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: 142842
Business Number: […]
Dear [Client]
Subject: GST/HST RULING
Whether the Global Adjustment is considered as part of the consideration payable for the supply of electricity and therefore subject to the RITC requirement
Thank you for your [correspondence] of [mm-dd-yyyy], as well as subsequent correspondence, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the Global Adjustment (GA). […]. We apologize for the delay in responding to your request.
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
We understand from the information provided that
- [The] […][(Corp)] is a corporation located in the province of Ontario.
- The Corp is registered for GST/HST purposes under the Business Number indicated above.
- The Corp is considered a large business pursuant to section 236.01, and section 27 of the New Harmonized Value-Added Tax System Regulations, No.2 (the Regulations).
- The Corp purchases electricity from a retailer. The invoice for the electricity is issued by your local distribution company and shows supplies of electricity made by the retailer of the electricity and the supply of distribution services including the Global Adjustment charges made by the local distribution company, both which occur simultaneously.
RULING REQUESTED
You would like to know whether the GA is part of the consideration payable for the energy and consequently, subject to recapture under section 236.01.
RULING GIVEN
Based on the facts set out above, we rule that the GA is part of the consideration payable for the energy and is therefore subject to recapture under section 236.01.
EXPLANATION
The GA, originally introduced in 2005 as the Provincial Benefit, is a volumetric charge based on the customer’s energy consumption (in kWh). It can be a credit or a charge to the customer.
According to the Independent Electricity System Operator (IESO), the GA
- is calculated based on the difference between the Hourly Ontario Electricity Price (HOEP) and:
- Regulated rates paid to Ontario Power Generation (OPG) nuclear and baseload hydroelectric generating stations
- Contracted rates with the OPA such as new gas-fired facilities, renewable facilities (wind and solar farms), and nuclear refurbishments
- Contracted rates administered by the Ontario Electricity Financial Corporation paid to existing generators.
- includes the cost of delivering conservation programs in the province and the payments made to participants under contracts with the Ontario Power Authority (OPA) for demand response programs.
- varies from month to month, responding to changes in both the HOEP and contract terms. Generally speaking, when the HOEP is lower, then the GA is higher in order to cover the additional costs mentioned above. The GA also changes when new projects come into service, contract payments take effect or as a result of changes in demand.
The Ontario Energy Board (OEB) describes the GA as the differences between the market price of electricity and the regulated or contract prices paid to generators for the electricity they produce. It also includes the cost of OPA conservation and demand management programs as well as well as any OEB-approved costs incurred by utilities to achieve their mandatory conservation and demand reduction targets.
The GA acts as a price guarantor for the generators. If the HOEP is lower than the guaranteed prices to the generators, the GA makes up the difference.
A report on the GA by Aegent Energy Advisors (a consulting company that works exclusively for energy buyers to optimize their gas and electricity procurement by ensuring adequate supply, reducing risk and managing cost) in February 2010, commented that the GA is an Ontario electricity market mechanism used to transfer costs between the market at large and customers. Costs arise from the difference between electricity prices paid by consumers and those paid to certain generators, plus expenditures on conservation and demand management. The large majority of GA costs arise from contracts with generators. A good portion of these contracts are at fixed prices, or they have elements that behave as fixed-price arrangements. Directionally then, when spot prices are low, the GA is high and vice versa. The extent to which there is a perfect offset between the two price components is an indication of the percentage of total market supply that falls under these contracts. The remainder of the GA costs is for conservation and demand management. These costs are largely unaffected by spot prices and so they are generally additive.
The legislative authority for the GA is section 25.33 of the Ontario Electricity Act, 1998, Section 26.33 of that Act requires IESO, distributors, and retailers to “make all adjustments” in accordance with the regulations under that Act. The GA is one of these adjustments. The purpose of section 25.33 is to ensure that, over time, the payments by market participants and customers reflect amounts paid to generators, distributors, the OPA, and OEFC under the IESO market rules or s. 78.1 - 78.5 of the Ontario Energy Board Act (OEBA), 1998. As part of its mandate, the OPA contracts with electricity generators for clean electricity resources.
The IESO is required to make payments to generators in respect of the electricity they supply into the system (section 78.1 of the OEBA) as well as to the OEFC (78.2 of the OEBA) and the OPA in respect of the contracts these bodies have with generators for the production of electricity (78.3 and 78.4 of the EBA) and to distributors in respect of conservation and demand management programs (78.5 of the OEBA).
Ontario Regulations 429/04 Adjustments under Section 25.33 of the Act, adopted under the authority of the Electricity Act, 1998 sets out the calculations and means of recovery of the required adjustments. Pursuant to this Regulation, the IESO is required to calculate and charge market participants the GA payable for each month.
