Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 245240
Dear [Client]:
Subject: GST/HST INTERPRETATION
Emission Allowance
Thank you for your correspondence of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to compliance credits created under the Clean Fuel Regulations – SOR/2022-140 (the Regulations) issued under the Canadian Environmental Protection Act, 1999, S. C. 1999, c.33 (the CEPA).
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand the facts as follows:
1. The Regulations came into law on June 20, 2022 (Footnote 1). The Regulations, in part, aim to reduce greenhouse gas (GHG) emissions in the transportation sector by establishing decreasing annual lifecycle carbon intensity (CI) limits for each type of gasoline and diesel primary suppliers produce in Canada and import into Canada.
The Regulations apply to primary suppliers who produce in Canada or import into Canada a volume of 400 m3 or more of gasoline or diesel during a compliance period (Footnote 2).
2. Subsection 1(1) of the Regulations defines primary supplier to mean a person who
(a) owns, leases, operates, controls or manages a fuel production facility in Canada at which gasoline or diesel is produced; or
(b) imports gasoline or diesel into Canada
3. The CI of a fuel refers to the amount of carbon dioxide equivalent emissions per unit of energy released over the lifecycle of the fuel, including extraction, refining or processing, distribution, and end use. CI is measured in grams of carbon dioxide equivalent per megajoule of energy contained in the fuel (gCO2e/MJ) (Footnote 3).
Subsection 5(1) of the Regulations [specifies the CI limits (gCO2e/MJ) for each compliance period for 2023 to 2030 and beyond in the Fuel Carbon-Intensity Limits table and] states that a primary supplier’s pool …of a liquid fossil fuel that is set out in Column 1 of the table […] must not have a CI that is greater than the corresponding limit set out in Column 2 [of the table] for the corresponding compliance period. […]
Subsection 1(1) of the Regulations defines a compliance period, in part, to mean January 1, 2023 to June 30, 2023; July 1, 2023 to December 31, 2023, and then each calendar year thereafter.
4. Under subsection 5(2) of the Regulations, a primary supplier must comply with subsection 5(1) with respect to a fuel for a compliance period by lowering the CI of their pool of that fuel for that compliance period by an amount that is equal to the difference between the baseline CI for that fuel and the limit set out in the table above for that fuel and that compliance period (Footnote 4). The CI must be lowered by using compliance credits in accordance with section 11 to satisfy the reduction requirement for that compliance period.
5. Subsection 5(3) of the Regulations sets out the baseline CI to be 95 gCO2e/MJ for gasoline and 93 gCO2e/MJ for diesel.
6. Section 9 of the Regulations sets out the formula to determine whether the CI of a pool of gasoline or diesel is considered to be lowered for purposes of subsection 5(2) of the Regulations for a compliance period. It is understood that the formula returns a value of CO2e in metric tonnes.
7. Subsection 11(1) of the Regulations states that a primary supplier must use the compliance credits that they create under sections 19 and 20 of the Regulations, or that are transferred to them under the compliance-credit transfer system (CCTS), to satisfy a total reduction requirement (Footnote 5), (Footnote 6).
8. Subsection 11(2) of the Regulations states that the use of one compliance credit by a primary supplier for gasoline or diesel that is produced in Canada or imported into Canada during a compliance period is deemed to reduce by one tonne the quantity of CO2e released over the life cycle of that fuel during that compliance period.
Credit creation
9. Under subsection 19(1) and section 20 of the Regulations, compliance credits may be created by registered creators (Footnote 7) by undertaking activities in any of the following categories (Footnote 8):
- Compliance Category 1 credits are created under paragraphs 19(1)(a) and 20(a) of the Regulations by registered creators who undertake actions throughout the lifecycle of a liquid fossil fuel that reduce its CI (such as carbon capture and storage) through GHG emission reduction projects;
- Compliance Category 2 credits are created under paragraphs 19(1)(b), 19(1)(c), 20(b) or 20(c) of the Regulations by registered creators who supply low CI fuels (such as ethanol);
- Compliance Category 3 credits are created under paragraph 19(1)(d) of the Regulations if registered creators engage in end-use fuel switching in transportation (when an end user of fuel changes or retrofits their combustion devices to be powered by another fuel or energy source, such as electricity in transportation).
10. Subsection 1(1) of the Regulations defines registered creator to mean a person registered with the Minister (Footnote 9) in accordance with subsection 25(1) of the Regulations.
11. Subsection 25(1) of the Regulations states that a person who wishes to create (Footnote 10) compliance credits under subsection 19(1) or section 20 of the Regulations or under an agreement referred to in section 21 of the Regulations may register with the Minister as a registered creator.
12. Subsection 23(1) of the Regulations states that any compliance credit created under subsection 19(1) or section 20 of the Regulations is considered to be a provisional compliance credit (Footnote 11) at the time that it is created.
13. Subsection 23(2) of the Regulations states that a primary supplier must not use a provisional compliance credit to satisfy a total reduction requirement … and must not transfer a provisional compliance credit under the CCTS.
14. Subsection 23(4) of the Regulations states that a provisional compliance credit that is the subject of a credit-creation report submitted under section 120 or 121 of the Regulations ceases to be provisional when the Minister deposits it into a compliance-credit account under subsection 24(1) or (2) of the Regulations.
15. Subsection 23(5) of the Regulations states that on creation, a provisional compliance credit is owned by the registered creator who created it.
Verification and deposit of credits
16. Under section 120 of the Regulations, a registered creator must submit to the Minister, no later than the April 30 of the calendar year that follows the end of a compliance period, a report respecting the creation of compliance credits during that compliance period under paragraph 19(1)(a), subparagraph 19(1)(d)(i), (ii), (iv) or (v) or paragraph 20(a) of the Regulations (Footnote 12).
17. Under subsection 121(1) of the Regulations, a registered creator must submit to the Minister quarterly credit-creation reports respecting the creation of compliance credits during a compliance period under paragraph 19(1)(b) or (c), subparagraph 19(1)(d)(iii) or paragraph 20(b) or (c) of the Regulations by the date listed in the respective paragraph in the subsection (Footnote 13).
18. Depending on which type of compliance credit is created, the registered creator may be required to have the report verified by a verification body and obtain a verification report prepared by the body (Footnote 14). The verification report must then be submitted to the Minister (Footnote 15).
19. Subsection 24(1) of the Regulations states that the compliance credits that are the subject of a credit-creation report submitted under section 120 or 121 of the Regulations must be deposited by the Minister as soon as feasible after the reception of the report into the registered creator’s account that was opened under
(a) paragraph 28(a), in the case of a compliance credit created under subsection 19(1); and
(b) paragraph 28(b), in the case of a compliance credit created under section 20.
20. Subsection 24(2) of the Regulations states that the compliance credits created under section 88, 89 or 90 (Footnote 16) of the Regulations that are the subject of a credit-creation report submitted under section 120 or a credit-adjustment report submitted under section 122 must be deposited by the Minister as soon as feasible after the reception of the report into any of the registered creator’s compliance-credit accounts opened under section 28 of the Regulations.
21. Subsection 24(3) of the Regulations states that the Minister must assign an identification number to each compliance credit when it is deposited into a compliance-credit account.
22. Subsection 23(4) of the Regulations states that a provisional compliance credit that is the subject of a credit-creation report submitted under section 120 or 121 of the Regulations ceases to be provisional when the Minister deposits it into a compliance-credit account under subsection 24(1) or (2) of the Regulations.
23. Section 28 of the Regulations states that on the registration of a primary supplier under subsection 10(1) or a registered creator under subsection 25(1) of the Regulations, the Minister must open the following accounts for the primary supplier or the registered creator in the compliance-credit transfer system:
(a) a liquid-fuel-compliance-credit account; and
(b) a gaseous-fuel-compliance-credit account.
24. Section 29 of the Regulations states that a compliance credit that is deposited into an account must remain in that account until the compliance credit is cancelled or transferred.
Credit acquisition
25. Primary suppliers who do not meet their reduction targets after using the compliance credits they created or by paying into a registered emission-reduction funding program (under subsection 19(2) of the Regulations) may acquire compliance credits through direct trading with other primary suppliers or registered creators, or by a credit clearance mechanism.
26. Subsection 106(1) of the Regulations states that only a participant may transfer a compliance credit and the transfer must be to another participant.
27. Subsection 1(1) of the Regulations defines participant to mean a primary supplier who is registered with the Minister in accordance with subsection 10(1) or a registered creator who participates in the CCTS.
28. Subsection 1(1) of the Regulations defines the term CCTS to mean the system administered by the Minister for the transfer of credits in accordance with sections 105 to 112 of the Regulations.
29. Subsection 105(1) of the Regulations states that a registered creator who is not a registered primary supplier becomes a participant in the CCTS as of the first day on which they create a provisional compliance credit.
30. Subsection 105(2) of the Regulations states that a primary supplier becomes a participant in the CCTS as of the day on which they register as a primary supplier under subsection 10(1) of the Regulations.
31. Subsection 106(2) of the Regulations requires participants who wish to transfer any compliance credits to another participant to submit a transfer request to the Minister that is signed by their authorized agent and contains the information set out in this subsection. This information includes the specific type of compliance credit to be transferred.
