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]
Case Number: 137873
Dear [Client],
Subject: GST/HST INTERPRETATION
Recaptured Input Tax Credits
This memo is response to [correspondence] sent to us by […] on [mm/dd/yyyy]. […].
We apologize for the delay in responding to your enquiry.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
[…][INTERPRETATION REQUESTED]
You requested clarification in the application of the New Harmonized Value-Added Tax System Regulations No 2. (Regulations) concerning the recapture of input tax credits. Specifically, you requested assistance with the following.
1. Confirm my understanding that “fuel for machinery and equipment that is not considered a motor vehicle and isn’t licensed or required to be licensed for use on public highways would be implicated under specified energy and unless being used directly in the production of tangible personal property should be recaptured on.”
2. How is heavy machinery (i.e., cranes, bulldozers) and farm equipment (i.e., tractors) treated? Are they excluded from the recapture requirement because the fuel used therein is used in a propulsion engine?
3. The fuel used in a forklift that places the raw materials on the front end of the production equipment is considered to be used directly in production of tangible personal property and is therefore not subject to the recapture requirement. However, the fuel used in the same forklift to move finished goods to storage or shipping is not considered to be part of production and is subject to the recapture requirement. Would the latter fuel not be excluded because it is used in a propulsion engine?
4. Clarify how ramp vehicles at an airport would be treated.
5. Clarify how drilling equipment would be treated.
[…][INTERPRETATION GIVEN]
1. Specified energy and specified property and services are subject to the recapture of input tax credits (RITC) requirement.
Specified energy as defined in section 26 of the Regulations means
(a) electricity, gas and steam; and
(b) anything (other than fuel for use in a propulsion engine) that can be used to generate energy :
(i) by way of combustion or oxidization, or
(ii) by undergoing a nuclear reaction in a reactor for the generation of energy.
For purposes of (a) above, the definition of gas is a combustible gas or gaseous mixture. Gasoline and diesel fuel do not meet this definition. Electricity, gas, and steam are specified energy even if used in a propulsion engine.
Specified property and services are prescribed in section 28 of the Regulations and in regards to fuel, include the following;
(b) motive fuel, other than diesel fuel, that is acquired in, or brought into, a specified province for consumption or use in the engine of a qualifying motor vehicle;
(e) specified energy that is acquired in, or brought into, a specified province other than qualifying heating oil, as defined in section 1 of the Deduction for Provincial Rebate (GST/HST) Regulations, acquired in, or brought into Prince Edward Island;
In the case of fuel, it is specified property if it is motive fuel (in Ontario and PEI) (other than diesel fuel) for use in qualifying motor vehicles or if it is specified energy. If the fuel is used directly in the production of tangible personal property for sale or is acquired exclusively for resale it is excluded from the RITC requirement.
A “qualifying motor vehicle” means a vehicle that
- is a motor vehicle;
- is licensed, or required to be licensed, under applicable provincial laws for use on a public highway; and
- weighs, while carrying its maximum capacity of fuel, lubricant and coolant, less than 3000 kg at the time that the vehicle is first licensed or required to be licensed in Ontario or Prince Edward Island, as the case may be.
Qualifying motor vehicles include vehicles that are acquired by way of sale, or by way of lease, license or similar arrangement (including short-term rentals).
2. If electricity, gas, or steam is used in any of these vehicles, they are considered specified energy and would be subject to the RITC requirement.
Also, anything (other than fuel for use in a propulsion engine) that can be used to generate energy is specified energy in certain circumstances (subparagraphs 26(b)(i)(ii)). The engines in the vehicles mentioned are often dual purpose. Firstly, they are used for propulsion purposes. Secondly, the energy produced by the propulsion engines may be transferred and used to power ancillary/operational equipment on the vehicle. This equipment is typically powered by the vehicle’s power take off (PTO). The PTO runs a hydraulic pump which pumps pressurized hydraulic fluid (typically oil) to hydraulic cylinders or hydraulic motors which in-turn run the equipment. For example, the hydraulic pump on a crane may be used to operate the boom, and the hydraulic pump on a bulldozer pumps oil to hydraulic cylinders which maneuver the blade.
It is our understanding that in the vehicles described above, the engine is directly linked to the vehicles transmission for the purpose of propelling the vehicle. Generally, in these cases, the primary purpose of these engines is to propel the vehicles. We would, therefore, consider these engines to be propulsion engines.
In paragraph 26(b) of the definitions, the definition of specified energy refers to “fuel for use in a propulsion engine” as opposed to “fuel for propulsion purposes”. Given that we consider these engines to be propulsion engines the fuels used therein do not meet the definition in 26(b). As such, they are not specified energy and, therefore, are not subject to recapture.
Where the gasoline or diesel is for use in a propulsion engine, we would not consider any of it to be specified energy despite a portion being used for operational purposes. Where any of these vehicles have separate motors for propulsion and for the operational equipment, the gas or diesel used in the latter would be specified energy and subject to recapture.
If any of these vehicles are found to be used directly in production as defined in the Regulations, the fuel used therein would be considered specified production energy and would not be subject to recapture.
Despite the above, no amount is subject to recapture for a reporting period of the person if the chief source of income for the taxation year of the person immediately preceding the reporting period is farming and all of the property or services to which the specified provincial input tax credit relates is primarily consumed or used in the person's farming activities.
3. Fuel used directly in production of tangible personal property for sale is not subject to the RITC requirement. The fuel used by a forklift placing the raw materials on the front end of the production is considered to be production. However, moving finished goods from the production area to storage or shipping is not considered to be production. As such, the fuel used for this purpose is not considered to be specified production energy and is not excluded from the RITC requirement under section 31 of the Regulations.
Specified energy includes electricity, gas and steam. As such, if the forklift uses any of these as fuel, it is specified energy even if used in a propulsion engine. The “other than propulsion engine” exclusion does not apply to electricity, gas and steam. It was mainly aimed at ensuring diesel and gasoline used in vehicles was not subject to recapture.
The engine in a forklift has two purposes; propulsion and lift. As noted in response number 2, where an engine is used for propulsion, we consider it to be a propulsion engine. As such, the fuel (other than fuel listed in paragraph 26(a) of the definitions) used therein does not meet the definition of specified energy in paragraph 26(b) of the Regulations and is, therefore, not subject to recapture.
4. There are many type of vehicles used on an airport’s apron (or ramp).
The fuel used in an vehicle used on an airport’s apron is subject to the RITC requirement if (a) the vehicle is a qualifying motor vehicle and the fuel is not diesel, or (b) if the fuel is specified energy.
Where a vehicle meets each of the criteria of a qualifying motor vehicle as defined in response #1 above, it would be a qualifying motor vehicle. Motive fuel, other than diesel fuel, that is acquired in, or brought into, a specified province for consumption or use in the engine of a qualifying motor vehicle is specified property or service and would be subject to the RITC requirement.
Specified energy includes electricity, gas and steam. As such, if these vehicles use any of these as fuel, it is specified energy even if used in a propulsion engine. Also, anything (other than fuel for use in a propulsion engine) that can be used to generate energy, in certain circumstances, is specified energy.
Generally, where the primary purpose of an engine is to propel the vehicle, we would consider the engine to be a propulsion engine.
Paragraph 26(b) of the definitions refers to “fuel for use in a propulsion engine” as opposed to “fuel for propulsion purposes”. Given that we would consider these engines to be propulsion engines the fuels used therein do not meet the definition in 26(b). As such, they are not specified energy and, therefore, are not subject to recapture.
Where the gasoline or diesel is for use in a propulsion engine, we would not consider any of it to be specified energy despite a portion being used for operational purposes. Where any of these vehicles have separate motors for propulsion and for the operational equipment, the gas or diesel used in the latter would be specified energy and subject to recapture.
5. You provided 3 different versions of drilling equipment; a) a self-contained drill which includes one engine for propulsion and operation of drill and compressor, b) a propulsion engine drill connected to a transportable compressor, and c) a drill without a propulsion engine.
If any of the drilling equipment happened to meet the criteria of a qualifying motor vehicle as listed in response #1 above, it would be a qualifying motor vehicle. The motive fuel, other than diesel fuel, that is acquired in, or brought into, a specified province for consumption or use in the engine of a qualifying motor vehicle is specified property or service and would be subject to the RITC requirement.
If the self-contained unit used electricity, gas, or steam that would be specified energy despite being used in a propulsion engine. The self-contained unit’s engine would be considered a propulsion engine and any other fuel used therein would not be specified energy and, therefore, not subject to recapture.
Where there are separate engines for the propulsion engine drill and for the transportable compressor;
- if the propulsion engine uses electricity, gas or steam it would be specified energy despite being used in a propulsion. Any other fuel used therein would not be specified energy and, therefore, not subject to recapture.
- the fuel used in the compressor would be specified energy and subject to recapture.
The fuel used in the drill without a propulsion engine is specified energy and, therefore, subject to recapture.
Also see response # 2.
Section 26 of the Regulations definitions
"motor vehicle" means a motorized vehicle designed for the transportation of individuals or of tangible personal property, but does not include
(a) a power-assisted bicycle;
(b) a snow vehicle;
(c) an all-terrain vehicle;
(c) an electrically propelled wheelchair;
(d) a street car;
(e) a vehicle that runs only on rails; or
(f) a farm tractor, or other farm machinery, acquired, or brought into a province, exclusively for use in farming activities.
"production" means an activity (other than the assembling, processing or manufacturing of tangible personal property in a retail establishment or the storage of finished products) that is
(a) the assembling, processing or manufacturing of particular tangible personal property to create other tangible personal property that is different in nature or character from the particular tangible personal property;
(b) the generation of any form of energy or its transformation into another form of energy;
(c) the restoring of tangible personal property by its owner;
(d) the recording of images or sound on media;
(e) the cutting, transforming and handling of timber in a forest and the building and maintenance of forest access roads in the course of those activities;
(f) the extraction and processing of a mineral until the first stage of concentration or the equivalent;
(g) the transformation of toxic industrial waste into a non-toxic product; and
(h) if performed in conjunction with an activity referred to in any of paragraphs (a) to (g) by the same person that performed that activity,
(i) the detection, measurement, treatment, reduction or elimination of water, soil or air pollutants that are attributable to producing personal property,
(ii) the transportation of refuse or waste derived from producing personal property,
(iii) the quality control of personal property being produced or of production equipment, and
(iv) the cleaning, screening, sifting, wrapping, packing or putting into containers of property.
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 or amendments to the Act, if enacted, or to the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
Yours truly
Doug Campbell
Senior Rulings Officer
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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