19 December 2003 GST/HST Interpretation 45870 - Application of the GST to Charges Under a Contract for Electricity

Please note that the following documents, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ces documents, bien qu'exacts au moment émis, peuvent ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX regarding the application of the Goods and Services Tax to charges under a contract for electricity. XXXXX. XXXXX.

XXXXX.

We understand the following with respect to how the industry usually operates:

1. When a contract sets out separate charges for capacity and electricity, generally the charges for capacity are fixed in the contract, while the charges for electricity are often determined in relation to the market price of electricity at the time of delivery. However, in some long-term contracts, the price of electricity may be fixed.

2. The contracts for electricity generally provide for a proportion of a reserved electricity capacity to be acquired by the recipient. This proportion may usually be selected by the recipient from within a range of percentages.

3. In some contracts, the recipient must pay for an amount of electricity corresponding to the lowest percentage of reserved capacity, even if the recipient does not have that amount of electricity delivered. These types of clauses are referred to as "take or pay".

4. Another type of contract used by the industry requires the supplier to furnish a fixed amount consisting of electricity and/or capacity. If the recipient does not receive the total amount contracted for in the form of electricity, then the supplier will invoice the recipient for the remainder of that agreed upon amount as capacity.

Interpretation Requested

How would CRA determine whether the charges for reserving capacity are for a distinct supply of reserving capacity or part of the consideration for the supply of electricity? What are the tax consequences of that determination?

Interpretation Given

Single or Multiple Supplies

Whether the capacity charge is considered to be for a separate supply of reserving capacity or part of the charge for the supply of electricity is determined on a case-by-case basis. The economic reality of a transaction is a key factor in identifying whether an element of a contract constitutes a supply by itself or is part of another supply. Therefore, during any review of a contract, consideration would be given to the industry's perception that the division of charges between capacity charges and energy charges is just a method of determining the consideration payable for the electricity.

In our view, an important factor in determining whether the reserving of capacity is a supply by itself, is whether there is a "take or pay" clause in the contract for electricity corresponding to a fixed proportion of the reserved capacity, or within a small range of such proportions. For example, where there is a minimum and a maximum proportion that must be taken or paid for by the recipient, and there is little difference between the two proportions, this would be an indication that the contract is for a single supply of electricity.

For those contracts that provide for a fixed amount to be supplied, consisting of electricity and/or capacity, where the main obligation of the supplier is the supply of that fixed amount, this would be an indication that the supply at issue is a single supply.

On the other hand, we understand that there may be some contracts where the clients find value in reserving capacity by itself. Such clients may not necessarily consume a great proportion of their reserved capacity, but they want to be assured that, if needed, the capacity will be available. Therefore, in these cases, there may be a separate supply of capacity.

Tax Consequences

A supply of electricity is considered to be a supply of tangible personal property. It is also a "continuous transmission commodity" as defined in subsection 123(1) of the Excise Tax Act (ETA). Where the electricity is delivered or made available outside Canada, the supply is deemed to be supplied outside Canada pursuant to paragraph 142(2)(a) of the ETA. Where the electricity is supplied in Canada for the purpose of being exported by means of a wire, pipeline or other conduit, such a supply would be zero-rated to a non-registered recipient pursuant to paragraph 1(a) of Part V of Schedule VI provided the other conditions of section 1 are met.

In the event that it is determined that a contract is not for a single supply of electricity but rather is for two separate supplies, namely, a supply of electricity and a supply of reserving capacity, the supply of reserving capacity is likely a supply of intangible personal property. The supply would be deemed to be made in Canada and be subject to tax, as the capacity is reserved from a production source in Canada, and the right to have the capacity is used in Canada. The supply would be deemed to be made in Canada pursuant to paragraph 142(1)(c) of the ETA. No zero-rating or exempting provision would apply to the supply of reserving capacity. As a result, the consideration for the supply of reserving capacity would be taxable at the rate of 7% where the supply is in a non-participating province, and the rate of 15% where the supply is made in a participating province (Nova Scotia, New Brunswick, or Newfoundland and Labrador).

If you require additional clarification or information, do not hesitate to contact John Sitka, Director, General Operations and Border Issues, at (613) 954-7959 or Alyson Trattner, Manager, Services and Intangibles Unit, at (613) 952-8813.

Yours truly,

E.H. Gauthier
Deputy Assistant Commissioner
Excise and GST/HST Rulings
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