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
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 247128
Dear [Client]:
Subject: GST/HST ruling
Emission Allowance
Thank you for your correspondence of January 31, 2024, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to supplies of compliance units issued under the Low Carbon Fuels Act, S.B.C. 2022, c. 21 (the LCFA).
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. Effective January 1, 2024, the LCFA replaces the Greenhouse Gas Reduction (Renewable and Low Carbon Fuel Requirements Act, S.B.C. 2008, c. 16 (GGR Act) under which British Columbia’s Low Carbon Fuel Standard was previously administered.
Together with the Low Carbon Fuels (General) Regulation, Order in Council 699/2023 (General Regulation) and the Low Carbon Fuels (Technical) Regulation, Ministerial Order 437/2023 (Technical Regulation), the LCFA helps reduce Greenhouse Gas (GHG) emissions in the transportation sector in British Columbia.
2. The LCFA and the supporting regulations set out two main requirements:
a. Renewable fuel target – Fuels must comprise a prescribed percentage of renewable fuel. (Footnote 1)
b. Annual carbon intensity target. Fuels must have a carbon intensity that meets the increasingly stringent carbon intensity reduction targets each year.
3. Subsection 12(2) of the LCFA states that a person who markets fuels in a compliance period(Footnote 2) must, at the end of the compliance date(Footnote 3) for the period, have a balance of zero or more compliance units.
4. Under subsection 6(1) of the LCFA, a person is considered to market fuel in British Columbia in a compliance period if
(a) the fuel is reportably supplied in the period, and
(b) the person is responsible for the fuel at the end of the compliance date for the period.
5. Under subsection 6(2) of the LCFA, a fuel is reportably supplied in a compliance period if the fuel
(a) has not previously been reportedly supplied(Footnote 4), and
(b) meets one of the following criteria in the period:
(i) the fuel is used in British Columbia;
(ii) the fuel is type A fuel and is supplied in British Columbia by a person who is responsible for the fuel at the end of a compliance date for the period;
(iii) the fuel is type B fuel and is supplied in British Columbia through final supply equipment.
6. Under subsection 6(3) of the LCFA, a person becomes responsible for a type A fuel if the person
(a) manufactures or imports the fuel in British Columbia,
(b) is made responsible for the fuel under the regulations, or
(c) is made responsible for the fuel under an allocation agreement(Footnote 5).
7. Under 6(4) of the LCFA, a person becomes responsible for a type B fuel if the person
(a) supplies the fuel through final supply equipment in British Columbia,
(b) is made responsible for the fuel under the regulations, or
(c) is made responsible for the fuel under an allocation agreement.
8. Section 1 of the LCFA defines type A fuel to mean fuel other than a type B fuel. Section 1 of the LCFA defines type B fuel to mean any of the following: (a) electricity(Footnote 6), (b) natural gas, (c) propane, or (d) a prescribed fuel.
Issuance of compliance units
Supply of fuel
9. Under subsection 13(2) of the LCFA, the director(Footnote 7) may, in accordance with subsection 13(3) of the LCFA, issue compliance units to a person in relation to fuel if
(a) the person markets the fuel for an applicable purpose(Footnote 8)(Footnote 9), or
(b) in the case of an application under subsection 13(1)(b) of the LCFA, the director is satisfied that the person intends to market the fuel for an applicable purpose.
10. Subsection 13(3) of the LCFA states that subject to subsection 13(4) (Footnote 10) of the LCFA, the number of compliance units to be issued under subsection 13(2) of the LCFA in relation to the fuel, which may be a positive or negative number, is the number determined in accordance with the following formula, as it applies on the date the fuel is reportably supplied:
Number = (TCI x EER – (RCI + UCI)) x EC/1 000 000 grams
where
TCI = the target carbon intensity for the fuel, as determined under subsection 13(5);
EER = the energy effectiveness ratio of the fuel, as determined in accordance with the regulations of the minister(Footnote 11);
RCI = the recorded carbon intensity of the fuel;
UCI = the additional carbon intensity attributed to the use of the fuel, as determined in accordance with the regulations of the minister(Footnote 12);
EC = the energy content of the fuel in megajoules, as determined in accordance with the regulations of the minister(Footnote 13);
11. Subsection 13(5) of the LCFA states that for the purpose of subsection 13(3) of the LCFA, the target carbon intensity for a fuel is the number determined in accordance with the following formula:
TCI = BCI x (1 – R)
where
BCI = the carbon intensity specified in section 19(a) of the LCFA for the base fuel for the category to which the fuel belongs;
R = the prescribed(Footnote 14) reduction for that category, expressed as a percentage.
12. It is understood that the formulas in subsections 13(3) and 13(5) of the LCFA calculates the difference between the number of tonnes of carbon dioxide equivalents (CO2e) contained in the marketed fuel compared to the number of tonnes of CO2e contained in the prescribed base fuel target. Where the carbon intensity of the marketed fuel is lower than the prescribed target carbon intensity limit for the base fuel for the category to which the fuel belongs, the formula in subsection 13(3) of the LCFA will generate a positive number of credits(Footnote 15) to be issued by the director. Where the carbon intensity of the marketed fuel is higher than the prescribed target carbon intensity limit for the base fuel for the category to which the fuel belongs, the formula in subsection 13(3) of the LCFA will generate a negative number representing the number of debits(Footnote 16) to be issued by the director.
Initiative agreement
13. Subsection 15(2) of the LCFA states that the director may issue credits to a person in accordance with an agreement under section 15 of the LCFA.
14. Subsection 15(3) of the LCFA states that subject to section 15 of the LCFA and the regulations, the director may, with the approval of the minister, enter into an agreement with a person that provides for the issuance of credits to the person in relation to an action that the person proposes to take.
15. Subsection 15(4) of the LCFA states that the director may not enter into an agreement under section 15 of the LCFA with a person in relation to a proposed action unless
(a) the person manufactures or supplies fuel for an applicable purpose, in British Columbia or elsewhere, for use in British Columbia and the director is satisfied that the proposed action has a reasonable possibility of achieving an eligible goal(Footnote 17),
(b) the person manufactures or supplies feedstock, in British Columbia or elsewhere, for manufacturing described in paragraph (a) and the director is satisfied that the proposed action has a reasonable possibility of achieving an eligible goal,
(c) the person intends to become a person described in paragraph (a) or (b) and the director is satisfied that the proposed action
(i) has a reasonable possibility of achieving an eligible goal, and
(ii) will advance the intention, or
(d) the director is satisfied that the proposed action has a reasonable possibility of reducing the use of a base fuel in British Columbia for a purpose other than transportation.
16. Subsection 15(5) of the LCFA prohibits the director from entering into an initiative agreement that contemplates the issuance of a number of credits that exceed the number set out in paragraphs (a) and (b) of subsection 15(5) of the LCFA.
Export of fuel
17. Subsection 17(2) of the LCFA states that the director may, in accordance with subsection 17(3) of the LCFA, issue debits to a person who reportably exports fuel.
18. Pursuant to subsection 17(3) of the LCFA, the number of debits to be issued under subsection 17(2) of the LCFA in relation to the fuel is the number determined in accordance with the formula under section 13(3) of the LCFA, modified in accordance with section 20 of the General Regulation.
Transfer of credits
19. It is understood that if a responsible person has a positive balance of compliance units at the end of a compliance period, the person may sell their excess credits to another registered person(Footnote 18).
Pursuant to subsection 16(1) of the LCFA, the director may record a transfer of credits from one person to another if the persons are both registered under the regulations, and both submit a notice of the proposed transfer in accordance with subsection 16(2) of the LCFA and section 18 of the General Regulation.
Section 17 of the General Regulations permits the director to register a person to transfer credits where the person provides to the director the requisite information described in the section.
Compliance report and assessment by director
20. Subsection 28(1) of the LCFA states that a person must submit a report for a compliance period if, in the period, the person
(a) markets fuel,
(b) reportably exports fuel, or
(c) allocates responsibility for a type A fuel under an allocation agreement other than an inter-refiner agreement.
The compliance report must be submitted to the director and must be prepared in accordance with and contain information required by the director(Footnote 19).
21. Subsection 30(1) of the LFCA states on receipt of a report under section 28(1)(a) or (b) or (3) of the LCFA of a person in relation to a compliance period, the director must serve on the person a notice of assessment that sets out the following, as applicable (all section references cited below are to the LCFA):
(a) …
(f) a statement of whether the person has met the low carbon fuel targets set under section 12;
(h) the number of credits that the director assesses as having been transferred away by the person under section 16, on or before the compliance date for the period, that have not been previously assessed as transferred;
(i) the number of credits that the director assesses as having been received by the person under section 16, on or before the compliance date for the period, that have not been previously assessed as transferred;
(j) the number of compliance units that the director previously issued to the person in relation to the period under each of the following provisions:
(i) section 13(2)
(ii) [Not in force]
(iii) section 15(2)
(iv) section 17(2)
(k) the number of compliance units that the director issues to the person in relation to the period under each of the following provisions:
(i) section 13(2)
(ii) [Not in force]
(iii) section 17(2)
(l) …
22. Reassessments by the director may also be conducted. On assessment or reassessment, the director may adjust the number of compliance units held by a person. (Footnote 20)
Transfer of validated credits under the former GGR Act
23. Subsection 61(1) of the LCFA states that a person who has a balance of validated credits(Footnote 21) under the former Act [GGR Act] immediately before its repeal has a starting balance under the LCFA that is equal to the amount of these credits, as determined by the director.
Subsection 61(1.1) of the LCFA states that after receiving a report for a person under section 7 of the former Act [GGR Act] in relation to the last old compliance period, the director may adjust the person’s starting balance under this Act for the purpose of resolving any difficulties arising from the transition from the former Act [GGR Act] to this Act.
RULING REQUESTED
You would like the Canada Revenue Agency (CRA) to publish guidance to clarify whether compliance units issued under the LCFA are emission allowances for the purpose of subsection 221(2.1) of the ETA.
RULING GIVEN
Based on the facts set out above, we rule that credits issued by the director under the subsections 13(2) and 15(2) of the LCFA meet the definition of emission allowance in subsection 123(1) of the ETA. In addition, we rule that credits determined by the director pursuant to subsection 61(1) of the LCFA to form a person’s starting balance under the LCFA also meet the definition of emission allowance in subsection 123(1) of the ETA. As such, subsequent transfers of these credits permitted under the LFCA and its supporting regulations 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 the compliance units issued under the LCFA 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 provincial, federal and international legislation as ruling and interpretation 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. As decisions are rendered and where appropriate, the letters relating to these decisions will be severed and published. 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 the compliance units issued under the LCFA or other provincial, federal and international credits, allowances and other instruments at this time.
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 compliance 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, 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 or by fax to 1-418-566-0319.
Sincerely,
Alison Jones
Special Projects Unit
Public Service Bodies and Governments Division
GST/HST Rulings Directorate
FOOTNOTES
1 This requirement is set out in section 9 of the LCFA and section 13 of the General Regulation. This requirement is not addressed in this interpretation.
2 Pursuant to section 1 of the LCFA and section 4 of the General Regulation, a compliance period means the calendar year.
3 Pursuant to section 1 of the LCFA and section 5 of the General Regulation, the compliance date is March 31.
4 Section 1 of the LCFA defines supply, in relation to fuel, to mean to sell or otherwise provide the fuel to a person.
5 Pursuant to section 1 and subsection 7(1) of the LCFA, allocation agreements allow persons who would be otherwise be responsible to transfer their responsibility to another person.
6 For purposes of this ruling request, how electricity is treated under the LCFA is not addressed, as indicated in the incoming letter.
7 Section 1 of the LCFA defines director to mean the government employee designated in writing by the minister as the director for the purposes of this Act. The minister is the Minister of Energy, Mines and Low Carbon Innovation as per CivicInfo BC.
8 Section 1 of the LCFA defines applicable purpose to mean (a) transportation, and (b) any prescribed purpose.
9 Section 2 of the General Regulation defines applicable purpose for purposes of paragraph (b) of the definition of applicable purpose in section 1 of the LCFA to mean the following purposes (a) use in cargo handling equipment; (b) use in ground support equipment; (c) use in a forklift.
10 Subsection 13(4) of the LCFA states that if a person described in subsection 13(2) does not have a carbon intensity record for the fuel, the recorded carbon intensity of the fuel for the purposes of subsection 13(3) is deemed to be the applicable carbon intensity specified in section
19 (a) or (b) (ii) of the LCFA.
11 As determined by section 7 of the Technical Regulation.
12 As determined by section 8 of the Technical Regulation.
13 As determined by section 9 of the Technical Regulation.
14 The prescribed carbon intensity reduction targets for fuel and gasoline are set out in section 15 of the General Regulation.
15 Section 1 of the LCFA defines credit to mean a positive number of compliance units.
16 Section 1 of the LCFA defines debit to mean a negative number of compliance units.
17 Subsection 15(1) of the LCFA defines eligible goal to mean (a) reducing the carbon intensity of a fuel, or (b) increasing the use of a fuel with a carbon intensity below the prescribed carbon intensity.
18 Section 19 of the General Regulations provides the grounds for which the director may refuse to record a transfer of credits.
19 Subsections 28(4) and 28(5) of the LCFA, Part 4 of the Technical Regulation.
20 Sections 31 and 32 of the LCFA.
21 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.