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: 231162
Dear [Client]:
Subject: GST/HST RULING
Emission allowance
Thank you for your correspondence of August 11, 2021, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the sale of British Columbia Low Carbon Fuel Standard (BC-LCFS) credits and debits.
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 following:
1. The British Columbia (B.C.) government enacted the Greenhouse Gas Reduction (Renewable and Low Carbon Fuel Requirements) Act (the GGR Act) and the related Renewable and Low Carbon Fuel Requirements Regulation (the Regulation) to reduce Greenhouse Gas (GHG) emissions in the transportation sector by encouraging the use and supply(Footnote 1) of alternate renewable and low carbon fuels in B.C. (Footnote 2)
2. Together, the GGR Act and the Regulation set out two main requirements fuel suppliers must meet in respect of the fuel they supply:
a. Minimum renewable fuel content – Fuels must have a 5% annual average renewable content in gasoline and 4% renewable content in diesel. (Footnote 3)
b. Annual carbon intensity limits. Fuels must have a carbon intensity that meets the increasingly stringent carbon intensity reduction limits each year.
Part 3 of the GGR Act requires fuel suppliers to reduce the carbon intensity of the gasoline and diesel fuel that they supply. Subsection 11.02(1) of the Regulation establishes a schedule of declining carbon intensity limits for each Part 3 fuel class.
3. Under section 1 of the GGR Act, a “Part 3 fuel supplier” means
(a) a person who, within [B.C.], sells Part 3 fuel for the first time after it is manufactured in or brought into [B.C.],
(b) in relation to Part 3 fuel that is not covered by paragraph (a) but is
(i) manufactured or received in [B.C.], or
(ii) brought into [B.C.],
for use in [B.C.], a person prescribed as being a Part 3 fuel supplier, or
(c) a person who is designated as a Part 3 fuel supplier under section 7.1.
Part 3 fuel suppliers must comply with the legislation unless they qualify for an exemption under section 11.022 of the Regulation. Compliance with Part 3 of the GGR Act is measured in terms of credits and debits.
4. Under section 1 of the GGR Act a “credit” is, in relation to a particular diesel class fuel or a particular gasoline class fuel, as applicable, for a period, means a positive difference, in tonnes of carbon dioxide equivalent emissions, between
(a) the number of tonnes of carbon dioxide equivalent emissions that a Part 3 fuel supplier could have had attributable to the quantity of the particular fuel it supplied in the period without exceeding the prescribed carbon intensity limit for the applicable class of fuel for the compliance period of which that period forms all or part, and
(b) the number of tonnes of carbon dioxide equivalent emissions attributable to the quantity of that particular Part 3 fuel that the Part 3 fuel supplier supplied in the period, and includes a credit issued under a Part 3 agreement.
and includes a credit issued under a Part 3 agreement.
5. Under section 1 of the GGR Act, a “debit” is, in relation to a particular diesel class fuel or a particular gasoline class fuel, as applicable, for a period, means a negative difference, in tonnes of carbon dioxide equivalent emissions, between
(a) the number of tonnes of carbon dioxide equivalent emissions that a Part 3 fuel supplier could have had attributable to the quantity of the particular fuel it supplied in the period without exceeding the prescribed carbon intensity limit for the applicable class of fuel for the compliance period of which that period forms all or part, and
(b) the number of tonnes of carbon dioxide equivalent emissions attributable to the quantity of that particular Part 3 fuel that the Part 3 fuel supplier supplied in the period;
6. Under subsection 6(1) of the GGR Act, a Part 3 fuel supplier must ensure that the sum of the credits it generates or acquires and applies against debits for a compliance period is equal to or greater than the number of debits the Part 3 fuel supplier is required to set off against credits for that compliance period(Footnote 4).
7. Under subsection 6(2) of the GGR Act, a Part 3 fuel supplier must set off against credits for a compliance period all debits that the Part 3 fuel supplier
(a) calculates under subsection (4) in respect of Part 3 fuel it supplies in the compliance period, or
(b) acquires under section 8 [transferring credits and debits] in that compliance period and has not transferred under section 8.
At the end of each compliance period a Part 3 fuel supplier with more debits than credits for that compliance period is out of compliance and therefore subject to an automatic penalty.
8. To comply with the GGR Act, Part 3 fuel suppliers can:
a. Supply low carbon fuels – A Part 3 fuel supplier generates credits for supplying fuels with a carbon intensity below the limits;
b. Enter into a Part 3 agreement – A Part 3 agreement is formed between a Part 3 fuel supplier and the director appointed under the GGR Act. Under this agreement, the Part 3 fuel supplier earns credits by engaging in actions that will help reduce GHG emissions through the use of Part 3 fuels; and/or
c. Engage in credit trading – Acquire validated credits from other Part 3 fuel suppliers.
Supply low carbon fuels
9. Where a Part 3 fuel supplier supplies Part 3 fuel, subsection 6(4) of the GGR Act requires the Part 3 fuel supplier to calculate, using the following formula, the credits it generated or debits it incurred for each Part 3 fuel it supplied in the compliance period:
Credit or Debit = (CI class × EER fuel – CI fuel) × EC fuel/1 000 000
where
Credit or Debit = the number of credits generated, if the number is positive, or the number of debits incurred, if the number is negative, for the compliance period;
CI Class = the prescribed carbon intensity limit for the compliance period for the class of fuel of which the fuel is a part;
EER fuel = the prescribed energy effectiveness ratio for that fuel in that class of fuel;
CI fuel = the carbon intensity of the fuel;
EC fuel = the energy content of the fuel calculated in accordance with the regulation.
Values for the Credit or Debit formula, including CI class, EER fuel and prescribed energy densities are published in the Regulation(Footnote 5).
Part 3 agreements
10. Under subsection 8.01(3) of the GGR Act, the director may enter into an agreement(Footnote 6) under subsection (1) of the GGR Act
(a) on request of a Part 3 fuel supplier, or
(b) after advertising to and inviting proposals from all Part 3 fuel suppliers.
11. Under section 1 of the GGR Act, a “director” is a government employee designated as the director by the Minister of Energy, Mines and Low Carbon Innovation for the purpose of the Act.
12. Under subsection 8.01(5) of the GGR Act, the director may agree to issue credits under a Part 3 agreement for an action in respect of which the Part 3 fuel supplier also generates, or is likely to generate, credits under section 6(4) of the GGR Act for the same or a different compliance period.
13. Under subsection 8.01(6) of the GGR Act, if the director is satisfied by evidence provided under subsection (4)(d) that the Part 3 fuel supplier has completed the action, or a stage of the action, that, under the agreement, entitles the Part 3 fuel supplier to a credit, the director must issue the credit.
14. A credit issued under subsection 8.01(6) of the GGR Act may be
(a) applied against the Part 3 fuel supplier's debits for any compliance period or, if the regulations restrict the application of credits generated in a compliance period to prescribed compliance periods, against the Part 3 fuel supplier's debits for a compliance period prescribed for that purpose, or
(b) transferred under section 8.
15. Under subsection 8.01(8) of the GGR Act, a credit issued under subsection (6) is conclusively deemed to be a validated credit for the purposes of section 8 of the GGR Act.
Credit and debit trading
16. Under subsection 8(2) of the GGR Act, subject to the regulation, a Part 3 fuel supplier may transfer to another Part 3 fuel supplier
(a) some or all of its validated credits for a compliance period or for a 3 month period of a compliance period, or
(b) some or all of the debits it incurs for a compliance period.
17. Under subsection 8(1) of the GGR Act, "validated credit" means a credit
(a) validated by the director under subsection (5), or
(b) issued by the director under a Part 3 agreement.
18. The GGR Act does not require the debits to be validated before transfer.
19. Under subsection 8(4) of the GGR Act, before transferring a credit under subsection (2)(a), the Part 3 fuel supplier must apply to the director, in accordance with the regulation, for validation of the credit. The application for validation submitted to the director must meet the requirements in section 11.101 of the Regulation.
20. Under section 11.11 of the Regulation, all credit transfers must be approved by the director through the submission of a Credit Transfer Proposal Form signed by both the transferor/seller and transferee/buyer.
21. It is understood that the credits and debits are not serialized or registered on a registry and therefore the purchaser does not know whether they are purchasing credits generated by a Part 3 fuel supplier and validated by the government or issued to a Part 3 fuel supplier by the government under a Part 3 agreement.
INTERPRETATION REQUESTED
You would like to know the following:
- Does the BC-LCFS credit meet the definition of an emission allowance pursuant to subsection 123(1), and thus requiring a registered purchaser to self-assess and remit the GST to the Canada Revenue Agency (CRA) pursuant to subsections 221(2.1) and 228(4)? If subsection 221(2.1) applies, it is understood the supplier is relieved of its obligation to charge and collect GST from the recipient.
- In the event the supply meets the definition of an emission allowance and where the supplier incorrectly charges GST to the recipient where subsection 221(2.1) applies and are otherwise relieved from their obligation to charge and collect GST pursuant to subsection 221(1), and if GST is paid by the recipient who is registered, how would the recipient recover the tax paid? Would the registered recipient be eligible for an input tax credit (ITC) or apply for a rebate of tax paid in error from CRA in respect of the tax paid to the supplier?
- In the event that a debit under the BC-LCFS is sold, what would be the GST treatment of this transaction? In the event the sale is characterized as a taxable supply, who is responsible for remitting the GST? Is the recipient entitled to an ITC?
RULING GIVEN
Based on the facts set out above, we rule that BC-LCFS credits do not meet the definition of emission allowance in subsection 123(1). In addition, we further rule that BC-LCFS debits do not meet the definition of emission allowance in subsection 123(1). As a result, the general rule for the collection and remittance of tax set out in subsection 221(1) applies and a Part 3 fuel supplier is required to collect from the recipient the GST/HST payable on any taxable supplies of BC-LCFS credits and debits it makes. A GST/HST registrant purchaser would be entitled to claim an ITC, as described below, provided the conditions under section 169 were met.
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;
Currently, no property is proposed to be prescribed.
For an instrument to meet the criterion in subparagraph (a)(i) of the definition emission allowance, the instrument must be issued or created by a regulator or by a body established by, or an agency of, a regulator. It is the CRA’s view that BC-LCFS credits do not meet this criterion, and therefore they do not meet the definition of emission allowance in subsection 123(1).
As a result, under the general rule for the collection and remittance of tax set out in subsection 221(1), a Part 3 fuel supplier is required to collect from the recipient (usually the purchaser) the GST/HST payable on any taxable supplies of BC-LCFS credits it makes. A GST/HST registrant purchaser will generally be entitled to claim an ITC under section 169 to recover the GST/HST paid or payable to the extent that the BC-LCFS credits are acquired for consumption, use or supply in the course of the purchaser’s commercial activities.
However, if it is determined that the BC-LCFS credits are capital property of the purchaser, under subsections 199(1) and (2), a GST/HST registrant purchaser, other than a financial institution, may claim a full ITC in respect of the GST/HST payable on the supply if it were for use primarily (i.e., greater than 50%) in commercial activities. There is no ITC entitlement if use of capital property is 50% or less in commercial activity.
The GST/HST registrant purchaser will report the ITC on their regular Form GST34-2, Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return For Registrants for the reporting period in which the tax became payable.
GST/HST treatment of the sale of BC-LCFS debits
Pursuant to section 165, every recipient of a taxable supply made in Canada is required to pay GST/HST on the value of the consideration(Footnote 7) for the supply, unless an exemption from GST/HST is available. The GST/HST exemptions are set out in Schedule V.
Generally, there are no exemptions in the ETA which would apply to exempt a supply of BC-LCFS debits made by way of sale, transfer, barter or exchange(Footnote 8). Therefore, generally a Part 3 fuel supplier who sells or trades BC-LCFS debits is making a taxable supply of property to that person.
BC-LCFS debits do not meet the definition of emission allowance in subsection 123(1). Therefore, under subsection 221(1), a Part 3 fuel supplier is required to collect from the purchaser the GST/HST payable on any taxable supplies of BC-LCFS debits it makes. GST or HST would be calculated on the consideration paid for the taxable supply, depending on the province in which the supply is made (as HST rates may differ from province to province). A GST/HST registrant purchaser would be entitled to claim an ITC, as described above, provided the conditions under section 169 were met.
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 Canada Revenue Agency (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.
Sincerely,
Alison Jones
Special Projects Unit
Public Services Bodies and Governments Division
GST/HST Rulings Directorate
FOOTNOTES
1 Supply is defined in section 1 of the GGR Act.
2 It is understood that Low Carbon Fuels Act replaced the GGR Act and as such, the GGR Act has been repealed effective January 1, 2024.
3 This requirement is set out in Part 2 of the GGR Act and Part 2 of the Regulation. This requirement is not addressed in this interpretation.
4 Pursuant to subsection 7(1) of the GRR Act, for each compliance period, a Part 3 fuel supplier must submit to the director a report, in accordance with the regulations, respecting, in part, (a) compliance with the requirements under section 6(1) of the GGR Act.
5 Sections 11.02, 11.04, 11.06 and 11.06 of the Regulation.
6 Subsection 8.01(4) of the GGR Act sets out what must be included in the terms and conditions of a Part 3 agreement.
7 The value of consideration is determined under 153(1) of the ETA.
8 Where the supplier is a public sector body, as defined in subsection 123(1) (which is defined to include the Canadian federal government, the government of a Canadian province or territory, a charity and a non-profit organization), the supply of carbon debits may be exempt under Schedule V in very specific circumstances.
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