10 August 1995 GST/HST Interpretation 11640-4[4] - Application of GST to the Supply of Natural Gas to Non-resident Gas Distribution Company

I refer to XXXXX facsimile message of May 24, 1995, addressed to Mr. Garry Ryhorchuk of my staff, requesting comments regarding a letter dated May 11, 1995, written by XXXXX, dealing with the supply of natural gas (gas) to the above-referenced non-resident.

The following facts were provided by XXXXX

1. XXXXX is a gas distribution company operating within the State of XXXXX serving residential, commercial and industrial customers. XXXXX system load fluctuates on an annual basis with greater gas requirements during the winter period.

2. XXXXX entered into a contract (the Original Contract) with a Canadian gas supplier ( XXXXX on June 26, 1991, for the supply of gas under certain specified terms.

3. The Original Contract provides that XXXXX is required to deliver the scheduled daily volumes of gas requested by XXXXX not exceeding the daily contract volume of XXXXX Mcf per day or such revised volume as may be determined from time to time, in accordance with the provisions of the Original Contract, or otherwise by the express written agreement of the parties.

4. Under the Original Contract, the delivery of the scheduled daily volumes requested by XXXXX is to be made at the international boundary near XXXXX , where the pipeline facilities of XXXXX and XXXXX interconnect.

5. XXXXX is responsible for payment of transportation charges on XXXXX (the pipeline used by XXXXX to transport the gas for delivery to XXXXX is effectively liable to pay a minimum charge respecting the transportation space contracted for by XXXXX , regardless of whether XXXXX makes any gas deliveries under the Original Contract. The transportation capacity contracted for by XXXXX is equivalent to the transportation capacity required to transport the daily contract volume.

6. As the parties to the Original Contract contemplated the possibility that XXXXX would use storage to level out its annual gas purchases, thus allowing it to reduce the daily contract volume (and thereby its exposure to XXXXX transportation costs which have not been utilized), the Original Contract contemplated XXXXX putting into place a storage service arrangement. The principal purpose of the storage service arrangement is to enable XXXXX to more evenly distribute its purchases of gas over each contract year to reduce the seasonal load factor fluctuation. Without storage, XXXXX requires XXXXX to contract for transportation capacity in proportion to XXXXX peak requirements, resulting in excess capacity for much of the year. With storage, XXXXX only needs XXXXX to contract for the reduced transportation capacity equal to XXXXX average annual requirements, allowing XXXXX to make full use of that capacity year round. This results in a much more efficient utilization of contracted XXXXX capacity.

7. An amending agreement, effective April 1, 1995 (the Amendment), was executed by XXXXX and XXXXX amending the terms of the Original Contract. The Amendment enables XXXXX to contract for storage services with a third party XXXXX and to reduce the daily contract volume for gas from XXXXX Mcf. The Amendment provides that the point of delivery for a portion of the gas (Storage Volumes) by XXXXX to XXXXX shall be the interconnection of the pipeline facilities of XXXXX and XXXXX near XXXXX This is where XXXXX delivers the Storage Volumes to XXXXX 8.        XXXXX has entered into a contractual arrangement with XXXXX has agreed to make available a combined storage and transportation service in respect of XXXXX bcf of gas per year. XXXXX will receive the Storage Volumes at XXXXX , store the Storage Volumes at facilities in either Canada or the U.S. and, upon the request of XXXXX transport the Storage Volumes for redelivery to XXXXX at the Canada/U.S. border near XXXXX It is anticipated that the Storage Volumes will typically be stored for a period not exceeding eight months. Storage injections and withdrawals occur on an annual cyclical basis, with Storage Volumes typically being reduced to zero at the end of the yearly withdrawal cycle.

9. Injection and withdrawal of storage gas is a common practice of local distribution companies (LDC's), such as XXXXX has acted to put in place storage service as soon as it could in order to minimize transportation costs and maximize the efficient utilization of Canadian transportation capacity. The delay in having Storage Volumes stored for some period of time is an integral part of XXXXX business practice. This practice is consistent with the normal practices of similar situated gas purchasers (i.e., LDC's with a fluctuating system load).

