27 July 1998 GST/HST Interpretation HQR0001246 - Exportation of Electricity

                                                                        GST/HST Rulings and
Interpretations
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Vanier, Ontario K1A 0L5

Dear XXXXX

Your facsimile message dated January 8, 1998, addressed to Mr. Robert Allwright, Senior Tax Policy Officer, Sales Tax Division, Department of Finance, has been forwarded to this office for reply. Specifically, you are enquiring about the exportation of electricity and the application of the zero-rating provisions of Schedule VI, Part V, section 1 to the Excise Tax Act (Act).

The following information was provided in your letter and in a facsimile message dated June 11, 1998, from XXXXX to Mr. Marcel Boivin, A/Manager, Border Issues Unit:

•   A non-resident company contracts with a Canadian utility to purchase electricity. The non-resident company also contracts with a second Canadian utility to "wheel" the electricity through the utility's transmission lines.

•   The electricity is delivered or made available to the non-resident in Canada and the non-resident subsequently exports the electricity.

•   During the transportation of electricity over the transmission lines a certain amount of electricity is "lost". This loss of electricity is referred to as line losses. Line losses are the energy lost in the transmission and/or distribution of electrical energy. It may be defined as the difference between the energy (in KWh) delivered to the grid (or line) and the energy supplied from the grid (or line) for export or to customers. Physically, line losses include resistive heat losses in the wires and connections, leakage to the ground through insulation, and reactive power flows caused by motors and other devices with a power factor less than unity. Line losses are the equivalent of scrap or waste in a manufacturing process.

•   During the transportation of electricity, transformers are utilized to increase (step-up) or decrease (step-down) the voltage, which results in the transformation or alteration of the electricity.

Interpretations Requested

1. Schedule VI, Part V, paragraph 1(b) excludes from zero-rating tangible personal property (i.e., electricity) that is acquired by the recipient (i.e., non-resident) for consumption, use or supply in Canada before the non-resident exports the electricity. Do the line losses constitute electricity acquired by the non-resident for consumption, use or supply in Canada?

2. If after the supply of the electricity is made, and before the non-resident exports the electricity, the electricity is further processed, transformed or altered in Canada to an extent that is not reasonably necessary or incidental to its transportation, Schedule VI, Part V, paragraph 1(c) excludes the supply from zero-rating. Is the use of the transformers to increase or decrease the voltage of the electricity reasonably necessary or incidental to the transportation of electricity?

Interpretations Given

Based on the information provided, I am pleased to provide the following interpretations:

1. Line losses do not constitute electricity that is acquired by the non-resident for consumption, use or supply in Canada before exportation. Therefore, the exclusion in Schedule VI, Part V, paragraph 1(b) does not apply.

2. The increase or decrease in the voltage of the electricity during transmission is reasonably necessary or incidental to its transportation. Therefore, the exclusion in Schedule VI, Part V, paragraph 1(c) does not apply.

The foregoing comments represent our general views with respect to the subject matter of your message. Unannounced or future amendments to the Act may result in changes to these interpretations. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6743.

Yours truly,

Garry L. Ryhorchuk
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Leglislative References:         Schedule VI, Part V, section 1
H.Q. letter dated 910725 (File : 11640-4(glr)) to XXXXX
H.Q. letter dated 9604 (File : 11640-3(dc)) to XXXXX
Department of Finance Explanatory Notes dated May 1990 (page 231)

NCS Subject Code:                 11640-4