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RITCs and ITR Restrictions on Energy
With the phase-out of the temporary Ontario HST recapture of input tax credits (RITC) requirements and QST input tax refund (ITR) restrictions for large businesses underway, many taxpayers are taking a closer look at these limitations on the recovery of tax. Indeed, various tax service providers are even offering to conduct reviews in these two specific areas, with the intention of identifying potential tax recoveries based on exceptions to these rules.
One potential recovery idea relates to how charges for energy, including natural gas and electricity, are often billed to customers. Looking at the myriad of line items on their invoices, it is common for purchasers (or perhaps their advisors) to try to identify which charges do not relate to the actual supply of energy. The thinking is that, since a particular charge does not appear to be for the actual gas or electricity consumed, the tax on that portion of the bill shouldn’t be subject to the RITC requirements or ITR restrictions – eliminating the need to report any recapture or allowing full ITRs to be claimed.
While it’s true that only specified property, including energy not used to manufacture tangible personal property for sale, is subject to the RITC requirements and ITR restrictions, readers are cautioned that most of the standard charges appearing on gas and hydro bills are considered to be related to the supply of specified energy – no matter what wording is used on the invoice.
For instance, “debt recovery”, “global market adjustment” and “regulatory” charges shown on hydro bills in Ontario are generally considered to form part of the consideration for the supply of electricity, notwithstanding the somewhat politically motivated wording used to describe such line items. As a result, the tax payable in relation to these charges remains subject to the RITC requirements and ITR restrictions.
Similarly, HST and QST related to charges for “delivery” by a supplier of electricity or natural gas are generally subject to the RITC requirements and ITR restrictions, even when such charges are shown separately on an invoice.
However, taxpayers should be aware of two common exceptions to the above guidelines. The first exception involves transportation charges when natural gas is supplied under a bona fide “buy-sell” agreement. Under such an arrangement, the purchaser acquires natural gas from a broker or producer and typically takes delivery of the gas at a point outside of a particular province (i.e.., Ontario or Quebec). The purchaser then enters into a buy-sell agreement with a distributor, under which the distributor purchases the gas at a certain price, sells it back to the purchaser at the same price, and agrees to deliver the natural gas to the purchaser in that particular province. Similar arrangements are possible for supplies of electricity involving third party marketers.
In these limited circumstances, the transportation provided would be considered a separate supply, on the basis that the purchaser is only entering into the agreement with the distributor or third party to effect the delivery of the gas or electricity. Consequently, any tax paid on the consideration for the transportation would not be subject to the RITC requirements or ITR restrictions.
It’s important to note that tax paid on energy supplied under traditional contracts will be subject to the RITC requirements and ITR restrictions in place at that time, even if the contract is with a distributor rather than a producer. Under these contracts, the supplier often agrees to both sell and deliver the gas or electricity. As noted above, the delivery or transportation charges will be regarded as part of the consideration for the supply of the energy, even if those charges are segregated on the invoice.
The second common exception arises out of the commercial lease of office space. In many cases, a landlord and tenant may agree that the rent is comprised of a fixed amount plus ancillary expenses, including the cost of electricity used by the lessee. If it is determined that the cost of the electricity is included in the rent, then the landlord would be considered the recipient of the electricity and subject to any potential RITC requirements or ITR restrictions. The lessee, on the other hand, would not be subject to these requirements or restrictions with respect to the amount paid for the electricity, since that amount is considered part of its rent. Readers are advised that the intent of the parties and the agreements between them must be carefully considered in making this determination.
Need more information? Call the Ryan TaxDirectTM line at 1.800.667.1600 or visit: Ryan Canada TaxDirect