Canada: Energy @ Gowlings - February 3, 2010

Last Updated: February 8 2010

Edited by Paul Harricks


  • Restrictions on Input Tax Credits for HST on Energy and Other Inputs
  • A Quick Discourse on Shale Ga
  • Korean Companies Set to Open the Green Economy in Ontario

By: Michael Bussman

British Columbia and Ontario are replacing their provincial sales taxes and the federal Goods and Services Tax (GST) with a single Harmonized Sales Tax (HST) from July 1, 2010. The federal legislation amending the Excise Tax Act received Royal Assent on December 15, 2009.

As part of the implementation, British Columbia and Ontario will impose restrictions on input tax credits for HST incurred on energy and a limited range of other inputs.

These restricted input tax credits are to be known as "specified input tax credits" (Specified ITCs). Specified ITCS will eliminate recovery of the provincial component of the HST, i.e., 7 of the 12 per cent HST in British Columbia and 8 of the 13 per cent HST in Ontario.

The restrictions on recoverability for inputs of energy should have the most significant impact as energy inputs are currently fully exempt under the existing provincial sales tax regimes. In entering into long-term design, build and operate agreements, consideration should be given to structuring supply of energy in an HST efficient manner.

Scope of the Restrictions

The restrictions on Specified ITCs for energy will include electricity, gas, combustibles and steam energy. However, the restrictions will not extend to HST incurred on energy used in producing goods for sale, nor for designing or producing equipment for producing goods for sale. Nonetheless, energy used for air conditioning, lighting, heating or ventilation of a production site will generally be subject to the restrictions.

The restriction on Specified ITCs for energy will not extend to motive fuels acquired to power a propulsion engine. However, restrictions on Specified ITCs will extend to HST on non-diesel fuel to power a vehicle weighing less than 3,000 kg that is required to be registered for use on public highways, as well as such road vehicles, their parts and servicing.

Other restrictions will include Specified ITCs for certain telecommunications services (other than internet access or toll-free numbers), as well as any on food, beverages and entertainment.

"Temporary" Restrictions

For now, the restrictions are intended to be temporary. After the first 5 years following implementation, Specified ITCs relating to restricted items are to be phased out over a three-year period. Accordingly, in the sixth year, the restrictions would be limited to 75 per cent of the Specified ITCs; in the seventh year, the restrictions would be limited to 50 per cent of the Specified ITCs; and in the eighth year, the restrictions would be limited 25 per cent of the Specified ITCs before being eliminated in the ninth year.

Only time will tell if these restrictions, in fact, will be lifted by future governments.

Definition of "Large Business"

The restrictions are only to apply to "large businesses", though the threshold is fairly low.

A person who is registered for GST/HST purposes would be considered to be a "large business" if the total consideration for GST/HST taxable supplies made in Canada by the person, or by associates of the person, that was paid or payable in the previous fiscal year exceeds $10 million.

In calculating the $10 million threshold, amounts attributable to consideration for supplies of zero-rated exports, supplies made outside Canada through a permanent establishment in Canada, and supplies deemed to have been made for nil consideration pursuant to a joint election made by specified members of a qualifying group will be included.

However, amounts attributable to consideration for supplies of financial services, exempt supplies, supplies of real property that is capital property, and supplies of the goodwill of a business in situations where GST/HST is not payable on those supplies need not be included.

Further Guidance

Many of the details of these changes are expected to be in Regulations to the Excise Tax Act that will be released at a later date, as well as in administrative policy to be issued soon by the Canada Revenue Agency. Since these restrictions are similar to the restrictions on the recoverability of the Quebec Sales Tax, the administrative policy is expected to be similar to that already issued by the Ministère du Revenu du Québec.

By: Alan Hollingworth

Much has been written recently on the topic of shale gas. The following represents an attempt to explain the topic to the uninitiated. Space limitations dictate that this description is very brief and far from complete.

