15 July 1998 GST/HST Interpretation HQR0000870 - GST/HST Treatment of Fuel Gas

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

Dear XXXXX

This is in response to XXXXX letter of November 24, 1994 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fuel gas used in the operation of gas pipelines and to gas consumed by straddle plant operations.

We apologize for the delay in responding to this letter.

Issue

XXXXX had written to us to point out apparent discrepancies in rulings and interpretations with respect to the consumption of shipper's fuel gas by pipeline operators when transporting gas not intended for export. When a shipper ships natural gas via pipeline, the pipeline operator needs gas to fuel the pipeline's compressors. This gas is referred to as "fuel gas" or "compressor gas". The issue is the tax status of the fuel or compressor gas.

XXXXX also requested clarification of the treatment to be accorded fuel gas used to operate a straddle plant.

Interpretations Given in Previous Letters

As was noted in the incoming letter, HQ had responded to several letters requesting interpretations with respect to the fuel gas issue. A brief synopsis of the conclusions reached in each of those letters follows.

June 7, 1991

(HQ letter to XXXXX: In the letter, it was stated that the operator reduced its tariff to the shipper in return for the fuel gas. HQ's interpretation was that where gas is shipped, transported and delivered entirely in Canada, the supply of fuel gas would be a taxable supply since it was identified as a separate supply through the reduction in the tariff.

June 13, 1991

(Responses for outstanding issues from XXXXX meeting): This document outlined the Department's position on fuel gas consistently with the letter of June 7, 1991, to XXXXX[.] Again, the conclusion was that the provision of the fuel gas was a supply since it was separately identified through the reduction in the tariff paid for the service provided by the operator of the pipeline.

November 12, 1991

(HQ letter to XXXXX: The incoming letter from XXXXX stated that fuel gas may be supplied by XXXXX for nil consideration or it may be purchased from XXXXX by the shipper at a price. The interpretation given states that fuel or compressor gas used to transport gas for export, whether invoiced separately or not is zero-rated, as per the amendments announced in the Department of Finance Press Release dated November 5, 1991. The interpretation goes on to state that fuel or compressor gas used for the transportation of gas through a pipeline, otherwise than for export, is not a taxable supply.

November 20, 1991

(HQ letter to XXXXX[.] The arrangement between the pipeline operator and the shipper is not described in detail. The interpretation given is that fuel gas used to transport gas other than for export is not a taxable supply.

Department's Position

While there is a reference in the ETA to fuel gas, it relates to shipments of gas for export. Section 15 of Part V of Schedule VI to the ETA provides that gas shipped for export outside of Canada is zero-rated under certain conditions. One of these conditions is 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 provision does not apply to separate transactions involving fuel gas, nor is it relevant in determining the tax status of fuel gas.

The use of fuel gas or compressor gas, whether in a domestic or export situation, can be likened to the electricity used by a company when performing cleaning services for a business at the business's premises. The use of the business's electricity would not be considered to be a supply by the business to the cleaning company. Accordingly, since there is no supply, there is no tax exigible on the transfer.

Similarly, a supply has not occurred when a pipeline company uses some of a client's gas to pump the gas through the pipeline. However, if the client separately charges for the fuel gas, the client has made a supply to the pipeline company. Lastly, a supply from the pipeline company to the client would occur if the pipeline company makes a separate charge (either in the contracts or on the invoices) for fuel gas consumed in the process of transporting gas.

The tax treatment accorded to gas consumed by a straddle plant operator to process the shipper's gas through the plant would be the same as that of fuel or compressor gas. In particular, if gas is supplied to a client by a straddle plant operator as replacement for gas consumed during the processing through the straddle plant, then the operator would have made a supply to the client.

We thank you for bringing this issue to our attention. Should you have any further questions or require clarification on the issue, please contact Ivan Bastasic, Acting Manager of the Services Unit, at (613) 954-4291.

Yours truly,

Gwen Preston
Senior Rulings Officer,
Goods Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate