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: 137405
Dear [Client]:
Subject: GST/HST INTERPRETATION
Recapture of Input Tax Credits - Specified Energy
Thank you for your [correspondence] of July 22, 2011, concerning the recapture of input tax credits (RITCs) as it relates to specified energy. We apologize for the delay in responding to your enquiry.
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.
You provided the following information about your clients.
1. Your clients are large businesses as contemplated within subsection 236.01(1) of the ETA.
2. None of your clients in question manufacture tangible personal property for sale.
3. Your clients dig trenches using bulldozers and other heavy earth-moving and construction equipment not licensed to be driven on public roads. Fibre-optic cable is installed in the trenches.
4. Your clients replace outdoor electrical cables and wires for power utilities […] who use trucks licensed to be driven on public roads, with a “bucket” that raises and lowers the individuals that perform the work, as well as the requisite equipment.
5. Your clients operate cement mixers, licensed to be driven on public roads.
6. Your clients operate garbage trucks, licensed to be driven on public roads.
7. In all cases, in doing their work your clients use equipment (backhoes, bulldozers, bucket trucks, ‘cherry pickers’, cement mixers, garbage trucks – collectively, “the equipment”) that runs on either gasoline or diesel.
8. The gasoline or diesel used in the engines of the equipment, and those engines themselves, have a dual purpose: (1) they ‘propel’ the equipment forward (‘propulsion purpose’) and (2) they generate the energy to operate the non-motive functions (‘operation purpose’) – digging the trenches, grading the soil, mixing the cement, compacting the garbage, etc.
INTERPRETATION REQUESTED
Where diesel or gasoline is used in a propulsion engine, but not all of the energy that the fuel and the engine generate is used for propulsion, is all of the fuel still considered to be “fuel for use in a propulsion engine”? If all of the fuel is “for use in a propulsion engine”, then it would not qualify as “specified energy”, and therefore the ITC recapture would not be required, even though some of the energy that the fuel generates is for the operation purpose.
INTERPRETATION GIVEN
Paragraph 28(1)(b) of the New Harmonized Value-Added Tax System Regulations No. 2 (the Regulations) defines specified property and services to include motive fuel, other than diesel fuel, that is acquired in, or brought into a specified province for consumption or use in the engine of a qualifying motor vehicle. Under paragraph 28(1)(e) specified property also includes specified energy that is acquired in, or brought into, a specified province (other than qualifying heating oil, acquired in, or brought into Prince Edward Island).
For purposes of the Regulations, specified province means Ontario, British Columbia (July 1, 2010 through March 31, 2013) or Prince Edward Island.
Section 26 of the Regulations defines a “qualifying motor vehicle” to mean a vehicle that
- is a motor vehicle acquired in, or brought into, a specified province;
- is licensed, or required to be licensed, under applicable provincial laws of the specified province for use on a public highway; and
- weighs while carrying its maximum capacity of fuel, lubricant and coolant, less than 3,000 kilograms at the time that the vehicle is first licensed or first required to be licensed under those provincial laws.
The RITC requirement generally applies to fuel (other than diesel fuel) that is acquired, or brought into Ontario, by a large business, to the extent that the fuel is used by that business in the engine of a qualifying motor vehicle (even if the vehicle was acquired, or brought into Ontario, prior to July 2010).
The vehicles mentioned are not likely to meet the weight requirement for qualifying motor vehicles (they would be over 3,000 kilograms) and therefore the fuel used in this capacity would not be considered specified property and services under paragraph 28(1)(b). However, should any of these vehicles weigh under 3,000 kilograms and meet the other requirements to be a qualifying motor vehicle, the motive fuel used therein, other than diesel fuel, would be considered specified property and subject to recapture.
Section 26 of the Regulations defines specified energy as
(a) electricity, gas and steam; and
(b) anything (other than fuel for use in a propulsion engine) that can be used to generate energy
(i) by way of combustion or oxidization, or
(ii) by undergoing a nuclear reaction in a reactor for the generation of energy.
For purposes of (a) above, the definition of gas is a combustible gas or gaseous mixture. Gasoline and diesel fuel do not meet this definition. Electricity, gas, and steam are specified energy even if used in a propulsion engine.
Also, anything (other than fuel for use in a propulsion engine) that can be used to generate energy is specified energy. The engines mentioned are dual purpose. Firstly, they are used for propulsion purposes. Secondly, the energy produced by the propulsion engines may be transferred and used to power ancillary/operational equipment on the vehicle. This equipment is typically powered by the vehicle’s power take off (PTO). The PTO runs a hydraulic pump which pumps pressurized hydraulic fluid (typically oil) to hydraulic cylinders or hydraulic motors which in-turn run the equipment. For example, the hydraulic pump on a cement truck pumps oil to a hydraulic motor which rotates the mixing drum, and the hydraulic pump on a garbage truck pumps oil to hydraulic cylinders which operate the compacting mechanism and raises the box to dump the load.
It is our understanding that in the vehicles described above, the engine is directly linked to the vehicles transmission for the purpose of propelling the vehicle. Generally, in these cases, the primary purpose of these engines is to propel the vehicles. We would, therefore, consider these engines to be propulsion engines.
Section 26(b) of the regulations refers to “fuel for use in a propulsion engine” as opposed to “fuel for propulsion purposes”. Given that we consider these engines to be propulsion engines the fuels used therein do not meet the definition in (b) above. As such, they are not specified energy and therefore are not subject to recapture.
Where the gasoline or diesel is for use in a propulsion engine, we would not consider any of it to be specified energy despite a portion being used for operational purposes. Where any of these vehicles have separate motors for propulsion and for the operational equipment, the gas or diesel used in the latter would be specified energy and subject to recapture.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
For your convenience, GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service can be found at www.cra-arc.gc.ca/E/pub/gm/1-4/README.html.
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 any 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 CPA CGA
General Operations Unit
General Operations and Border Services Division
Excise and GST/HST Rulings Directorate
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