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: 245426
Dear [Client]:
Subject: GST/HST RULING
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 supplies of emission allowances issued under the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, chapter Q-2, r. 46.1 (the Regulation), established pursuant to the Environment Quality Act, CQLR C. Q-2 (the EQA).
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.
STATEMENT OF FACTS
We understand the facts as follows:
1. To fight global warming and climate change, the government of Quebec sets greenhouse gas (GHG) reduction targets for Quebec pursuant to section 46.4 of the EQA and established a cap-and-trade system (the System) pursuant to section 46.5 or the EQA. The Regulation sets the rules for the operation of the System with the first compliance period commencing on January 1, 2013(Footnote 1).
Compliance obligation
2. Pursuant to section 2 of the Regulation, generally any person or municipality who:
- operates an enterprise in a sector of activity listed in Appendix A(Footnote 2) of the Regulation and has annual GHG emissions equal to or exceeding the threshold of 25,000 metric tons of CO2 equivalent;
- acquires electricity that is generated outside Quebec for its own consumption or for sale in Quebec whose associated GHG emissions equal or exceed 25,000 metric tons of CO2 equivalent annually; or
- distributes 200 litres or more of certain fossil fuels (including gasoline, diesel fuel, propane, natural gas, and heating oil)
is an emitter subject to the Regulation and is required to register with the System(Footnote 3) (Footnote 4).
A person or municipality can choose to be register with the System if they operate a facility with emissions between 10,000 and 24,999 metric tonnes of CO2 equivalent(Footnote 5). Participants(Footnote 6) and clearing houses(Footnote 7) are also permitted to register with the System; for example, legal entities and natural persons wishing to obtain GHG emission allowances during government auctions or through the carbon market.
3. Subsection 3(5) of the Regulation defines emission allowance (hereinafter Quebec emission allowances) to mean
any emission allowance referred to in the second paragraph of section 46.6(Footnote 8) of the Environment Quality Act (chapter Q-2), namely a greenhouse gas emission unit, offset credit or early reduction credit, and any emission allowance issued by a partner entity(Footnote 9), each allowance having a value corresponding to one metric ton of greenhouse gas CO2 equivalent.
4. Section 19 and 19.0.1 of the Regulation generally state that every emitter referred to in section 2 and 2.1 of the Regulation is required to cover each metric tonne CO2 equivalent of the verified emissions from an establishment or, if applicable, an enterprise referred to in the same section when its GHG emissions are equal to or exceed the emissions threshold.
5. Section 20 of the Regulation states, in part:
To be valid for the purpose of covering GHG emissions, the emission allowances(Footnote 10) used to cover GHG emissions must meet the requirements of section 37 [of the Regulation] ….
6. Section 37 of the Regulation states, in part:
The following emission allowances(Footnote 11) may be traded through the system and used for compliance purposes:
(1) every emission unit and early reduction credit referred to in this Title(Footnote 12);
(2) every offset credit issued by the Minister(Footnote 13) pursuant to subparagraph 2 of the first paragraph of section 46.8 of the Environment Quality Act (chapter Q-2).
7. Section 21 of the Regulation states:
On 1 November following expiry of a compliance period or, if that day is not a business day, on the first following business day, at 8:00 p.m., every emitter must have at least as many emission allowances in its compliance account as its verified emissions …
The Minister deducts the required emission allowances in chronological order, from the least recent to the most recent according to their year of issue and vintage, in the following order:
(1) offset credits, up to the limit provided for in the second paragraph of section 20;
(1.1) emissions units from the Minister’s reserve account, using units from categories C, B and A, in that order;
(2) early reduction credits;
(3) emission units other than units referred to in subparagraph 1.1.
The emission allowances deducted by the Minister in accordance with this section are placed in the Minister’s retirement account and are extinguished.
Emission units
8. Under section 46.7 of the EQA, the Government, by order, sets a cap on the emission units that may be granted by the Minister for each period. The emission units created are placed into the Minister’s issuance account pursuant to section 6 of the Regulation.
9. Section 38 of the Regulation states:
Based on the cap on emission units set by order in accordance with section 46.7 of the Environment Quality Act (chapter Q-2), the Minister places in the Minister’s reserve account a quantity of emission units that may be used in adjusting the allocation made without charge in accordance with Division II or may be sold by mutual agreement in accordance with Division IV of this Chapter.
The quantity of emission units represents
…
(4) 4% of the emission units available under the cap set for the years 2021 and following.
The Minister places the unreserved emission units in the Minister’s allocation account. The units may be allocated without charge in accordance with Division II of this Chapter.
The emission units in excess of the total estimated quantities that may be allocated without charge for a given year are placed in the Minister’s auction account to be sold in accordance with Division III of this Chapter.
Early Reduction credits
10. Early reduction credits were granted to emitters who voluntarily reduced their GHG emissions in a period prior to when they were required to cover them.
Generally, section 66 of the Regulation states that an emitter referred to in the first paragraph of section 2 of the Regulation that is required to cover its GHG emissions starting with the compliance period starting on 1 January 2013 is eligible for early reduction credits. To be eligible, the conditions set out in sections 65, 66 and 67 of the Regulation(Footnote 14) must be met.
11. Under section 68 of the Regulation, an emitter wishing to be issued early reduction credits must send the Minister, no later than 31 May 2013, an application containing the required information and documents set out is section 68 of the Regulation.
12. Section 70 of the Regulation states
The Minister issues, to every emitter that meets the conditions of this Chapter, a quantity of early reduction credits corresponding to the lesser of
(1) the quantity calculated in accordance with section 69; and
(2) the quantity corresponding to the reductions that meet the conditions of this Chapter.
The credits are issued to the emitter’s general account by the Minister not later than 14 January 2014.