The Regulations set out how the different adjustment, including the GA, are collected from or credited to consumers/market participants by distributors, retailers or the IESO, and ultimately remitted to or paid to IESO.
Each section of the Regulations that sets out the adjustment made by an entity which invoices electricity user contains a provision requiring them to reflect the GA amounts on invoices. The amounts that a distributor charges to customers must include an amount equal to the GA that the distributor is required to pay the IESO. The GA only appears on the invoices to most residential consumers where the residential consumer enters a contract with an electricity retailer for the acquisition of electricity.
Consideration, Price Adjustment, or Tax
We will now consider whether the GA is consideration for the supply of electricity, a price adjustment for the supply of electricity, or a tax, fee, or duty.
Is the GA Consideration?
The issue is whether the GA is part of the consideration for the supply of energy (which includes ancillary services) or whether it represents a separate supply. Section 123 defines consideration to include any amount that is payable for a supply by operation of law. Also, pursuant to section 154, certain taxes, duties or fees imposed under an Act of Parliament, provincial levies, and other amounts that are collectible by the supplier under an Act of the legislature of a province may be deemed to be consideration.
Is there a single supply of electricity or a supply of electricity and a supply of GA? According to Policy Statement P-077R2 Single and Multiple Supplies, CRA will, in determining whether a transaction consisting of several elements is to be regarded as a single supply or multiple supplies, use the following principles to determine whether a transaction consisting of several elements is to be regarded as a single supply or multiple supplies.
- Every supply should be regarded as distinct and independent.
- A supply that is a single supply from an economic point of view should not be artificially split.
- There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
A buyer could not purchase electricity without, or independently from, the GA; thus, both elements are highly interconnected and interdependent. The true nature of the transaction for which consideration was paid was the supply of the electricity, which, in the fact situation here, cannot be made without the GA. The supply of the GA to the customers cannot stand by itself or be omitted from the overall supply of the electricity. In other words, the fact situation of this case would make it impossible to purchase each of the supplies or elements separately and still end up with a useful service.
Where there is a supply of electricity from a generator, and a supply of distribution from a distributor that is shown separately on the invoice, how does the GA fit in? Is the GA a third supply or is it part of one of the other supplies? As above, you cannot purchase electricity without the GA and it is not possible or realistic to purchase the GA by itself. CRA accepts that the distribution services are a separate supply where the generation and distribution services are performed by different parties and are shown as separate line items when invoiced. As such there is a single supply of electricity and the GA along with a separate supply of distribution services.
Only the supply of electricity is considered specified energy.
The GA reflects economic reality in that it can be positive or negative, and therefore it can reduce (and in the past actually has reduced) the overall amount payable by electricity consumers. It is difficult to imagine a separate supply of the GA when it is negative.
In Miller v The Queen, 2005 TCC 419 (Miller), the court found that the Debt Retirement Charge (DRC) that is included in most Ontario electricity invoices and used by the Ontario Electricity Financial Corporation to pay down the debt of the former Ontario Hydro is a provincial levy and therefore is to be included in consideration pursuant to section 154 of the ETA. It went on to say that had it not found it to be a provincial levy it would have no difficulty finding that it was consideration as defined in section 123.
In paragraph 33 the court said, “It is also unnecessary to review section 123 of the Excise Tax Act, though, had I not concluded that the DRC is a provincial levy, I would have had no difficulty in finding it was caught by the definition of "consideration" in section 123. It is too closely linked to the supply of electricity to find otherwise. The DRC must be paid to consume the supply of electricity.”
The GA must be paid to consume the supply of electricity too. The GA is more closely related to the supply of electricity than the DRC as it is made up mostly of the difference in the spot price of electricity and the rates paid to various regulated and non-regulated generators, while the DRC is based on the debt of the former Ontario Hydro being allocated to current electricity customers based on current usage. As such, if tested it is reasonable to expect the court to conclude that the GA would be caught by the definition of consideration.
It is payable by every consumer, regardless as to whether:
- the consumer is under a RPP, is billed by a local distribution company (LDC) or the IESO, or has a contract with an electricity retailer or a generator;
- it is shown as a separate line item on a bill or not (e.g., it is not shown as a separate line item on bills to customers under the RPP, but it is factored into the rate paid by those consumers for electricity).
Pursuant to section 26 of the New Harmonized Value-Added Tax System Regulations, No. 2, (Regulations) electricity is specified energy. According to section 28 of the Regulations, specified energy that is acquired in, or brought into, a specified province by a large business is specified property or service. Assuming the customer is a large business as defined in section 236.01, the provincial portion of the HST on the consideration for the GA is subject to recapture under section 236.01.
Residential customers and small businesses that purchase their electricity on a RPP pay a price that has the GA embedded in it. There is no issue that the total amount paid is considered to be consideration for the supply of electricity. The GA should be treated the same way when shown separately on an invoice.
For the reasons above, the GA, whether embedded or a separate line item, is consideration for the supply of electricity.
Is the GA a Price Adjustment?
Section 232 of the ETA deals with price adjustment and is included, in part, below.
232. (1) Refund or adjustment of tax — Where a particular person has charged to, or collected from, another person an amount as or on account of tax under Division II in excess of the tax under that Division that was collectible by the particular person from the other person, the particular person may, within two years after the day the amount was so charged or collected,
(a) where the excess amount was charged but not collected, adjust the amount of tax charged; and
(b) where the excess amount was collected, refund or credit the excess amount to that other person.
(2) Adjustment — Where a particular person has charged to, or collected from, another person tax under Division II calculated on the consideration or a part thereof for a supply and, for any reason, the consideration or part is subsequently reduced, the particular person may, in or within four years after the end of the reporting period of the particular person in which the consideration was so reduced,
(a) where tax calculated on the consideration or part was charged but not collected, adjust the amount of tax charged by subtracting the portion of the tax that was calculated on the amount by which the consideration or part was so reduced; and
(b) where the tax calculated on the consideration or part was collected, refund or credit to that other person the portion of the tax that was calculated on the amount by which the consideration or part was so reduced.
(3) …
(4) …
Subsection 232(1) refers to reducing the excess amount of tax charged, which either means that consideration and/or tax were overcharged or that they were reduced after the fact.
While the GA can be either positive or negative, history shows that in most cases, it is a positive amount that has not been charged.
A positive GA cannot be considered a price adjustment under subsection 232(2) because the wording refers to “… the consideration or part is subsequently reduced …”.
As such, the GA is not considered to be a price adjustment for purposes of section 232.
Is the GA a Provincial Levy under Section 154?
Subsection 154(1) and (2) read as follows
154. (1) Meaning of "provincial levy" — In this section, "provincial levy" means a tax, duty or fee imposed under an Act of the legislature of a province in respect of the supply, consumption or use of property or a service.
(2) Levies included in consideration — For the purposes of this Part, the consideration for a supply of property or a service includes
(a) any tax, duty or fee imposed under an Act of Parliament that is payable by the recipient, or payable or collectible by the supplier, in respect of that supply or in respect of the production, importation, consumption or use of the property or service, other than tax under this Part that is payable by the recipient;
(b) any provincial levy that is payable by the recipient, or payable or collectible by the supplier, in respect of that supply or in respect of the consumption or use of the property or service, other than a prescribed provincial levy that is payable by the recipient; and
(c) any other amount that is collectible by the supplier under an Act of the legislature of a province and that is equal to, or is collectible on account of or in lieu of, a provincial levy, except where the amount is payable by the recipient and the provincial levy is a prescribed provincial levy.
Emphasis added.
We’ll address the following individually.
1) Is the GA a tax? (154(1))
2) Is the GA a duty or fee? (154(1))
3) Is the GA imposed under an act of the legislature of a province? (154(1))
4) Is the GA in respect of the supply, consumption or use of property or service? (154(1))
5) Is the GA a provincial levy? (154(1))
6) Is the GA a prescribed provincial levy? (154(2)(b))
1) Is the GA a Tax? (154(1))
We will examine the criteria by which the DRC in Miller was determined to be a tax for purposes of section 154 in order to determine if these criteria apply to the GA.
The DRC is payable under section 85(4) of the Electricity Act, 1998. It is a charge payable by the consumer to pay part of the debt of Ontario Hydro, which was dissolved and replaced by Hydro One.
In Miller the court found that the DRC that is included in most Ontario electricity invoices and used by the Ontario Electricity Financial Corporation to pay down the debt of the former Ontario Hydro is a provincial levy and therefore is to be included in consideration pursuant to section 154 of the ETA. It went on to say that had it not found it to be a provincial levy it would have no difficulty finding that it was consideration as defined in section 123.
In examining whether the DRC was a tax, for purposes of section 154, the court, following the Supreme Court, examined the following criteria at paragraph 24 of the judgement.