Shale gas is considered to be unconventional gas, along with coalbed methane and tight gas. The presence of shale gas has been known for a long time but its economics of production were always questionable because of the low permeability of the rock in which the gas is located. In other words, a given well would produce a relatively small amount of gas which was not as economic as other wells. Advances in hydraulic fracturing and horizontal drilling have improved the picture for shale gas. Wells are now routinely drilled down and then horizontally, thus exposing the well bore to a greater area. Combined with techniques to fracture the rock and thereby free the gas, greater production is possible from a given well.

Advances in shale gas technology have resulted in large natural reserve additions, particularly in the United States where the trend is more advanced. Indeed, the US has seen net additions to its gas reserves in the last couple of years, following years of decline.

The prospect in Canada is similar although the industry is not as far along. Shale reserves exist in many areas of Canada, particularly in the Montney and Horn River areas of B.C. but also over large areas of Alberta and in the St. Lawrence River basin. Areas in B.C. are producing already. The Alberta Department of Energy estimates that the Western Canada Sedimentary Basin, the chief producing area of Canada, contains up to 100 trillion cubic feet of gas, although by no means all of that gas would be recoverable in an economic fashion based on today's technology.

It is also true that shale gas production is seen as a potential health hazard by many people. The fracturing process referred to requires large volumes of water, sand and several toxic chemicals. Home owners in areas of shale gas production have complained about fouled drinking water and illness. Recently, New York City requested a ban on shale gas production in the catchment area for its drinking water supply.

In brief, shale gas represents a significant additional source of natural gas although techniques for its production may need refinement to improve its acceptability to all stakeholders.

By: Danielle Waldman

On January 21, 2010, the McGuinty government announced that it has signed an agreement with a South Korean consortium to bring green energy and green manufacturing jobs to Ontario's economy in accordance with the policy objectives of The Green Energy and Green Economy Act, 2009 (the GEA). The deal provides that the consortium, led by Samsung C&T Corporation and the Korean Electric Power Corporation, will invest $7 billion in the province, build 2,500 megawatts of renewable energy generation in the form of wind and solar, and to create more than 16,000 jobs in the province. These jobs will be in constructing, installing and operating the renewable energy projects as well as direct manufacturing jobs.

The province has also agreed to pay the consortium $437 million in incentives through the Economic Development Adder if the consortium builds four manufacturing plants in the province. It is anticipated that the plants will manufacture wind turbine towers and blades, as well as solar inverters and modules. The plants are expected to be built between 2013 - 2015 in separate phases, and the incentives are tied to the manufacturing plants being built on time. The incentives will result in an additional $1.60 being added annually to each consumer's electricity bill across the province over the lifetime of the generation contracts.

The deal has a term of 25 years, in hopes of establishing a firm base for a green manufacturing sector in Ontario for many years to come. The products manufactured at these plants will be available for use in Ontario and will assist other renewable energy developers to meet the domestic content requirements of the GEA's feed-in tariff (FIT) program, as well as for export across North America.

The renewable energy generation projects built by the consortium will also qualify for the premium being paid for renewable energy generation in the province pursuant to the FIT program. If all 2,500 megawatts are built, the projects will provide enough electricity to light up more than 580,000 homes in the province. Construction is expected to occur in five phases, with the first phase scheduled to be completed in 38 months. The deal required the province to reserve capacity on the transmission grid, which was accomplished by the Ministerial Directive issued to the Ontario Power Authority on September 30, 2009 setting aside capacity in Chatham-Kent, Essex and Haldimand for the first phase of the consortium's development. Transmission for subsequent phases will depend on the consortium's ability to deliver the manufacturing plants.

Many locally-based developers and manufacturers are claiming that the consortium has been provided with an unfair competitive advantage in the green marketplace. Many of the criticisms are that there was no "openness and transparency" as is required for all other players in the marketplace. Did the government provide priority access to the grid for the consortium? Or was the government just trying to jump start the green economy that they promised would be built through the introduction of the GEA? Or was this an attempt by the government to compete with the "Buy American" policies of the United States and woo international manufacturers to our jurisdiction? These are all questions that will be addressed in due course as the consortium begins operations in Ontario over the next few months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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