Bill 6 sets out the features of the new LNG tax regime. The LNG
taxation proposals have been the subject of great public scrutiny,
ongoing negotiations and political pressure since they were
announced in the 2014 BC Budget. This tax is levied on any taxpayer
involved in "liquefaction activities" at an LNG Facility
in BC. This tax is also in addition to existing federal and
In introducing this Bill, B.C. Finance Minister Mike De Jong
used an example of a hypothetical producer that would have paid
approximately $1.5 billion in taxes over 10 years under the earlier
proposals, and stated that the same producer would pay only $800
million under the revised taxing regime in the proposed
The significant components of the tax scheme include a tax of
1.5% on "net operating income", which many are referring
to as the Tier 1 Tax, and a 3.5% tax (increasing in 2037 to 5%) on
"net income" or Tier 2 Tax. The calculations of net
operating income and net income, while starting with net income for
regular income tax purposes, are subject to certain statutory
In the calculation of "net operating income", no
deductions are allowed for capital cost allowance (i.e.
depreciation) or financing costs (including interest expense).
However, a special "investment allowance", at a rate to
be prescribed by regulation, will be deductible.
In the calculation of "net income" losses from prior
years and a deduction for capital investment may be claimed.
Finally, with respect to the calculation of income, it is
important to note that income from LNG operations is broadly
defined, and includes income from the purchase and sale of natural
gas, income from operating LNG facilities (e.g. tolling
arrangements), income from the sale of electrical power from an LNG
facility, other ancillary sources of income, as well as the
purchase and sale of personal property related to LNG facilities,
and the acquisition and disposition of LNG facilities themselves.
As previously announced, there is a mechanism to allow any Tier
1 Tax paid to be recovered against any Tier 2 tax payable in the
current or a subsequent taxation year.
As is the case with many sophisticated tax regimes, there will be
specific transfer pricing provisions setting out rules for
valuation of transactions between all non-arm's length parties
- including self-dealing. This is significantly different from
income tax that only apply transfer pricing rules to transactions
with non-residents. It is not clear how these transfer pricing
rules may be affected by income tax treaties that Canada federally
enters into with other countries.
There are two other important components of the proposed
legislation. First, the legislation provides for a tax credit for
"eligible expenditures" incurred on the closure of an LNG
facility. The amount of the credit is subject to a limitation
calculation based on the amount of Tier 2 Tax paid and the maximum
claim is 5% of the eligible expenditures.
Second, a tax credit that applies against ordinary provincial
income tax will be provided to corporations with a permanent
establishment in BC. The tax credit is based on 0.5% of the inlet
cost of natural gas at an LNG Facility and may only be claimed in
years when the corporate taxpayer is paying LNG income tax.
Further, the credit can not reduce the provincial corporate tax
paid below 8%. The number of restrictions around this credit may
have a significant impact on proponent structuring decisions.
Reaction from industry has so far been positive, with several
representatives lauding the government for recognizing the reality
of global competitive pressures and world conditions. Proponents
have also expressed relief that the government has now provided
some certainty around the tax and emissions trading regimes.
The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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