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FROM: MAY-JUN 2009 ISSUE | BY R. JASON RICHE
The oil and gas industry has a difficult time applying the GST rules to Continuous Transmission Commodities (CTCs) – typically oil, natural gas, and electricity products that can be transported via a wire, pipeline, or other conduit. This difficulty can be amplified when the GST rules are interpreted by the Canada Border Services Agency (CBSA), which administers the collection of GST on imports.
With CTCs there is no way to ensure that the product placed into the conduit is the same product that is delivered, as CTCs often become intermingled with other like products within the conduit. The recent case of Tenaska Marketing Canada v. R. [Federal Court (FC) in 2006; Federal Court of Appeal (FCA) in 2007] seems to have brought some much needed clarity to this issue.
Tenaska, a U.S. corporation, purchased natural gas in western Canada and shipped it to eastern Canada via a pipeline in the U.S. The CBSA assessed Tenaska for not paying GST on the re-importation of the natural gas. One of the arguments put forth to the federal court by Tenaska was that the CBSA overlooked a provision that deems CTCs moved from one point to another in Canada via the U.S. not to be considered exported and re-imported.
The Crown held that this provision would not apply because Tenaska could not demonstrate that the gas put into the pipeline was the “same” gas taken out. The judge did not agree and the Crown appealed to the FCA; however, the FCA dismissed these appeals, and asked the CBSA to consider the matter in light of the intention of the legislation. The underlying rationale of the GST rules dealing with CTCs concerns the fact that the property exported and imported will not have the same molecular structure.
In response to Tenaska, the CBSA has undertaken an in-depth review and will publish a new policy mid-2009. Somewhat concerning are recent statements made by CBSA officials indicating they will be looking to ensure the tracking of the physical movement of CTCs. The CBSA does not appear to disagree with the courts, but it does appear to be concerned with establishing the evidentiary burden. I hope the CBSA considers the comments of the FCA and considers volumes based on quantity and quality of CTCs, rather than tracking physical lots.
In contrast, the Canada Revenue Agency has taken a practical approach in its interpretation of this issue, which is in line with the court’s comments in Tenaska. The CRA has focused on energy content and seeks to track movement on a contractual basis as opposed to a physical basis.
Perhaps because the CBSA focuses on transactional accounting for identifiable goods, wrestling with how to treat CTCs is a challenging proposition. While there may be a natural tendency for the CBSA to compare the movement of CTCs to other in transit shipments of goods that can be specifically identified, sealed, and reported, the decision of the FCA also serves as a reminder that the requirements cannot be applied the same in the context of CTCs as the special provisions dealing with these commodities were not intended to be applied only to sealed pipelines.
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