28 March 2013 GST/HST Ruling 139339 - Recapture of Input Tax Credits on […] Propane [used in membrane roof systems]

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.

Dear [Client]:

Thank you for your letter dated September 15, 2011, regarding the requirement for […] [Company A] to recapture input tax credits (RITCs) in respect of its roofing and sheet metal activities in […] [Participating Province X]. We apologize for the delay in providing our response.

The Harmonized Sales Tax (HST) applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia. The Goods and Services Tax (GST) applies in the rest of Canada at the rate of 5%.

Effective April 1, 2013, the 12% HST in British Columbia will be replaced by the 5% GST and a provincial sales tax. It is also proposed that, effective April 1, 2013, the provincial sales tax and the 5% GST currently in effect in Prince Edward Island will be replaced by a 14% HST.

Statement of Facts

Our understanding of the facts is as follows:

1. [Company A] is a large business as defined under subsection 236.01(1) of the Excise Tax Act (ETA) and subsection 27(1) of the New Harmonized Value-Added Tax System Regulations No. 2 (the Regulations).

2. [Company A], as part of its roofing and sheet metal activities in [Participating Province X], acquires and uses propane, which qualifies as specified energy, as defined under section 26 of the Regulations.

3. The two main uses for propane in the installation of […] [membrane roof systems] are as follows:

(a) Torch-on membranes used by [Company A] require the use of propane fueled, 2000 degree "tiger" torches. The membrane is heated using these hand-held propane torches and welded to the substrate and/or the ply of the roofing membrane.

(b) Mopped-on membranes used by [Company A] require the use of propane fueled hot asphalt kettles to transition solid blocked asphalt to liquid asphalt at approximately 500 degrees. Once liquid, the asphalt is pumped onto a roof top and distributed using a process called "mopping", which creates a liquid asphalt bed on the substrate. The […] membrane is then rolled into the liquid asphalt. This process is then repeated for the 2nd ply of […] membrane and/or a tiger torch is used for the 2nd ply.

4. The roofing systems in question are manufactured by […] [Company B]. […]

5. [Company A's] Web site includes the following description: […]

Ruling Requested

It is your position that the RITC provisions of the ETA would not apply to propane used in [Company A's] installation of [membrane roof systems]. In particular, you feel that the installation of a roofing system constitutes the "production of tangible personal property for sale" and as such, any input tax credits (ITCs) for the provincial part of the HST paid or payable on specified energy (propane) used by [Company A] in installing the roofing systems should not be subject to the RITC requirements.

Ruling Given

Based on the facts set out above, we rule that propane used by [Company A] in its roof system installations is not specified production energy, as defined in section 31 of the Regulations. Accordingly, [Company A] is required to recapture ITCs for the provincial part of the HST paid or payable on propane used in its roof system installations.

Explanation

In general, only large businesses (whose revenues from taxable supplies are more than $10 million annually) and certain financial institutions are required to recapture ITCs for the provincial component of the HST paid or payable on specified property and services acquired, imported, or brought into [Participating Province X] for consumption or use in that province. You have stated that [Company A] is a large business for the purposes of the RITC requirement.

Pursuant to section 236.01 of the ETA and the Regulations, a large business will be subject to RITCs in respect of specified property or services that are acquired, or brought into [Participating Province X or Participating Province Y], by a large business for consumption or use by that business in those provinces.

Specified property and services include specified energy. Section 26 of the Regulations defines specified energy as:

(a) electricity, gas, steam; and

(b) anything (other than fuel for use in a propulsion engine) that can be used to generate energy;

(i) by way of combustion or oxidization; or

(ii) by undergoing a nuclear reaction in a reactor for the generation of energy.

Propane is a gas and thus would fall under the definition of "specified energy".

Relief from the requirement to recapture ITCs for the provincial part of the HST paid or payable on specified energy only applies to "specified production energy", which is defined under subsection 31(1) of the Regulations as specified energy used for the production of tangible personal property intended for resale.

We have determined that [Company A] is providing the service of installing a roof system. [Company A] does not manufacture the membrane roof systems itself. The membrane roof systems applied by [Company A] as part of its operations are produced by [Company B]. Furthermore, it is our position that the membrane roof systems, once attached to roofs, are permanent in nature. It would be extremely difficult to remove the membrane roof system from any property as this system would essentially be considered the roof of the property. The membrane roof system could not be removed from one property and re-installed on another property. Once removed, the membrane roof system would be rendered useless and a new roof system would have to be installed on the property. The membrane roof system greatly enhances the usefulness of any property on which it is installed. In essence, this system serves as the roof itself. Therefore, based on these facts, it can be concluded that the membrane roof systems, when attached to the roof, would constitute an improvement to the real property.

In conclusion, it is our opinion that [Company A] is not involved in the production of tangible personal property intended for sale in [Participating Province X], and consequently, cannot consider that a portion of its specified energy (propane) is being used in the production of tangible personal property intended for sale. As a large business, [Company A] is required to recapture 100% of its ITCs for the provincial component of the HST paid or payable on the acquisition of the propane used in [Participating Province X] in its roof system installation operations.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (905) 721-5220. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.

Yours truly,

Zubair Patel, CGA
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate