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Canadian Energy Traders & GST/HST Collection Obligations

Posted by on in Commodity Tax Blog
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Canadian energy traders often misunderstand their tax collection obligations for the GST/HST and other sales taxes.

The issue may relate to a 2014 administrative decision by the CRA to begin to take a very restrictive approach to the application of section 144 of the Excise Tax Act (ETA), and a very broad approach to other deeming provisions in the ETA, which has arguably changed how the GST/HST applies to many Canadian energy transactions.

Section 144 was often relied upon by traders in oil and gas and other commodities to actively trade in those commodities while they were “in bond” in Canada (not yet released from Customs control) without having to charge and collect the GST/HST, until the goods were finally imported into Canada, at which point GST/HST under Division III of the ETA would apply.  It was commonly thought that where goods were delivered under Incoterms that required the purchaser to import the goods being acquired, no GST/HST was required to be charged on the sale.

The change in policy at the CRA effectively means that section 144 is no longer applicable where long-term supply agreements exist for such goods, making transactions subject to DAP, DAT, and DDU Incoterms all potentially subject to GST/HST collection obligations – even if the transactions are concluded before the goods have been imported but while the goods are in the territory of Canada. 

(In the CRA’s view, section 144 only applies to one-off deals that are arranged and made after the goods have been imported, but while the goods are still “in bond”.  Not many of those situations appear to exist in reality, however.)

Under the CRA’s current administrative position, a good rule of thumb is that any time a commodity is sold while it is physically in Canada (including “flash sales”), there is probably GST/HST that needs to be charged.  While there are some limited exceptions, energy traders not charging GST/HST on Canadian transactions should be doing so on the basis of sound legal advice.

What to do if in this situation?

Getting into compliance on a going-forward basis is always the proper approach.  But what to do about the past?  Since there is no current obligation in the ETA to “correct” an error, some registrants may decide to do nothing, but that often carries with it an audit risk – especially where “go forward” compliance begins to change the “net tax” amounts reflected in one’s GST/HST returns.  In this light the ability to correct past non-compliance under a so-called tax amnesty program like the CRA’s GST/HST Voluntary Disclosure Program also often looks inviting.  But those programs are not really “tax amnesty”, and recent changes have made Voluntary Disclosures more difficult in practice than they have been in the past.

Accordingly, while there is no “one size fits all” approach to what to do in these circumstances, there are some legal options for working one’s way out of this situation.

Best to understand those before the CRA comes knocking, however.


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