10. At no time after the sale of the gas to XXXXX is the gas processed, transformed or altered in any way.

11. Once the gas is exported, pipeline meter tickets, statements or other evidence of exportation is provided to XXXXX to demonstrated that the gas was exported to the United States.

 XXXXX is enquiring if the supply of gas to XXXXX by XXXXX , based on the facts outlined above, qualifies for zero-rating under the provisions of Schedule VI, Part V, section 15 to the Excise Tax Act. XXXXX requests you to assume that XXXXX intends to export the gas by pipeline and that the conditions set forth in Schedule VI, Part V, paragraphs 15(c) and 15(d) are, or will be, met. What remains to be determined is whether the conditions outlined in Schedule VI, Part V, paragraphs 15(a) and 15(b) will be met in order that the supply of the gas by XXXXX to XXXXX may be zero-rated.

Schedule VI, Part V, paragraph 15(a) requires that "the recipient exports the gas as soon after it is delivered by the person to the recipient as is reasonable having regard to the circumstances surrounding the exportation and, where applicable, to the normal business practice of the recipient".

 XXXXX advises that the gas may be stored in Canada for up to eight months before it is exported to the United States. As stated by XXXXX "... the storage services are mandated by sound business practice and are undertaken to reduce the transportation costs that XXXXX would otherwise incur if the storage services were not available and to maximize the efficient use of Canadian pipeline transportation capacity. The concern over transportation costs and the desire to mitigate such costs is common to all purchasers of natural gas, regardless of whether they are residents of Canada. As a result, the delay caused by the implementation of the storage arrangements is within the normal business practice of all purchasers of natural gas, including XXXXX who serve markets with a fluctuating demand."

Based on the information provided, XXXXX is exporting the gas as soon after it is delivered by XXXXX to XXXXX as is reasonable given the circumstances surrounding the exportation and the normal business practice of XXXXX Therefore, the conditions outlined in Schedule VI, Part V, paragraph 15(a) are met.

Schedule VI, Part V, paragraph 15(b) requires that the gas is not acquired by the recipient for consumption, use or supply in Canada, except to the extent that it is used by a carrier as fuel or compressor gas to transport the gas by pipeline, before the exportation of the gas by the recipient.

The fact that gas is placed in storage at XXXXX facilities would not constitute consumption or use of the gas in Canada by XXXXX Also, XXXXX states that XXXXX does not resupply gas in Canada nor is it used in Canada by an ultimate consumer. However, before determining if the conditions outlined in Schedule VI, Part V, paragraph 15(b) are met, the following information should be obtained from XXXXX

A. Does XXXXX use any of the gas as fuel or compressor gas to transport the gas to and from its storage facilities? and

B. Is XXXXX a carrier?

The answers to these questions are important because XXXXX has indicated that XXXXX is providing a combined storage and transportation service (Point 8 in the Statement of Facts). Therefore, it is likely that some of the gas will probably be used by XXXXX as fuel or compressor gas. If this is the case, in order to meet the conditions outlined in Schedule VI, Part V, paragraph 15(b), and allow the zero-rating of the supply of gas by XXXXX to XXXXX must be a carrier.

If you determine that XXXXX is using some of the gas as fuel or compressor gas, but XXXXX is not a carrier, the conditions outlined in Schedule VI, Part V, paragraph 15(b) will not be met. As a result, the supply of gas by XXXXX to XXXXX will be subject to the GST at the standard rate of 7%.

If you require any further information, please contact Mr. Ryhorchuk at (613) 952-6743 or Mr. Randy Nanner at (613) 952-8810.

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Policy and Legislation Branch

c.c.:      R. Nanner
GAD: 1280(REG)
G. Ryhorchuk
XXXXX