“The section 154 issue therefore becomes just the one question 2 is the DRC a tax, fee or duty? The Respondent relies upon the Supreme Court of Canada cases of Lawson v. British Columbia (Interior Tree Fruit & Vegetable Committee of Direction 6 and Eurig Estate v. Ontario (A.G.) 7 to set the criteria for a tax. The Respondent lists the essential elements of a tax as:
- enforceable by law;
- imposed under the authority of legislature;
- binding without requiring individual consent;
- imposed by a public body;
- made for a public purpose.
The Respondent argues the DRC meets all these criteria. I agree.”
How does the GA compare to DRC using these criteria?
Q. Is the GA enforceable by law?
A. Yes, pursuant to 25.33 of the Electricity Act, 1998, and the regulations adopted under its authority.
Q. Is the GA imposed under the authority of legislature?
A. Yes, the law under which the adjustment is charged and enforced is a law of the legislature of Ontario.
Q. Is the GA binding without requiring individual consent?
A. Yes, the charge is mandatory and does not require consent.
Q. Is the GA imposed by a public body?
A. In the Supreme Court case, Lawson v. British Columbia (Interior Tree Fruit & Vegetable Committee of Direction)(Footnote 1), the public body which was a Committee created by provincial legislation. To determine that the Committee was a public body, the Supreme Court invoked the following motives:
“This Committee, of which the chairman is appointed by the Lieutenant-Governor in Council, and which is invested with wide powers of regulation and control over the fruit and vegetable industry within a great extent of territory, constituted by, and acting in every way under, the authority of the statute, exercising compulsory powers as well as inquisitorial powers of a most exceptional character, is assuredly a public authority. “
At paragraph 10, the court said,
[…] The levy is also made for a public purpose. When such compulsory, not to say dictatorial, powers are vested in such a body by the legislature, the purposes for which they are given are conclusively presumed to be public purposes. Indeed, when one considers the number of people affected by the orders of this Committee, and the extent of the territory over which it executes its orders and directions, it becomes evident that, in point of their potential effect upon the population of the territory and of the interest of the population in the Committee's activities, the operations of the Committee, as contemplated by the statute, greatly surpass in public importance many municipal schemes, the levies for the support of which nobody could dispute, would come under the head of taxation.
In Miller, at paragraph 29, the court said:
A levy imposed by a public authority on electricity consumption, something that affects all Ontarians can likewise be "for purposes" conclusively presumed to be "public purposes". The fact that the monies raised from the levy do not fall into the Consolidated Revenue Fund does not remove them from the public purpose.
Comparatively, the IESO has extended powers, in that it regulates the whole market of electricity in Ontario. Also, the IESO is governed by an independent board whose directors are appointed by the government of Ontario, and the directors appoint the chief executive officer, pursuant to sections 7 and 8 of the Electricity Act, 1998(Footnote 2). Thus, the IESO qualifies as a public body for purposes of determining whether the amount imposed is a tax.
Q. Is the GA made for a public purpose?
A. Paragraphs 28 and 29 of Miller read as follows,
[28] The Supreme Court of Canada in Lawson dealt with a levy imposed by the province of British Columbia pursuant to the Produce Marketing Act. 8 In finding such levy constituted a tax the Court stated at paragraph 10:
[…] The levy is also made for a public purpose. When such compulsory, not to say dictatorial, powers are vested in such a body by the legislature, the purposes for which they are given are conclusively presumed to be public purposes. Indeed, when one considers the number of people affected by the orders of this Committee, and the extent of the territory over which it executes its orders and directions, it becomes evident that, in point of their potential effect upon the population of the territory and of the interest of the population in the Committee's activities, the operations of the Committee, as contemplated by the statute, greatly surpass in public importance many municipal schemes, the levies for the support of which nobody could dispute, would come under the head of taxation.
[29] A levy imposed by a public authority on electricity consumption, something that affects all Ontarians can likewise be "for purposes" conclusively presumed to be "public purposes". The fact that the monies raised from the levy do not fall into the Consolidated Revenue Fund does not remove them from the public purpose. Hamlyn J. in Kempe v. R. 9 adopted similar reasoning. This was a case involving the nature of a German church tax. He wrote at paragraph 10:
The enforceable church tax levied against the Appellant was imposed under the authority of the German legislature. German constitutional law sanctions the tax and the German legislature (a public body) grants the Lutheran Church the right to impose a church tax on its members. The constitutional approval and the legislative action together are conclusively presumed to be for public purposes.
[30] Apart from circumstances justifying such a conclusive presumption, I step back and look at the history of what the DRC is intended to cover, that is the Ontario Hydro debt incurred to provide electricity to Ontarians, and I find a common sense answer is that this is indeed for a public purpose. Mr. Miller has directed me to no case that suggests a levy is only for a public purpose if it falls into the Consolidated Revenue Fund. I conclude that the DRC is a tax for purposes of section 154 of the Excise Tax Act.
[31] I note the British Columbia Superior Court dealt with a similar issue in Edmonds v. Actton Super-Save Gas Stations Ltd. 10 It took a slightly different approach but also found that GST was applicable to a charge on electricity imposed under the Transit Act 11 of British Columbia. The Court stated at paragraph 36:
However, in my view, the plaintiff has not addressed the correct issue. In my view it is not relevant as to why the provincial government decided to impose a transit levy or indeed how the revenues raised by that levy may ultimately be used. The language of s. 154 is concerned with whether a tax such as the transit levy is imposed in respect of the supply of the property or service and in my view the fatal flaw in the plaintiff's submission is the overlooking of the key word 'imposed".
The GA exists to ensure that generators receive compensation according to their regulated or contracts prices despite the market price of electricity. It also provides the financial resources for OPA conservation and demand management programs as well as any OEB-approved costs incurred by utilities to achieve their mandatory conservation and demand reduction targets all of which are for public purposes.
The GA is for a public purpose.
The GA meets all the requirements of the above test to be considered a tax.
2) Is the GA a Duty or Fee? (154(1))
If the GA is to be deemed to be part of the consideration for the supply of electricity pursuant to section 154 the GA must be a tax, duty or fee imposed by an act of the legislature of a province in respect of the electricity.
We previously determined that the GA was imposed by an act of the legislature of a province.
Black’s Law dictionary (Black’s) defines “fee” as follows: “A charge for labour or service, esp. professional services”. Thus, the Ga would not be a fee, as electricity is considered to be tangible personal property. Black’s was not useful for a definition of the term duty, as it generally described it as an obligation of any kind. The Termium database defined duty as a tax imposed in certain circumstance, such as at importation for example. It appears that a duty, in the context of section 154, would be a kind of tax which is called duty in given contexts.
3) Is the GA a Charge “in respect of the supply of electricity”? (154(1))
For an amount under section 154 to be deemed to be part of the consideration of a given supply, the amount must be “in respect of that supply or in respect of the production, importation, consumption or use of the property or service”. The calculation of the GA is provided for by Ontario Regulation 429/04. As noted previously, the GA is made up of differences between the market price of electricity and the regulated or contract prices paid to generators for the electricity they produce, the costs of OPA conservation and demand management programs, as well as well as any OEB-approved costs incurred by utilities to achieve their mandatory conservation and demand reduction targets.The particular GA charged to a particular consumer is proportional to the electricity consumed by that consumer.
The Supreme Court of Canada stated in Nowegijick v. R/ (1983) SCR 29, an income tax case, that the words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.”
It is thus clear that GA is a charge in respect of a supply (of electricity).
4) Is the GA imposed under an Act of the legislature of Ontario? (154(1))
In order to know if section 154 applies to the GA, it has to be determined whether it is a “provincial levy” defined at subsection 154(1) as “a tax, duty or fee imposed under an Act of the legislature of a province in respect of the supply, consumption or use of property or a service.”
The GA is imposed under section 25.33 of the Electricity Act, 1998, and the Regulations adopted under its authority. That act is an act of the Ontario provincial legislature. This condition is met.
5) Is the GA a provincial levy? (154(1))
The GA meets the requirements in subsection 154(1) as it is a tax, it is imposed by an Act of a legislature of a province, and it is in respect of a supply (of electricity). The GA is therefore a provincial levy.
6) Is the GA a prescribed provincial levy? (154(2)(b))
The GA is not prescribed under the Taxes, Duties and Fees (GST/HST) Regulations. As such, it is not a prescribed provincial levy.
Given the above analysis, we find that the GA is not a tax, duty or fee imposed under an Act of Parliament and is therefore not included in the consideration of the supply pursuant to paragraph 154 (2)(a).
However, we also find that the GA is a tax under provincial legislation. Its meets the definition of provincial levy in subsection 154(1) as it is a tax imposed by an Act of the legislature of a province in respect of a supply of property or service. The GA is therefore included in the consideration for the supply of electricity pursuant to paragraph 154(2)(b).
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 613-670-9882. 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,
Doug Campbell
General Operation Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
1 This case is quoted in the passage of the Miller judgment quoted above in this document. It is in the Lawson judgment that we find the criteria for determining what a tax is. We note that whether the Committee was an agent of the Crown was not a criterion to make the decision.
2 The directors are appointed by the Minister, pursuant to section 7, and “Minister” is defined in the Act as “the Minister of Energy or such other member of the Executive Council as may be assigned the administration of this Act under the Executive Council Act.
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