Offset credits
13. Under the Regulation, the Minister may issue offset credits representing GHG emission removals and reductions generated from projects that are certified and verified by third party auditors accredited in compliance in the requirements of the Regulation.
14. Section 70.2 of the Regulation states
A promoter(Footnote 15) must file with the Minister an issuance request for offset credits for the first reporting period(Footnote 16) for a project, established in accordance with the ministerial regulation(Footnote 17) that is applicable to the project not later than 6 months following the end of that period.
15. Section 70.3 of the Regulation contains the information and documentation required to be included in the issuance request for offset credits.
16. Section 70.4 of the Regulation states
The Minister, after receiving an issuance request accompanied by a verification report that includes a positive or qualified positive verification opinion, issues, as the case may be, an offset credit for each metric tonne CO2 equivalent of reduction in GHG emissions attributable to the project, quantified in accordance with the ministerial regulation that is applicable to the project, or offset credits corresponding to removals of GHG from the atmosphere attributable to the project, quantified in accordance with the ministerial regulation that is applicable to the project.
Trade
17. Section 24 of the Regulation states:
An emission allowance may be traded only between emitters, participants and clearing houses registered with the Minister or a partner entity.
18. Section 25 of the Regulation states that every emitter or participant(Footnote 18) who wishes to trade emission allowances with another emitter or participant must follow the procedure established in section 26 of the Regulation and send the Minister a transaction request containing the information set out in subsections (1)-(6) of this section.
19. Pursuant to section 27 of the Regulation, requests for transfer or retirement of emission allowances must be sent to the Minister.
RULING REQUESTED
You would like the Canada Revenue Agency (CRA) to clarify whether each of the Quebec emission allowances (i.e., emission units, offset credits and early reduction credits) are emission allowances for the purposes of subsection 221(2.1) of the ETA.
RULING GIVEN
Based on the facts set out above, we rule that Quebec emission allowances are issued by the Minister under the Regulation and meet the definition of emission allowance in subsection 123(1) of the ETA. As such, subsequent supplies of valid Quebec emission allowances permitted under the Regulation constitute supplies of emission allowances for purposes of Part IX of the ETA.
In addition, you further requested that the CRA publish its guidance clarifying whether each of the Quebec allowances are emission allowances for the purposes of subsection 221(2.1) of the ETA in a publication to the broader industry to avoid additional confusion regarding the interpretation of the definition. We provide the following comment.
The CRA reviews the relevant Canadian federal, provincial and international legislation as requests are received to determine which existing credits, allowances and other instruments are an emission allowance, as defined under subsection 123(1) of the ETA. Given that these laws are not administered by the CRA and are subject to change, the CRA cannot consistently verify if allowances, credits or similar instruments issued under these laws meet the ETA definition of emission allowance and update any public information. Therefore, the CRA does not anticipate publishing a document to the broader industry regarding each of the Quebec allowances or other provincial and federal credits, allowances and other instruments at this time. However, should you have a factual situation or transaction that involves Quebec emission allowances, we invite you to write to us including all of the relevant details.
In your letter you recommended that transactions made prior to the publication of CRA’s interpretation should not be assessed solely on the basis that the position taken by the taxpayers differs from CRA’s eventual position as there is currently significant uncertainty about CRA’s interpretation on emission allowances in general and on the emission performance units in particular. We provide the following comment.
Whether a supplier is responsible for collecting and reporting the tax on a supply (or whether the recipient is required to pay and remit the tax) can be determined only upon consideration of all applicable facts and legislation. During an audit, auditors have the discretion whether to (re) assess based on the facts of the case.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, CRA is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) 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. Definition of compliance period in subsection 3(12) of the Regulation.
2. Target sectors of activity include mining, industrial manufacturing, electric power transmission and pipeline transportation.
3. Section 7 of the Regulation.
4. Subsection 3(14) of the Regulation defines system to mean the cap-and-trade system for GHG emission allowances.
5. Sections 2.1 of the Regulation.
6. Section 8 of the Regulation.
7. Section 18.1 of the Regulation.
8. Section 46.6 of the EQA states that every emitter determined by regulation of the Government must, subject to the conditions and for each period determined by regulation of the Government, cover its GHG emissions with an equivalent number of emission allowances.
9. Emission allowances issued by a partner entity are not subject to this ruling.
10. Paragraph 2 of section 20 of the Regulation limits the quantity of offset credits an emitter may use to cover the GHG emissions to 8% of the GHG emissions to be covered in the compliance period.
11. Section 37 of the Regulation excludes Quebec emission allowances that have been suspended, cancelled, extinguished or used for compliance purposes under another cap-and-trade systems for GHG emission allowances or GHG emissions reduction program.
12. Title refers to Title III and includes section 36 to section 70.22 of the Regulation.
13. Minister is defined in section 1 of the EQA as the Minister of Sustainable Development, Environment and Parks
14. Section 66 of 67 of the Regulation.
15. Defined in subsection 3(12.1) of the Regulation to mean a person or municipality responsible for the implementation of a project eligible for the issuance of offset credits.
16. Defined in subsection 70.1(2) of the Regulation to mean a continuous period, within an eligibility period, during which reductions in GHG emissions or offset credits corresponding to removals of GHG from the atmosphere attributable to a project eligible for the issuance of offset credits are quantified pursuant to the ministerial regulation that is applicable to that project for the issuance of offset credits.
17. See Appendix D to the Regulation, and Regulation respecting landfill methane reclamation and destruction projects eligible for the issuance of offset credits, Regulation respecting landfill methane reclamation and destruction projects eligible for the issuance of offset credits, Regulation respecting afforestation and reforestation projects eligible for the issuance of offset credits on privately-owned land.
18. Clearing houses must following the process described in sections 26.1-26.4 of the Regulation.
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