32. Subsection 106(3) of the Regulations lists the credits created under the following paragraphs as eligible for transfer to another participant: 19(1)(a), 19(1)(b), 19(1)(c), 19(1)(d), 20(a), 20(b), and 20(c) of the Regulations.
33. Subsection 106(5) of the Regulations states that if the transfer request submitted to the Minister meets the requirements of subsections 106(2) to (4), the compliance credits described in the request must be withdrawn from the transferor’s account opened under paragraph 28(a) or (b) of the Regulations, as the case may be, and deposited into the account of the transferee that was opened under the same paragraph.
34. Subsection 108 (1) of the Regulations states that a registered creator who has created provisional compliance credits under paragraph 19(1)(b) or (c) or 20(b) or (c) by producing in Canada or importing into Canada a quantity of low-carbon-intensity fuel must not transfer those provisional compliance credits to a participant who is purchasing that low-carbon-intensity fuel unless the registered creator and the transferee submit a transfer request to the Minister that is signed by the authorized agent of the registered creator as well as the authorized agent of the transferee and contains the information referred to in subsection 108(2).
35. Subsection 108(2) of the Regulations includes information including:
(a) -(d) the names, address and other contact information for the registered creator, the transferee and their respective authorized agents;
(e) -(f) the type and carbon intensity of the low-carbon intensity fuel used to create the compliance credit; and
(g) the compliance period to which the transfer relates.
36. Section 109 of the Regulations states that after the Minister receives the transfer request, any compliance credits deposited by the Minister during the compliance period referred to in paragraph 108(2)(g) into the registered creator’s account opened under paragraph 28(a) or (b), as the case may be, must be immediately withdrawn from that account and deposited into the transferee’s account opened under the same paragraph.
37. Under section 112 of the Regulations, a primary supplier who cannot otherwise satisfy its compliance obligation by using credits it has created or acquired through direct trading must acquire Compliance Category 1, 2 and 3 credits via a credit clearing mechanism.
38. Under subsection 126(1) of the Regulations, a registered creator or a primary supplier must submit to the Minister a compliance-credit balance report no later than the August 15 that follows the end of a compliance period.
Subsection 126(2) of the Regulations sets out the requisite information that must be contained in the compliance-credit balance report.
Satisfaction of compliance obligation
39. Under subsection 127(1) of the Regulations, a registered primary supplier must, no later than the July 31 that follows the end of each compliance period, submit a report to the Minister with respect to their compliance for the compliance period with … the total reduction requirement (Footnote 17). The compliance report must contain the information referred to in Schedule 18 for the compliance period and be signed by the authorized agent of the primary supplier.
Schedule 18 to the Regulations includes, in part, information for the compliance period such as the type, quantity and location of liquid fuel produced in or imported into Canada; total reduction requirement, the number and type of compliance credits required to satisfy the reduction requirement.
40. Subsection 11(4) of the Regulations states that the Minister must cancel a compliance credit immediately after it is used.
Under subsection 128(1) of the Regulations, a registered primary supplier who, by the July 31 that follows the end of a compliance period, has not satisfied the total reduction requirement must submit to the Minister a complementary compliance report no later than the December 15 that follows the end of the compliance period.
RULING REQUESTED
You would like to know whether compliance credits generated under the Regulations constitute an emission allowance as defined in subsection 123(1) of the ETA.
RULING GIVEN
Based on the facts set out above, we rule that the compliance credits deposited by the Minister into a compliance-credit account of a primary supplier or registered creator under the Regulations are an emission allowance as defined in subsection 123(1) of the ETA.
EXPLANATION
An emission allowance is defined in subsection 123(1) as:
(a) an allowance, credit or similar instrument (other than a prescribed allowance, credit or instrument) that
(i) is issued or created by, or on behalf of,
(A) a government, a government of a foreign country, a government of a political subdivision of a country, a supranational organization or an international organization (each of which is in this definition referred to as a "regulator"),
(B) a board, commission or other body established by a regulator, or
(C) an agency of a regulator,
(ii) can be used to satisfy a requirement under
(A) a scheme or arrangement implemented by, or on behalf of, a regulator to regulate greenhouse gas emissions, or
(B) a prescribed scheme or arrangement, and
(iii) represents a specific quantity of greenhouse gas emissions expressed as carbon dioxide equivalent, or
(b) a prescribed property;
To meet the definition of emission allowance, an allowance, credit or similar instrument must satisfy all of the conditions set out in paragraph (a), or be prescribed in paragraph (b) of the definition of emission allowance in subsection 123(1) of the ETA. Currently, no property is prescribed.
Compliance credits created under subsection 19(1) and section 20 of the Regulations are credits for purposes of paragraph (a) of the definition of emission allowance in subsection 123(1) of the ETA. As the Minister is a government, the question to be determined in this case is whether the Minister, by depositing the Compliance Credits into the compliance-credit account of a primary supplier or registered creator under subsections 24(1) or 24(2) of the Regulations, is issuing the credits by, or on behalf of a regulator, as required by subparagraph (a)(i) of the definition of emission allowance in subsection 123(1) of the ETA.
It is the Canada Revenue Agency’s (CRA) view that where subsection 23(4) of the Regulations applies and the Minister deposits Compliance Credits into a compliance-credit account under subsection 24(1) or 24(2) of the Regulations, the Compliance Credits are being issued by a regulator and the condition set out in subparagraph (a)(i) of the definition of emission allowance in subsection 123(1) of the ETA is met.
Once issued by the Minister, the Compliance Credits can be used by primary suppliers to meet their annual CI compliance obligation imposed under subsection 5(2) of the Regulations. The requirements are mandatory under the CEPA and the Regulations which were implemented by the Government of Canada. Therefore, the condition in clause(a)(ii)(A) in the definition of emission allowance in subsection 123(1) of the ETA is met.
Subsection 11(2) of the Regulations deems that the use of one Compliance Credit reduces the quantity of CO2e released over the life cycle of fuel during that compliance period by one tonne. As a Compliance Credit represents a specific quantity of greenhouse gas emissions expressed as carbon dioxide equivalent, the condition in subparagraph (a)(iii) of the definition of emission allowance in subsection 123(1) of the ETA is met.
Based on the above, it is the CRA’s view that the Compliance Credits deposited by the Minister under the Regulations are an emission allowance as defined in subsection 123(1) of the ETA.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 343-550-1665. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287 or by fax to 1-418-566-0319.
Sincerely,
Alison Jones
Special Projects Unit
Public Services Bodies and Governments Division
GST/HST Rulings Directorate
FOOTNOTES
1 Subsection 139(1) of the CEPA states that no person shall produce, import or sell a fuel that does not meet the prescribed requirements. The Regulations, which have been made under subsection 140(1) of the CEPA and, for the compliance credits regime, under section 326 of CEPA, implement this prohibition.
2 Subsection 4(1) of the Regulations.
3 Subsection 1(1) of the Regulation defines carbon intensity and CO2e.
4 A primary supplier’s reduction requirement is calculated on a company-wide basis as subsection 8(1) of the Regulations requires a primary supplier to determine the total volume of their pool of gasoline and diesel that was produced in Canada or imported into Canada during a particular compliance period to calculate their reduction requirement.
5 Subsection 1(1) of the Regulations defines total reduction requirement to mean the sum of the reduction requirements in respect of gasoline and diesel for the compliance period that ended most recently, and the deferred portion of the reduction requirements for each preceding compliance period.
6 Under subsection 11(3) of the Regulations, compliance credits that are created as provisional compliance credits can be used to satisfy a primary supplier’s reduction requirement for the compliance period in which they were created, or for any subsequent compliance period, but newly created provisional credits cannot be used for any prior compliance periods.
7 Credits created under paragraphs 19(1)(a), 19(1)(c), 19(1)(d), 20(a) and 20(c) can also be created by a person who has entered into a valid agreement under section 21 of the Regulations which has been submitted to the Minister as per section 22.
8 Under 19(2) of the Regulations, a primary supplier may also create a compliance credit in respect of the liquid class if they make a contribution to a registered emission-reduction funding program in accordance with section 118 of the Regulations. As subsection 119(1) prohibits these compliance credits from be transferred, they cannot be traded. Therefore, the determination of whether they are an emission allowance is not necessary.
9 The term Minister is defined in subsection 3(1) of the CEPA as the Minister of the Environment. It is understood that this position changed to the Minister of Environment and Climate Change in 2015.
10 Subsection 25(2) of the Regulations state that a registered creator must not create provisional compliance credits under subsection 19(1) or section 20 of the Regulations until the day after the day on which they become a registered creator.
11 Subsection 1(1) of the Regulations defines provisional compliance credit to mean a compliance credit referred to in subsection 23(1) of the Regulations.
12 Subsection 120(3) of the Regulations states despite subsection (1), the registered creator must submit the credit-creation report for the compliance period that ends on December 31, 2022 no later than June 30, 2023.
13 Under subsection 121(3) of the Regulations, the registered creator must combine the reports required under subsection (1) for the compliance period that ends on December 31, 2022 into a single report and submitted no later than June 30, 2023.
14 Subsection 131(1) of the Regulations.
15 Subsection 131(3) of the Regulations.
16 Sections 88, 89, and 90 of the Regulations refer to credit adjustments.
17 Under subsection 127(3) of the Regulations, this reporting requirement does not apply in respect of any compliance period that ends before July 1, 2023.
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