5 February 2013 GST/HST Ruling 141852 - Cross–Border Crude Oil Transactions

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.

[Addressee]	Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5
	Case Number: 141852
	Business Number: […]
	February 5, 2013

Dear [Client]:

Subject:

GST/HST RULING Cross-Border Crude Oil Transactions

Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to cross-border crude oil transactions between […]([…][Company A]) and […]([…][Company B])). We apologize for the delay in responding.

HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.  

All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.

Statement of Facts

We understand that:

1. [Company A] and [Company B] are affiliates of […] and are engaged in, […], oil […] and related activities.

2. [Company A] and [Company B] are actively engaged in commodities (specifically, crude oil) marketing (trading) and refining.

3. [Company B] is a US resident corporation with no establishment in Canada. [Company B] is registered for GST/HST purposes. Its GST/HST registration number is […].

4. [Company A] is a Canadian resident corporation. [Company A] is registered for GST/HST. Its GST/HST registration number is […].

5. Both [Company A] and [Company B] are engaged exclusively in commercial activities for GST/HST purposes.

6. [Company A] and [Company B] entered into a verbal agreement wherein [Company A] has agreed to sell crude oil to [Company B] on a regular and continuous basis.

7. The crude oil sold pursuant to this agreement generally originates in […] Canada and is, specifically, of the following varieties: […].

8. The crude oil sold from [Company A] to [Company B] is transported from [Company A] to [Company B] along a pipeline operated by […][XYZ]. […]

9. The crude oil is considered to be sold from [Company A] to [Company B] either before or at the point that it is injected into the pipeline. Specifically, legal title to and delivery of the crude oil transfers from [Company A] to [Company B] at such time. You understand that this is consistent with [XYZ] tariff arrangement.

10. You have indicated that the crude oil is transported via [XYZ] pipeline into the US. Specifically, it is brought to […][City 1, US] and […][City 2, US] where it is processed at certain […] refineries.

11. [Company B], as it becomes the legal owner of the crude oil in Canada, is identified as the importer of record for US Customs import declaration purposes.

12. In certain situations, [Company B] will not require the crude oil that it has purchased from [Company A] (e.g., the refinery may not have capacity to process the crude oil due to a refinery upset) so it will provide the crude oil back to [Company A].

13. The provision of crude oil back to [Company A] is calculated at the then current market price. Specifically, [Company A] could settle with (refund to) [Company B] an amount equal to, lesser than, or greater than the original sale price to [Company B]. The provisions of crude oil from [Company B] back to [Company A] are recorded as sales and purchases respectively in […] accounting system. Legal title to the crude oil is transferred from [Company B] to [Company A].

14. […]. Such recording specifically allows the parties to accurately reflect market price changes for accounting purposes.

15. The crude oil that has already been purchased by [Company B] and that is provided back to [Company A] is offset (netted) against current/future sales of crude oil made by [Company A] to [Company B].

16. You have indicated that the crude oil that is provided back is offset against the same class of crude oil then being sold by [Company A] (e.g., Heavy Crude Petroleum provided back is netted against Heavy Crude Petroleum being sold).

17. As a part of its standard processes and procedures, [Company A] will accept back less of a particular class of crude oil than it is selling in a particular period, i.e., there is a net amount of crude oil (of all classes) supplied from [Company A] to [Company B] in any given period. For example, in your letter you have provided a table containing data with respect to various transactions for illustrative purposes.

18. In many cases, the crude oil has crossed the border and is physically in the US when it is provided back to [Company A] and, in other cases, it has not yet crossed the border and is physically still in Canada.

19. Once the crude oil is provided back to [Company A], it will then sell it in Canada to a purchaser who will use or further supply the crude oil in Canada, sell it in Canada to a purchaser who will export the crude oil, or sell it outside of Canada after receiving the crude oil outside of Canada.

20. With respect to the sale of crude oil from [Company A] to [Company B], [Company A] charges GST/HST to [Company B] at a rate of 0% (zero-rated) based on what you have indicated is the fact that the crude oil is intended to be exported from Canada.

21. With respect to [Company B] providing the crude oil back to [Company A], currently no GST/HST is being accounted for on this provision.

22. […].

Ruling Requested

You would like confirmation that [Company B] is not required to collect tax in respect of the provisions of crude oil to [Company A] as described in the facts on the basis that either:

(i) the provisions of crude oil are not supplies, but rather product returns that constitute reductions of consideration for the initial supplies of crude oil made by [Company A] within the meaning of subsection 232(2), or,

(ii) if the provisions of crude oil are supplies, that those supplies are either deemed to be made outside Canada pursuant to paragraph 142(2)(a), or that the value of the consideration for those supplies is deemed to be nil under the barter rules in subsection 153(3).

Ruling Given

Based on the facts set out above, we rule that:

1. The provisions of crude oil by [Company B] to [Company A] as described in the facts are taxable (other than zero-rated) supplies of the crude oil made by way of sale that are not considered to be reductions of the consideration for the initial supplies of crude oil made by [Company A] within the meaning of subsection 232(2).

2. Subsection 153(3) does not apply to deem the value of the consideration for those supplies to be nil.

3. [Company B] is therefore required to collect tax in respect of those supplies of crude oil that is, or is to be, delivered or made available to [Company A] in Canada, and is consequently deemed to be supplied in Canada pursuant to paragraph 142(1)(a).

4. [Company B] is not required to collect tax in respect of those supplies of crude oil that is, or is to be, delivered or made available outside Canada to [Company A], and is consequently deemed to be supplied outside Canada pursuant to paragraph 142(2)(a).

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

Ruling #1 - Reduction of consideration for purposes of subsection 232(2)

Subsection 232(2) provides that where a particular person has charged to, or collected from, another person tax under Division II calculated on the consideration or a part thereof for a supply and, for any reason, the consideration or part is subsequently reduced, the particular person may, in or within four years after the end of the reporting period of the particular person in which the consideration was so reduced,

(a) where tax calculated on the consideration or part was charged but not collected, adjust the amount of tax charged by subtracting the portion of the tax that was calculated on the amount by which the consideration or part was so reduced; and

(b) where the tax calculated on the consideration or part was collected, refund or credit to that other person the portion of the tax that was calculated on the amount by which the consideration or part was so reduced.

As set out in GST/HST Memoranda Series 12.2, Refund, Adjustment, or Credit of the GST/HST Under Section 232 of the Excise Tax Act, a reduction in consideration for purposes of subsection 232(2) may occur under the following circumstances:

* when some or all of the consideration is returned;

* as a result of surpassing a certain volume of purchases, i.e., a volume rebate;

* where goods delivered are found to be substandard; or

* where goods are returned to the supplier for a full or partial refund of the consideration.

The reduction in consideration must relate to the original supply and may be made for any reason but must not depend on any action undertaken by the recipient or any supply made by the recipient.  Furthermore, a reduction in consideration is not considered to have occurred if the goods are sold back to the original supplier. To be considered a reduction of consideration, it must be evident that the goods are being returned to the supplier rather than being sold to the supplier.

[Company B] and [Company A] respectively track and record the provisions of crude oil by [Company B] to [Company A] in their accounting system as sales and purchases made at current market prices with a corresponding transfer of ownership. In some cases, the current market price when the crude oil is supplied from [Company B] to [Company A] will actually be greater than the market price of the crude oil when it was supplied from [Company A] to [Company B]. Based on these facts, [Company B] is considered to be selling the crude oil to [Company A], rather than merely returning the crude oil back to [Company A]. As a result, the provisions of crude oil by [Company B] to [Company A] are not considered to be reductions of the consideration for the initial supplies of crude oil made by [Company A] within the meaning of subsection 232(2).

Ruling #2 - Barter rules under subsection 153(3)

Subsection 153(3) provides that where property of a particular class or kind is exchanged between registrants as consideration or part thereof for the same class or kind of property as inventory for use exclusively in commercial activities, the value of the consideration or that part thereof is deemed to be nil.

Certain conditions must be satisfied for subsection 153(3) to apply. Although we understand that there is no physical change in possession of the crude oil being supplied by each party to the other, based on the facts, there is a change in ownership of the crude oil and each supply is recorded as a purchase or sale in the books and records of each party.

However, based on the facts, the crude oil supplied by [Company B] does not serve as consideration for the supplies of crude oil by [Company A] to [Company B]. You state in your letter that the crude oil that is supplied back to [Company A] is offset (netted) against current/future sales of crude oil made by [Company A] to [Company B]. It is our view that there is a difference between property supplied as consideration for other property, and property which is supplied for which a credit is given for use against future supplies.

It is CRA's position that a credit for a specific dollar amount provided in exchange for a supply (in this case, the supplies of crude oil made back to [Company A] by [Company B]) is considered to be the same as consideration that is expressed as money. Therefore, the condition that property be supplied as consideration for other property in order for subsection 153(3) to apply is not met in this case.

For your information, where the supply made back to a supplier for which the supplier receives a credit takes place in a particular reporting period and the use of the credit for the subsequent supply takes place in another reporting period, the transactions have to be accounted for in the appropriate reporting period.

Rulings #3 and #4 - Place of supply under section 142

Pursuant to paragraph 142(1)(a), a supply by way of sale of tangible personal property (TPP) is deemed to be made in Canada (subject to sections 143, 144 and 179) if the TPP is, or is to be, delivered or made available in Canada to the recipient of the supply. Alternatively, pursuant to paragraph 142(2)(a), a supply by way of sale of TPP is deemed to be made outside Canada, if the TPP is, or is to be, delivered or made available outside Canada to the recipient of the supply.

Generally, this place of supply rule is based on where legal delivery of the goods to the recipient occurs, which can generally be determined by reference to the terms of the agreement for the sale of the goods and the applicable sale of goods law, taking into account the facts of each case.

The crude oil that is physically outside Canada when it is sold by [Company B] to [Company A] will, subject to any evidence to the contrary, be considered to be delivered or made available outside Canada to [Company A], and consequently deemed to be made outside Canada pursuant to paragraph 142(2)(a). [Company B] is not required to collect tax in respect of these supplies.

[Company B] is required to collect tax in respect of the supplies of crude oil that it makes to [Company A] that are otherwise determined to be delivered or made available in Canada to [Company A], and consequently deemed to be made in Canada pursuant to paragraph 142(1)(a).

A taxable (other than zero-rated) supply that is made in Canada is subject to GST at a rate of 5% if made in a non-participating province and is subject to HST at the applicable rate if it is made in a participating province.

Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. Furthermore, a supply that is made in Canada that is not made in any participating province is deemed to be made in a non-participating province.

Pursuant to section 1 of Part II of Schedule IX, a supply of TPP by way of sale is made in a province if the supplier delivers the TPP, or makes it available, in that province to the recipient of the supply.

Section 3 of Part II of Schedule IX further provides that TPP is deemed to be delivered in a particular province by a supplier and is deemed not to be delivered in any other province by the supplier where the supplier either:

• ships the TPP to a destination in the particular province that is specified in the contract for carriage of the TPP,

• transfers possession of the TPP to a common carrier or consignee that the supplier has retained on behalf of the recipient to ship the TPP to such a destination; or

• sends the TPP by mail or courier to an address in the particular province.

Additional comments regarding the supplies of crude oil made by [Company A] to [Company B]

In your letter, it is stated that the initial supplies of crude oil made by [Company A] to [Company B] are zero-rated based on the fact that the crude oil is intended to be exported from Canada.

Section 15.2 of Part V of Schedule VI zero-rates the supply of a continuous transmission commodity made to a recipient who is registered for GST/HST purposes in certain circumstances. In order for this provision to apply, the recipient must provide the supplier with a declaration in writing that:

(a) the recipient intends to export the commodity by means of a wire, pipeline or other conduit in the circumstances described in

(i) in the case of natural gas, paragraphs 15(a) to (c) of Part V of Schedule VI, and

(ii) in any other case, paragraphs 1(b) to (d) of Part V of Schedule VI, or

(b) the recipient intends to supply the commodity in the circumstances described in subparagraphs 15.1(a)(i) to (iv) of Part V of Schedule VI.

The conditions in paragraphs 1(b) to (d) of Part V of Schedule VI are as follows:

(b) the recipient exports the TPP as soon after the TPP is delivered by the person to the recipient as is reasonable having regard to the circumstances surrounding the exportation and, where applicable, to the normal business practice of the recipient;

(c) the TPP is not acquired by the recipient for consumption, use or supply in Canada before the exportation of the TPP by the recipient;

(d) after the supply is made and before the recipient exports the TPP, the TPP is not further processed, transformed or altered in Canada except to the extent reasonably necessary or incidental to its transportation.

A further condition for the application of section 15.2 of Part V of Schedule VI is that, if the recipient subsequently neither exports the commodity as described in paragraph 15.2(a) nor supplies it as described in paragraph 15.2(b), it is the case that the supplier did not know, and could not reasonably be expected to have known, at or before the latest time at which tax in respect of the particular supply, calculated at the rate set out in subsection 165(1), would have become payable if the supply were not a zero-rated supply, that the recipient would neither so export nor so supply the commodity.

If a registrant has received a zero-rated supply of a continuous transmission commodity included in section 15.2 of Part V of Schedule VI in a situation where the previously explained conditions have been met, and the commodity is neither exported, as described in paragraph (a) of that section, nor supplied, as described in paragraph (b) of that section, by the registrant, section 236.1 requires the registrant to add an amount to its net tax for the reporting period that includes the earliest day on which tax, calculated at the rate set out in subsection 165(1), would have become payable in respect of the supply. This addition to net tax reflects the cash-flow benefit that the registrant received by acquiring the supply on a zero-rated basis. The amount to be added to net tax is equal to interest, at the prescribed rate, on the total amount of tax that would have been payable in respect of the supply if it were not a zero-rated supply, computed for the period beginning on that earliest day on which the tax would have become payable and ending on the day on or before which the return for that reporting period is required to be filed.

There is no indication in your letter that [Company B] has provided a written export declaration to [Company A] pursuant to section 15.2 of Part V of Schedule VI with respect to the supplies of crude oil made by [Company A] to [Company B] described in your letter. Furthermore, in order to provide such a written export declaration, the recipient must, from the outset, clearly be intending to export the continuous transmission commodity, such as crude oil, that is being purchased. If the recipient does not know at the time of purchase whether the continuous transmission commodity, including a portion thereof, purchased from a particular supplier will be exported, then the recipient cannot and should not provide a written declaration stating that the commodity is intended to be exported in the circumstances described in paragraphs 1(b) to (d) of Part V of Schedule VI.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8220. 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,

Kevin W. Smith
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate