6 January 2006 Excise Interpretation 64976 - Refund of Excise Tax on Diesel Fuel Used for Drilling and Production of Oil and Gas Wells

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter of XXXXX concerning the refund of Federal Excise Tax (FET) on diesel fuel used for drilling and production of oil and gas wells. Your letter has been referred to the Headquarters Excise Tax Unit in Ottawa for reply. We apologize for the delay in responding.

You have requested confirmation of your understanding of the Canada Revenue Agency (CRA) policy on a number of points that relate to the provision of exemption from FET to the purchasers of diesel fuel in the drilling and the oil & gas industry. We will respond to each point in the order presented in your letter.

Before commenting on the points raised in your letter, I would like to outline the relevant legislative provisions and the applicable CRA administrative policy.

Subsection 23(1) of the Excise Tax Act (ETA) imposes excise tax on items listed in Schedule I to the ETA, at the rate specified in the Schedule. Section 9.1 of Schedule I to the ETA specifies a tax rate of $0.04 per litre on diesel fuel. Diesel fuel is defined in subsection 2(1) of the ETA to include "... any fuel oil that is suitable for use in internal combustion engines of the compression-ignition type, other than any such fuel that is intended for use and is actually used as heating oil."

Paragraph 23(8)(c) of the ETA provides for an exemption of excise tax on diesel fuel for use in the generation of electricity, except where the electricity so generated is used primarily in the operation of a vehicle.

The current CRA administrative policy concerning end-user refunds for diesel fuel used in the generation of electricity is as follows:

•   If at the time of purchase, all the diesel is going to be used entirely in the generation of electricity, then the diesel must be purchased exempt of excise tax by furnishing the fuel supplier, at the time of purchase, an excise tax exemption certificate.

•   If at the time of purchase, it was not possible to determine the use of the diesel or the diesel had multiple uses, then the diesel must be purchased on an excise tax paid basis and the purchaser can file an end user refund directly with the CRA for the portion of diesel that was used to generate electricity.

I will now comment on your points in the order they were raised.

Point 1

Diesel fuel can be purchased exempt of excise tax provided 100% of the diesel fuel purchased for electrical drilling rigs is used for the generation of electricity. Purchasers should furnish an excise tax exemption certificate, at the time of purchase, in order to receive such exemption. Clients who purchased diesel fuel on a tax-paid basis in error should seek a credit adjustment with their fuel supplier.

Point 2

The CRA has not established any exemption factors for the equipment specified in your point or any other equipment used in the oil and gas industry. Tax relief is available for fuel purchased wholly for use in tax-exempt purposes by providing the supplier with an exemption certificate at the time of purchase; the CRA will not accept any such claims for refunds. Fuel that is purchased for both taxable and exempt uses must be purchased with the excise tax fully paid; the purchaser would subsequently file an N15 refund claim, with the CRA, based on the actual exempt usage pursuant to the ETA.

Point 3

Diesel fuel can be purchased exempt of excise tax provided 100% of the diesel fuel purchased for electrical gensets for temporary or permanent power at wellsites or plantsites is used for the generation of electricity. Purchasers should furnish an excise tax exemption certificate, at the time of purchase, in order to receive such exemption. Clients who purchased diesel fuel on a tax-paid basis in error should seek a credit adjustment with their fuel supplier.

Point 4

Diesel fuel can be purchased exempt of excise tax provided 100% of the diesel fuel purchased for "genset or boiler only" consumption for all service rigs is used for the generation of electricity. Purchasers should furnish an excise tax exemption certificate, at the time of purchase, in order to receive such exemption. Clients who purchased diesel fuel on a tax-paid basis in error should seek a credit adjustment with their fuel supplier.

Point 5

The CRA has not established any exemption factors for the equipment specified in your point or any other equipment used in the oil and gas industry. Tax relief is available for fuel purchased wholly for use in tax-exempt purposes by providing the supplier with an exemption certificate at the time of purchase; the CRA will not accept any such claims for refunds. Fuel that is purchased for both taxable and exempt uses must be purchased with the excise tax fully paid; the purchaser would subsequently file an N15 refund claim, with the CRA, based on the actual exempt usage pursuant to the ETA.

Point 6

The CRA has not established any exemption factors for the equipment specified in your point or any other equipment used in the oil and gas industry. Tax relief is available for fuel purchased wholly for use in tax-exempt purposes by providing the supplier with an exemption certificate at the time of purchase; the CRA will not accept any such claims for refunds. Fuel that is purchased for both taxable and exempt uses must be purchased with the excise tax fully paid; the purchaser would subsequently file an N15 refund claim, with the CRA, based on the actual exempt usage pursuant to the ETA.

Point 7

Where diesel fuel is purchased in bulk for multiple or co-mingled consumption purposes, the diesel fuel must be purchased on an excise tax-paid basis. The purchaser would be entitled to file an N15 refund claim with the CRA based on the actual exempt usage pursuant to the ETA.

Point 8

There is currently no legislative provision within the ETA that allows for the filing of end-user refunds. However, as noted in the above administrative policy, the CRA will allow end-users to file refunds in specific and limited circumstances.

Point 9

A fuel manufacturer licensed under the ETA may provide credit to a customer who purchases tax-paid fuel in error. For any such credit provided, the licensed manufacturer would be entitled to take an internal deduction on their monthly return or submit an N15 refund claim to the CRA.

Point 10

It is assumed that the term "rebranding" refers to diesel fuel, purchased by vendors not licensed under the ETA, that is subsequently sold as heating oil. In this situation, an unlicensed fuel vendor who "rebrands" diesel fuel should seek supplier credit from the licensed fuel manufacturer who sold fuel. For any credit provided, the licensed manufacturer would be entitled to take an internal deduction on their monthly return or submit an N15 refund claim to the CRA.

Point 11

A certificate of exemption would be considered adequate documentation in order to purchase diesel fuel for which 100% of the diesel will be used in the generation of electricity. The following is the suggested wording for the certificate of exemption:

"We certify that the diesel fuel ordered hereby is for use in the generation of electricity, except where the electricity so generated is used primarily in the operation of a vehicle.

___________________________
Signature of Purchaser"

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-5899.

Yours truly,

Darren Weiner
Excise Tax Unit
Excise Duties and Taxes Division
Excise and GST/HST Rulings Directorate

2006/01/18 — RITS 65231 — Refund of Federal Excise Tax on Fuel Sold for Use as Ships' Stores