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: 135233
Business Number: […]
July 20, 2012
Dear [Client]:
Subject: GST/HST RULING
Recapture of input tax credits (RITC) - energy used to dry grain, corn, and oilseed
Thank you for your fax of May 3, 2011, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to RITCs for specified energy used to dry grain, corn and oilseed. Please accept our apology for the delay in responding to your fax.
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.
STATEMENT OF FACTS
We understand, based upon your fax, the following:
* […][ABC] is registered for GST/HST purposes and assigned Business Number […] and operates a grain elevator located near […].
* [ABC] is a “large business” for GST/HST purposes and thus may be subject to RITCs, pursuant to section 236.01 of the ETA and the New Harmonized Value-Added Tax System Regulations, No. 2 (the Regulations).
* [ABC] is a member of the […], who had previously requested a ruling from the Canada Revenue Agency (CRA) regarding the use of specified energy consumed to operate grain dryers.
* [ABC] receives grain from farmers and uses energy (electricity, natural gas and propane) to dry grain, corn and oilseed to a standard moisture level so that it can be safely stored without spoiling. The drying process removes moisture from the grain, corn and oilseed, and is an essential process to prevent the build up of insects, mites, and moulds and fungi.
* The farmers transport the grain and corn in a combined and shelled state. The corn and grain usually contain moisture of between 25% and 30%. The intent is to dry the grain to a reduced moisture content of approximately 15% to 20% so that it can be safely stored.
* The grain is unloaded immediately after being harvested in the fields at [ABC]’s grain elevator at which time [ABC] uses conveyors and other equipment to carry the grain to the drying towers. The drying process starts with using heated air that is circulated in the tower dryer using fans. The heaters use natural gas in order to heat the air. The drying process takes approximately 2 hours, depending on the moisture content of the grain or corn, and the amount of grain to be dried. The dried grain is then located into [ABC]’s common storage tower, to be sold at a later date.
* Some farmers only use [ABC]’s grain drying services, although the majority of the farmers sell the grain, corn and oilseed to [ABC]. The bulk of the drying typically takes place during a six week period during the annual fall harvest period.
* The dried grain, corn and oilseed are used in a variety of products, such as corn starch and used as feed for cattle. [ABC] does not market or warrant the dried grain, corn and oilseed as being of a guaranteed status or of meeting any government standards other than possibly being disclosed as to being of particular moisture content when sold.
RULING REQUESTED
Energy (electricity, natural gas, and propane) used in the process of drying grain, corn and oilseed (i.e., for storage and/or resale) by [ABC] is subject to the RITC requirements.
RULING GIVEN
Based on the facts set out above, we rule that the specified energy used in the process to dry the corn, grain and oilseed for storage and/or resale is subject to the RITC requirements.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
EXPLANATION
Pursuant to section 236.01 of the ETA and the Regulations, 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.
Under section 31 of the Regulations, the RITC requirement will generally not apply to specified energy used by a large business directly in the production of tangible personal property (TPP) for sale, or in the production of equipment used by the large business in the production of TPP for sale.
The RITC requirement will, however, generally apply to specified energy that is used by the large business to facilitate such production, including specified energy that is used to light, heat, air condition or ventilate a production facility, unless that consumption or use is integral to that production. However, “production” will generally not include either the storage of finished product or the assembly, processing or manufacturing of TPP in a retail establishment.
Production
Pursuant to section 26 of Part 6, Recapture of Specified Provincial Input Tax Credits, of the Regulations, the definition of “Production” generally means the assembling, processing or manufacturing of TPP to make other TPP that is different from the first property by its nature or characteristics, and includes:
* the restoring of TPP by its owner;
* the recording of images or sounds on media;
* the generation of any form of energy or its transformation into another form of energy;
* the cutting, transformation and handling of timber in a forest, including the building and maintenance of forest access roads in the course of carrying on a timber business;
* the extraction and processing of minerals to the first stage of concentration or the equivalent, and
* the transformation of toxic industrial waste into a non-toxic product.
Production also generally includes the following activities when performed in conjunction with one of the production activities described above:
* the cleaning, screening, sifting, wrapping, packing, or putting into containers of personal property;
* the transportation of refuse or waste derived from producing personal property;
* the quality control of personal property being produced or of production equipment; and
* the detection, measurement, treatment, reduction or elimination of water, soil, or air pollutants that is attributable to producing personal property.
For the purposes of the RITC requirement, “production equipment” generally means
(a) machinery, tools, equipment and accessories used directly in the production of TPP,
(b) moulds and dies,
(c) media for recording images or sounds,
(d) plans, drawings, models and prototypes,
(e) components or spare parts of the property described in paragraphs (a) to (d),
(f) materials used to produce or repair the property described in paragraphs (a) to (e), and
(g) explosives and the material to manufacture them.
The drying of corn, grain and oilseed is one method of preserving food and feedstock. It is simply the removal of moisture by forcing warm dry air through the grain. Air serves two basic functions in grain drying. First, the air supplies the necessary warmth for moisture evaporation; second, the air serves as a carrier of the evaporated moisture. The amount of moisture which can be removed from the corn depends on the moisture content of the corn, and the drying air relative humidity and temperature.
Therefore, it is our opinion that the drying process is a necessary or supplementary part to the harvesting and storage of grain, corn and oilseed. Immediately after the farmer harvests the grain, corn and oilseed from the fields they immediately start to dry the grain so that it can be stored safely and for longer periods of time otherwise the grain, corn and oilseed would spoil and would not be suitable for consumption. If the farmer does not start to dry the grain, corn and oilseed after harvesting then based on the moisture content of the grain at the time of harvest it could start to spoil within 3 to 5 days. If the farmer does not have the facilities to dry the grain they will usually deliver the grain, corn and oilseed to a nearby grain elevator or a storage facility that will dry the grain for the farmer and deduct the cost of the service from the selling price of the grain.
In conclusion, based on the information available to us, we determined that the process of drying grain, corn, and oilseed for storage and/or for resale does not meet the definition of production. We determined that the drying process does not substantially change the nature and characteristics of the original product. The drying of corn, grain and oilseed is not assembling, processing, or manufacturing of TPP to make other TPP that is different from the first property by its nature or characteristics. Therefore, energy used by a large business in providing drying services of grain, corn and oilseed is subject to the RITC requirements.
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 Issues Division
Excise and GST/HST Rulings Directorate
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