DOCKET: GTP1483
11755-19(sn)
181.1
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Subject:
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Application of GST to Rebates Paid by Natural Gas Brokers to XXXXX
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The following summarizes telephone discussions of October 19, 1995 between Sara Nixon and XXXXX with respect to the application of GST to certain rebates paid by a natural gas broker to XXXXX[.]
Background
1. Prior to natural gas ("gas") deregulation in 1985, gas consumers had little choice as to the source of their gas supply. All gas consumers purchased their gas from local distributors. Prices and terms were based on agreements between the Government of Alberta and the federal government, and rates and terms were regulated by the XXXXX[.] Since deregulation, gas consumers have the ability to negotiate contracts to purchase gas from persons other than the gas distributor XXXXX[.] Gas distributors such as XXXXX earn their revenues from delivering gas; not from supplying it. For those gas consumers who also want to use their gas distributor as their gas supplier, these companies generally enter into long-term supply contracts to ensure a steady, guaranteed supply of gas. (Long-term being 15 to 20 year contracts) At times when gas prices are falling, the price to be paid to purchase gas under the long-term supply contract will generally be higher than the current price. Gas consumers are therefore motivated to find a method of purchasing gas which takes advantage of falling gas prices.
2. A gas consumer wishing to use an alternative gas supplier generally is not able to purchase from gas suppliers directly in enough volume so as to be able to negotiate a lower price of gas than that being offered by the gas distributor. As a consequence, independent brokers exist to purchase on behalf of groups of gas consumers.
3. XXXXX is a non-profit organization operating in XXXXX the members of which are generally residential apartments owners. XXXXX was initially formed to provide support to its members on issues such as tax, municipal by-laws, zoning, landlord and tenant rights and other similar matters as well as to obtain the best commodity prices possible for members through group action and purchasing. One particular function provided by XXXXX is to act as a broker in making bulk gas purchases directly from suppliers, for delivery to buildings owned by members.
4. A particular member of XXXXX ("gas user") enters into a written agreement called XXXXX which appoints XXXXX as the exclusive agent of the gas user for the purchase of gas on behalf of the gas user and the sale of gas to XXXXX for a certain period of time. The gas user agrees to pay for gas as supplied by XXXXX at the regular rates charged by XXXXX and to indemnify XXXXX for all losses and expenses which XXXXX might incur in the event that the gas user defaults on its payments to XXXXX[.]
5. As is indicated by the Exclusive Appointment of Agent agreement, there is an actual purchase of gas by XXXXX and an actual sale of gas by XXXXX. XXXXX then sells the gas to the gas user and charges its normal rates for gas supply and delivery. XXXXX has several methods of dealing with private gas consumers and their independent brokers. The most frequently used method is where XXXXX purchases the gas from the independent broker and resells the gas to the private gas consumer. This is the method used by XXXXX and the gas users who have appointed XXXXX as their gas purchasing agent. Embedded in the delivery charge per cubic meter of gas purchased by a gas user are a variety of charges for services provided by XXXXX such as transportation, load balancing, peaking and storage as well as the basic charge for the gas itself. Where a gas user is purchasing gas through an agent, the only charge which XXXXX is not making to the gas user is the basic charge for the gas itself. XXXXX continues to provide all of the other services of gas transportation and storage and load balancing and peaking and continues to make the same charge for those services. In the case of the load balancing and peaking charges, if a particular gas user contracts with a gas supplier through an independent agent for a certain volume of gas to be delivered by XXXXX and circumstances determine that the volume purchased is insufficient, the ongoing load balancing charge made by XXXXX is effectively the gas user's insurance that XXXXX will make arrangements to purchase any excess gas required by the gas user. When gas purchasing through independent agents initially became popular, the most efficient way that XXXXX had to deal with the accounting for the various transactions was to purchase the gas from the broker and resell to the gas user at the same price a gas user would pay when using XXXXX for both gas supply and gas distribution. There was therefore no requirement to amend billing procedures and rates to take into account who the gas supplier was.
6. As use of independent agents for purchasing gas has increased, XXXXX has developed a new method of accounting for the transactions. The method is called XXXXX being for transportation. Under this method, XXXXX never takes title to the gas. The broker bills the gas user directly. XXXXX bills for the bundle of services it is providing as the gas distributor. An available option will be for XXXXX to provide the billing service on behalf of the agent.
Application of GST
The application of GST to the described transactions will be dependent on whether or not XXXXX takes title to the gas it is supplying to the gas user. Ultimately, the gas user will pay the same amount of GST regardless of who his gas supplier is.
If XXXXX is using the XXXXX service method of billing for the gas supplied to the gas user and the broker bills the gas user directly for the supply of the gas, or XXXXX bills on behalf of the broker, (assuming legal agency is present), the billing to the gas user would reflect the lower current price that the broker has been able to negotiate for the gas user. GST would be charged on the lower price. No subsequent adjustment to the gas price is required after the billing is raised.
However, where XXXXX is purchasing the gas from the broker and then selling the gas to the gas user at XXXXX regular rates, the gas user must apply to the broker to receive the benefit of the lower price negotiated by the broker since that lower price has not been reflected in the XXXXX billing.
XXXXX is charging GST on the regular rates it is charging for the supply and delivery of the gas. When the broker subsequently pays an amount to the gas user to adjust the price paid for the gas to a lower amount, although this is a price adjustment, it is not being made to the gas user by the supplier of the gas. The provisions of former subsection 181(2) and current section 181.1 would therefore be the appropriate provisions of the Excise Tax Act ("the Act").
Payments which are subject to the provisions of section 181.1 are consideration for a supply which the provisions of section 181.1 act to treat as a taxable supply. Without the provisions of section 181.1 it is likely that the payments would be a financial service.
When a gas user signs an agreement with an independent broker and then purchases gas from XXXXX at the regular rates which XXXXX charges to all of its customers, the gas user knows that he is unconditionally entitled to some sort of payment (referred to as a rebate in section 181.1) from the independent broker as soon as he (the gas user) purchases gas from XXXXX[.] We would generally see that payment as being the settlement of a debt but for section 181.1. Section 181.1 deems the independent broker to have received a taxable supply of a service for use exclusively in commercial activity and to have paid, at the time the payment is made, tax in respect of the supply equal to the tax fraction. An input tax credit claim then becomes available.
Until December, 1992, the independent broker was not required to disclose that tax was included in the payment in order to claim an input tax credit. Since January 1, 1993, the independent broker is required to disclose the tax contained in the payment if he wishes to claim an input tax credit pursuant to section 181.1.
It appears that XXXXX has never processed a claim to recover the tax which is embedded in the amount of the payments it makes to the gas users. Unfortunately, as has been discussed, a portion of the tax which could have been recovered is now outside the four year limitation period. However, the input tax credit claim is available for the balance of the period with the additional disclosure requirement for any claim for a period after December, 1992.
Should you have any further questions on this matter, please contact one of the members of the Application Team in the Tax Provisions Unit. They are: Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 954-7931 and Sara Nixon (613) 954-4397.
H.L. Jones
Director
General Applications Division
GST Rulings & Interpretations
1494 (REG)
Mitch Bloom (signoff)
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