ET/SL 66

August 2007

This policy is being disseminated by the Canada Revenue Agency in draft form for comments from the public. Comments or suggestions should be sent by October 15, 2007 to:

Manager
Excise Taxes and Other Levies Unit
Excise and GST/HST Rulings Directorate
Canada Revenue Agency
20th floor, Place de Ville, Tower A
320 Queen Street
Ottawa ON K1A 0L5
Telephone: 613-957-8154
Fax: 613-954-2226

DRAFT

Application of Excise Tax to Diesel Fuel Used in the Generation of Electricity for the Provision of Hotel Services on Vehicles

Issue and Decision

The Canada Revenue Agency (CRA) is revising its policy with respect to the application of excise tax on diesel fuel used in the generation of electricity on vehicles for purposes of "hotel" services. This policy revision includes two main changes, the application of the "primarily test" and establishment of the point of usage assessment at the "global level" for purposes of the exemption. Under paragraph 23(8)(c) of the Excise Tax Act (the Act), excise tax is not payable in the case of diesel fuel for use in the generation of electricity, except where the electricity generated is primarily for use in the operation of a vehicle. While the word "vehicle" is not defined in the Act, the CRA’s position is that a vehicle, for purposes of the exemption, means carriages or conveyances of all kinds, which are used to carry or transport persons and/or goods. Examples include, but are not limited to, ships, tugs, ferries, trucks, tractor-trailers, locomotives, airplanes, and railway rolling stock.

Hotel services are not related to the operation of the vehicle. Rather, they are services that provide for the comfort and convenience of the passengers and/or crew. Examples of hotel services are heat/air conditioning, light, entertainment and the preparation of meals.

Only diesel fuel used to generate electricity will be eligible for the exemption. This means that diesel fuel used to propel a vehicle will not be considered as eligible fuel for purposes of the exemption.

The primarily test – Global level application

The legislation provides that the exemption for diesel fuel used to generate electricity applies only where the electricity generated is not used primarily in the operation of the vehicle. Under current practice, the electrical usage calculation could result in the exemption of a portion of the diesel fuel used to generate electricity, without ensuring that the diesel fuel used was primarily for non-operational purposes. Under this revised policy, the comparison of the aggregate usage of electrical power for hotel vs. operational purposes will result in the entire amount of fuel used to generate electricity being either subject to exemption, or taxable.

The above partial exemption was determined by making electricity usage assessments at various levels of the vehicle’s electrical production stages (on a component by component or generator by generator basis), then assessing each component separately for purposes of the exemption. Under this revised policy, the application of the primarily test will be done at the global level for the entire vehicle. This means that for each vehicle, only the final aggregate electricity usage amounts for hotel vs. operational purposes will be compared.

Based upon the above principle, where the electricity generated in a vehicle is primarily for hotel services, and not primarily for the operation of the vehicle, 100% of the diesel fuel used to generate electricity will be exempt of excise tax. Where the electricity generated in a vehicle is primarily for the operation of the vehicle, the entire amount of diesel fuel used in generating electricity is taxable. Partial excise tax relief is not available for diesel fuel used to electrically power individual pieces of equipment or components of a vehicle.

Calculation of exemption

The determination of whether the diesel fuel used in the generation of electricity on a vehicle is primarily for hotel services will be calculated as follows:

1. Determine and exclude, from the total fuel load on a given vehicle, the amount of diesel fuel used to propel the vehicle or consumed for any other non-electrical purposes. The resulting amount will be considered the eligible diesel fuel for exemption purposes.

2. Analyse the electrical draw placed on the vehicle to determine the portion of the total draw attributable to each piece of equipment for hotel services and for operational use.

3. The electrical draw for hotel services and operational use for each piece of equipment must be summed to determine the total vehicle usage for hotel services and operational use.

If the total vehicle hotel services electrical draw is greater than 50%, 100% of the eligible diesel fuel will be exempt of excise tax.

Examples

Example No. 1

Facts

1. A vehicle consumes 1,000 litres of diesel fuel of which 655 litres is for propulsion and 345 litres is for use in the generation of electricity.

2. The following chart is an electrical load analysis of the vehicle’s equipment.

Issue

What amount of diesel fuel under paragraph 23(8)(c) will be exempt of excise tax?

Decision

None of the diesel fuel is exempt from excise tax, since the diesel fuel used in the generation of elecricity is used primarily (in this case 64%) for the operation of a vehicle.

Example No. 2

Facts

1. A vehicle consumes 2,000 litres of diesel fuel of which 1500 litres is for propulsion and 500 litres is for use in the generation of electricity.

2. The following chart is an electrical load analysis of the vehicle’s equipment.

Issue

What amount of diesel fuel under paragraph 23(8)(c) will be exempt of excise tax?

Decision

As 61% of the diesel fuel used in the generation of electricity is used for hotel services, this fuel is not primarily used in the operation of a vehicle. For this reason, all 500 litres of fuel used in the generation of electricity will be exempt from excise tax.

Example No. 3

Facts

1. A vehicle consumes 3,000 litres of diesel fuel of which 2,700 litres is for propulsion and 300 litres is for use in the generation of electricity.

2. The following chart is an electrical load analysis of the vehicle’s equipment.

Issue

What amount of diesel fuel under paragraph 23(8)(c) will be exempt of excise tax?

Decision

None of the diesel fuel is exempt from excise tax, since the diesel fuel used in the generation of electricity is used primarily (in this case 88%) for the operation of a vehicle.