2 May 2002 External T.I. 2001-0115235 - Ontario Gross Revenue Charge

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether payments under subsections 92.1(1) and 92.1(2) of the OEA, also referred to as the property tax component and the water rental component under the GRC tax regime, are a tax or levy that are deductible in computing income under subsection 9(1) of the Income Tax Act.

Position: 1. Yes, based on the definition of 'gross revenue' applicable for the period from January 1, 2001 until the electricity market opens to competition.

2. For the period after that time, it depends on the definition of 'gross revenue' which has not yet been defined.

Reasons: 1. For the period prior to the opening of the electricity market, the taxes are not taxes on income and are payments made to earn income from a business.

2. For the subsequent period, a determination regarding the deductibility of the payments cannot be made until the term 'gross revenue' is defined for that period.

XXXXXXXXXX 2001-011523
D. Shugar
May 2, 2002

Dear XXXXXXXXXX:

Re: Payments made under Section 92.1 of the Ontario Electricity Act, 1998 (the "OEA")

This is in reply to your letter of December 14, 2001 wherein you requested our views with respect to the deductibility by XXXXXXXXXX, of amounts paid under section 92.1 of the OEA.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Section 92.1 of the OEA came into force on January 1, 2001. Generally, subsections 92.1(1) and 92.1(2) of the OEA require the owner of a hydro-electric generating station to pay a tax, from 2.5 per cent to 26.5 per cent of its gross revenue from the generation of electricity, depending on the gigawatt hours of electricity generated. Subsection 92.1(5) of the OEA requires the holder of a water power lease to pay a water rental charge of 9.5 per cent of its gross revenue from annual generation from the hydro-electric generating station. These payments are referred to as the property tax component and the water rental component of the Gross Revenue Charge (GRC) tax regime.

Information provided in Ontario Tax Bulletin EA 1-2002 states that for the period from January 1, 2001 to the day before Ontario's electricity market opens to competition, the gross revenue of a hydro-electric generating station is defined as the amount determined by multiplying the station's annual generation for the year by a price of $40,000 per gigawatt hour. The Bulletin does not indicate whether there are any adjustments to the gross revenue so determined. For the period after the electricity market opens to competition, and as of the date of this letter, the term 'gross revenue' has not yet been defined by the Ontario government for purposes of the GRC tax regime.

One factor to consider in determining whether the amounts described in section 92.1 of the OEA are deductible, is whether the tax is a tax on profits or a cost incurred as part of the income earning process. This would depend, in part, on the definition of 'gross revenue,' and the deductions made in calculating gross revenue. If the definition of gross revenue results in an amount similar to net income, the payments may have the characteristic of being a tax on income, and may not be deductible under subsection 9(1) of the Act. Such a determination can only be made after a review of all the facts of the situation, including the law defining 'gross revenue.'

Based on our understanding of the facts and based on the definition of 'gross revenue' provided in the above-mentioned Ontario Tax Bulletin, and assuming there are no adjustments to that definition of 'gross revenue,' it is our view that for the period from January 1, 2001 until the electricity market opens to competition, the property tax component and the water rental component of the GRC payments described in section 92.1 of the OEA are deductible under subsection 9(1) of the Act, for that period. We cannot provide an opinion regarding the deductibility of the payments for the period after the electricity market opens to competition, until we have had the opportunity to review the definition of 'gross revenue' for that period.

We trust this will be of assistance.

Yours truly,

Section Manager
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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