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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[addressee]
November 9, 2021
Case Number: 200342
Dear [client]:
Subject: EXCISE INTERPRETATION
Application of the Fuel Charge to Transactions under Buyback Arrangements
Thank you for your letter dated March 26, 2019, concerning the application of the Greenhouse Gas Pollution Pricing Act to transactions occurring under buyback arrangements. My apologies for the delay in responding to your letter.
All legislative references are to the Greenhouse Gas Pollution Pricing Act (the Act) and the regulations therein, unless otherwise specified.
We understand the following information regarding transactions occurring under a buyback arrangement:
Particular distributors deliver/sell fuel products to intermediaries and retailers/dealers who, in turn, deliver to their own customers. These retailers/dealers may also (deliver(Footnote1)) products to end customers of particular registered distributors, under a contractual agreement referred to as […] or […] or other name given to denote a similar contractual arrangement. These arrangements are generally known in the industry as “buybacks”.
These contractual agreements allow registered distributors or registered intermediaries (hereinafter referred to as registered distributors), depending on the situation, to “buyback” fuel products previously delivered to a retailer/dealer, at the moment immediately preceding the delivery of the product to an end customer of the first registered distributor who delivered the fuel products. The delivery to the end customer, by nature of the contractual arrangement, becomes the responsibility of that registered distributor who originally delivered the fuel products.
Generally, retailers are […] establishments, but can be independent dealers, and are not required, or may not be eligible, to be registered under the Act. Dealers are independent operators that deliver fuel to various end-customers. For purposes of this document, these establishments will be referred to as “retailer(s)/dealer(s)”.
End customers of a registered distributor that purchase fuel products at an independent retailer/dealer, operated by an intermediary, will do so on a […] system which identifies them as end customers of that registered distributor. Similarly, end customers of a registered distributor may obtain fuel products through a retailer/dealer based on specific delivery instructions provided by the registered distributor. When the end customer of that registered distributor receives the fuel, at that very moment, and as specified in the contractual agreement, the registered distributor who originally delivered the fuel products, becomes the legal person responsible for that fuel, essentially taking back the fuel product (known as a buyback) from the retailer/dealer at market price. The registered distributor will then bill their end customer for the fuel products that were delivered by the retailer/dealer.
System configurations allow tracking of fuel products transacted in this manner, between all parties linked in a buyback agreement. When an end customer of a registered distributor obtains a fuel product from a retailer/dealer, the system triggers a notification from the retailer/dealer which, in accordance with the obligations under the contractual arrangement in respect of those buybacks, sets off a series of accounting adjustments. This results in a credit note being issued by that registered distributor to that retailer/dealer for the exact quantity of fuel products delivered to the end customer of that registered distributor.
In a complex buyback agreement, where there are multiple registered distributors involved, we understand that these transactions reverse in the same order that they progressed through the supply chain until they are reflected in the records of the registered distributor to whom the end customer belongs.
Interpretation Requested
You would like to know the following:
1. Whether retailers can voluntarily register as a distributor under subsection 55(3);
2. Whether the first sale from a registered distributor to a chargeable person is the only chargeable event and whether any subsequent transactions create chargeable events.; and
3. The manner in which the contracting parties should account for the various transactions.
Interpretation Given
1. Subsection 55(3) outlines the requirements for permitting a person to register as a distributor. Under paragraph 55(3)(a), a person may register as a distributor in respect of a type of fuel if the person carries on the business of selling, delivering or distributing fuel of that type and, in the ordinary course of that business, delivers fuel of that type in a listed province to any of the following:
* another person for the purpose of resale, in the ordinary course of business, by the other person,
* a registered distributor in respect of that type of fuel,
* a farmer at a farm if the fuel is qualifying farming fuel,
* a fisher if the fuel is qualifying fishing fuel,
* a registered specified air carrier in respect of that type of fuel if the fuel is qualifying aviation fuel,
* a registered specified marine carrier in respect of that type of fuel if the fuel is qualifying marine fuel,
* a registered specified rail carrier in respect of that type of fuel if the fuel is qualifying rail fuel,
* a registered emitter at a covered facility of the registered emitter,
* a registered user in respect of that type of fuel, or
* to another person if the fuel is, in accordance with the Ships’ Stores Regulations, designated as ships’ stores for use on board a conveyance of a class prescribed under those regulations.
Although […] facilities are not specifically covered under this section, we refer you to the Regulations Amending the Fuel Charge Regulations: SOR/2019-265, published July 10, 2019. Section 20 of the regulations, for purposes of paragraph 55(3)(c) of the Act, allows an operator of a […] facility to register as a distributor in respect of a fuel that is a qualifying […] fuel if that operator carries on the business of selling, delivering or distributing fuel of that type, in a listed province to a […], that is their customer, at the operator’s […] facility. This permits the operator of the […] to register as a distributor and provide relief from the fuel charge to the […] when qualifying fuel is delivered to that […] through their […], and the delivery is subject to an exemption certificate in accordance with the Act. The registration also imposes the obligations of monthly reporting and paying the charge when required by that person.
In the context of the current request, the CRA is of the view that a delivery under a buyback arrangement does not result in a delivery of a type of fuel in a listed province by the retailer/dealer back to the registered distributor which holds a contractual arrangement with its end customer who purchased fuel at the retailer/dealer. Further, the CRA views buyback transactions, understood to be a transaction between the retailer/dealer and a registered distributor that is generated when the retailer/dealer delivers fuel to an end customer of that registered distributor as part of a contractual arrangement between the two, to be a return of goods.
As a result, a retailer/dealer, as described in the prior paragraph, is permitted to register only to the extent that it meets conditions provided for in the above-noted regulations or conditions described in paragraph 55(3)(a). A retailer/dealer is not permitted to register as a distributor strictly for purposes of the buyback agreement, since transactions under a buyback agreement are considered a return of goods from the retailer/dealer, who sold fuel to a client that had a contractual arrangement with that registered distributor, back to the registered distributor who originally delivered the fuel. Under this scenario, the retailer/dealer would not meet the legislative or regulatory requirements to register.
2. Subsection 17(1) applies a charge when a registered distributor delivers a type of fuel to a person in a listed province, unless the person is a farmer, a fisher or a registered person stipulated in subsection 17(2), or to a person eligible for relief in accordance with Regulations Amending Fuel Charge Regulations: SOR2019/65, and who has provided a valid exemption certificate in accordance with the Act. In the examples provided as part of your submission, it is the responsibility of the registered distributor to report and remit the fuel charge to the CRA when that registered distributor delivers a type of fuel in a listed province to a non-registered retailer/dealer. All deliveries by that non-registered retailer/dealer to its clients or to a client of a registered distributor occur with the fuel charge embedded in the price.
You noted that when the retailer/dealer delivers or sells fuel to an end customer of the registered distributor, the fuel product is considered to be “bought back” by one or more registered distributors when the transaction is linked to a [agreement] with the retailer/dealer. You further indicated that, in these types of agreements, the title to the product “bought back” reverts to the registered distributor with whom the end customer is bound by a delivery agreement, when the product is delivered to the end customer of that registered distributor through a retailer/dealer with whom the registered distributor has a [agreement].
Transactions where an end customer of a registered distributor receives fuel from a retailer/dealer in accordance with a [agreement], are known in the industry as “buybacks”. The CRA does not consider buyback arrangements to result in a delivery from the retailer/dealer back to the registered distributor holding a contractual arrangement with its client.
While the Act does not make specific reference to the return of goods, the CRA views the buyback transaction as a return of goods (for that fuel product and the listed province) and, at the same time, as a delivery to the end customer of that registered distributor when completed as part of contractual arrangement allowing the “buyback” to occur. It is the obligation of the registered distributor to report and pay the fuel charge, in accordance with subsection 17(1), when the fuel product is delivered to that registered distributor’s end customer through the retailer/dealer.
The CRA confirms that the buyback transactions and the manner in which they are accounted for, as described below, are an acceptable approach under the Act for dealing with transactions that occur under a [agreement] or other similar contractual arrangements that provide for the registered distributor to “buyback” the fuel delivered to its end-customer through a retailer/dealer. Delivery of a fuel product by a registered distributor to its end customer, who received the fuel via the retailer/dealer, creates a fuel charge obligation under subsection 17(1) for that registered distributor.
3. The various parties to these transactions are required to account for the transactions using standard accounting practices that would normally require the full reversal of the original transaction entries in the books and records, including the fuel charge, back through the distribution chain to the registered distributor who will be required to account for the fuel charge on the delivery to its end customer by a retailer/dealer under the [agreement] or other similar contractual arrangements.
For the registered distributor who paid the fuel charge on the initial delivery to the retailer/dealer in accordance with section 17(1), the transaction would result in a reversing of the revenue recorded at the time of original delivery to the retailer/dealer, the related cost of goods sold as well as increasing the inventory, reversing the fuel charge from the liability account and properly affecting the cash account or accounts receivable account. Any other registered distributor involved in the delivery chain must also reverse its accounting entries related to that fuel delivered.
However, the fuel charge account would be unaffected for transactions between registered distributors involved in the delivery chain for that transaction because exemption certificates would apply to those transactions. At the same time, the registered distributor, who is making the delivery to its end customer through a retailer/dealer, must properly record the delivery of the product to its end customer, as well as affect all related accounting records, including the fuel charge liability account, unless the end customer has provided an exemption certificate and that delivery is subject to an exemption certificate in accordance with the Act.
The registered distributor must demonstrate the direct link between the buyback volumes and the fuel delivered to its end customers. Deductions to the fuel charge liability account in these scenarios will be acceptable provided that they are valid and supported. It is the responsibility of the registered distributors and all participating parties to the [agreement] or other similar contractual arrangements to maintain detailed supporting documents and records that demonstrate they have met their obligations under this Act and to make such documents available to the CRA during an audit.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the Act, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 343-549-5873.
Yours truly,
Tim Hord
Industry Sector Specialist
Excise Program Integration – Fuel Charge Unit
Excise Duty and Taxes Division
Excise and GST/HST Rulings Directorate
FOOTNOTES
1 Delivery, is intended to mean delivery as defined in section 3 of the Act, which defines delivery as in respect of fuel or in respect of a substance, material or thing, includes, except in the definition confirmed delivery service and in Division 6, making the fuel, substance, material or thing available.
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