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, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 131102
July 31, 2012
Dear [Client]:
Subject: GST/HST INTERPRETATION
Recapture of input tax credits (RITC) for specified energy
Thank you for your letter of December 1, 2010, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) and RITCs to specified energy. We apologize for the delay in our response.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand the following facts from your letter:
1. ABC is a resident and a GST/HST registrant.
2. ABC’s business activities include the processing of food products, including the freezing of meat products.
3. ABC acquires liquid carbon dioxide (CO2) and liquid nitrogen (N2) for consumption, use or supply exclusively in the course of its commercial activity for GST/HST purposes.
4. ABC consumes the CO2 and N2 directly in the cryogenic processing of its food products, taking the meat from 4 degrees Celsius to -32 degrees Celsius.
5. CO2 is a colourless and odourless gas occurring naturally in the atmosphere.
6. CO2 has various applications in the food, oil and chemical industries, such as refrigeration, carbonated beverages, fire extinguishers and aerosols.
7. N2 is a colourless, odourless unreactive gaseous element that forms four-fifths of the earth’s atmosphere.
8. N2 has a variety of applications including air replacement, food preservation, manufacturing of stainless steel and others.
9. In the cryogenic process, the CO2 and N2 begin in a liquid state under high pressure storage and transition to a gas due to expansion during the process.
INTERPRETATION REQUESTED
You would like to know if CO2 and N2, used for the purpose of freezing meat products, is considered “specified energy” for RITC purposes, in accordance with section 236.01 of the ETA and section 26 of the New Harmonized Value-Added Tax System Regulations, No. 2 (the Regulations).
INTERPRETATION GIVEN
Based on the facts set out above, we provide the following interpretation; Carbon dioxide (CO2) and nitrogen (N2) in a liquid state used on the cryogenic process to freeze food products would not be considered “specified energy” for RITC purposes.
Explanation
Pursuant to section 236.01 of the ETA, a large business will be subject to RITCs in respect of specified property or services that are acquired, or brought into Ontario or British Columbia, by a large business for consumption or use by that business in those provinces.
Specified property and services include specified energy. Specified energy will generally include the following when acquired, or brought into Ontario or British Columbia, for consumption or use in these provinces by a large business:
• electricity, gas, steam; and
• anything (other than fuel for use in a propulsion engine) that can be used to generate energy;
-by way of combustion or oxidization; or
-by undergoing a nuclear reaction in a reactor for the generation of energy.
For purposes of the RITC requirement, consideration for a single supply of specified energy will include the consideration attributable to transportation services and fees (e.g., delivery charges or regulatory fees) that are incidental to the supply of energy itself. Conversely, consideration for a supply of specified energy will generally not include consideration for transportation services that are not incidental to the supply of energy itself.
The word “gas” in the list of words defining specified energy in section 26 of the regulations would generally carry the same meaning of the words that it is listed with, that being “electricity” and “steam”. Electricity is energy as it has the ability to operate machinery. Steam is created from the process of heating water and putting it under high pressure to create energy and operate machinery (i.e. a steam engine). Therefore the meaning of the word “gas” would be associated with the meaning of the words “steam” and “electricity”, and therefore would mean that it is energy and it is used to operate machinery.
Cryogenic freezing process
ABC Company uses either liquid carbon dioxide or liquid nitrogen in the process to freeze meat and food products, taking the meat and food products from 4 degrees Celsius to -32 degrees Celsius. The process involves freezing the outer layers of the food beyond its actual freezing point, while the inner part of the product remains warm. Both carbon dioxide and nitrogen begin in the liquid state under high pressure storage and transition to a gas during the process.
Carbon dioxide, a consumable refrigerant, is sprayed directly onto the meat or food product. Once the liquid carbon dioxide reacts with the air, it changes to approximately equal parts (by weight) of solid and vapour. The combined effect of the vapour, solid, and the internal distribution mechanisms it creates a blizzard within the freezer chamber.
The liquid nitrogen, a consumable refrigerant, is sprayed into the freezer chamber. As the liquid nitrogen droplets touch the meat or food product’s surface, the nitrogen changes to a vapour that extracts heat from the food. A simultaneous distribution of the nitrogen vapour throughout the freezer chamber creates a wind-chill effect that increases the rate of freezing. Liquid nitrogen systems obtain about 50% of their refrigeration from the vaporization of the liquid and the other 50% from the cold vapour. To ensure efficient and economical use of nitrogen, the system must contain a vapour heat exchange area. In standard Cryogenic freezers systems, liquid nitrogen is injected into a single zone, and the cold vapours’ are directed to the ends of the freezer to completely envelope the food product.
Conclusion
The RITC requirement in Ontario and British Columbia applies to specified property and services that are acquired or brought into Ontario and British Columbia, by a large business for consumption or use by that business in these provinces. Specified property and services include specified energy. Specified energy will generally include electricity, gas, steam and anything that can be used to generate energy by way of combustion or oxidization or by undergoing a nuclear reaction in a reactor for the generation of energy.
The Cryogenic process has generally three phases, the pre-freezing stage, the freezing stage and the lowering of the temperature to the required storage temperature, typically below -10 Celsius. The freezing process starts with the liquid nitrogen or liquid carbon dioxide being sprayed directly on to the batch of food products as it enters the freezing tunnel. During the process liquid nitrogen turns into a gas as it is sprayed on to the food. The liquid carbon dioxide turns into equal parts of a solid and a gas. Therefore the process does not produce any energy from the use of liquid nitrogen and carbon dioxide or the gases that are created during the process as no energy is created. CO2 and N2 are therefore not specified energy subject to the RITC requirements.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-2826. 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,
Paul Lepine
General Operations Unit
General Operations and Border Services Division
Excise and GST/HST Rulings Directorate
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