported and remitted on such charges.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 905-721-5218. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Zubair Patel, CPA, CGA
Basic Groceries and Recapture of Input Tax Credits Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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