British Columbia Natural Gas Tax Credit

Coinciding with the enactment on November 27, 2014 of the Liquefied Natural Gas Income Tax Act (SBC 2014, c. 34) (“the LNG Tax Act”) implementing an LNG income tax, the provincial government also enacted amendments to the provincial Income Tax Act (“the BC ITA”) implementing a natural gas income tax credit.

The credit, effective for qualifying corporations for taxation years beginning on or after January 1, 2017, is computed as 0.5 percent of the cost of natural gas acquired or notionally acquired at an LNG facility for LNG tax purposes. The credit could reduce a corporation’s provincial income tax rate from 11 percent to 8 percent, and any unused credit can be carried forward indefinitely (subject to certain conditions). The mechanics of section 172 of the BC ITA result in the credit being available to reduce a qualifying corporation’s income taxes (but not LNG taxes) payable on all taxable income allocated to British Columbia.

Pursuant to sections 172(1) and (2) of the BC ITA, to qualify for the credit a person must

  1. be a taxpayer as defined in the LNG Tax Act;

  2. maintain a permanent establishment (PE) in the province for income tax purposes at any time during each relevant taxation year; and

  3. acquire, or notionally acquire, natural gas at the inlet meter of an LNG facility in the province during the relevant taxation year.

LNG Taxpayer

An LNG taxpayer, as defined in section 1 of the LNG Tax Act, is a person who engages in or has income derived from liquefaction activities, whether or not the person is liable to pay LNG tax. The definition of “liquefaction activities” is broad, and in certain circumstances it can be difficult to determine whether a person is an LNG taxpayer. For example, an upstream producer that disposes of natural gas to an LNG processor may or may not be an LNG taxpayer, depending on the place where ownership of the gas transfers. Transactions must be carefully structured to achieve the desired tax results.

Provincial PE

Assessing whether a taxpayer has a PE in a province is governed by the federal Income Tax Regulations. The taxpayer should have a PE in British Columbia if the taxpayer owns an LNG facility, maintains an office, or operates a natural gas well there. However, the corporation may not have a PE in British Columbia (and as a result may be ineligible for the natural gas tax credit) if it maintains an office and concludes contracts (natural gas purchases, pipeline transportation, processing, and sales) outside British Columbia and natural gas is processed under a tolling arrangement with another entity that owns an LNG facility in British Columbia.

Acquires or Notionally Acquires

The application of the third criterion — that the taxpayer acquires, or notionally acquires, natural gas at the inlet meter of an LNG facility in British Columbia — should generally be straightforward in respect of a corporation directly engaged in liquefaction activities. However, eligibility under this criterion is less clear for a corporate member of a partnership when the partnership acquires or notionally acquires the natural gas. In that case, the corporation’s eligibility depends on the interaction of deeming provisions in the natural gas tax credit rules and the LNG Tax Act. It appears that the intent of the rules is to extend the credit to the members of a partnership engaged in processing activities. In particular, if the qualifying corporation is a member of a partnership (as defined by section 97 of the LNG Tax Act), section 172(5)(b) provides that in determining a corporate partner’s cost of natural gas, the corporation is deemed to have acquired natural gas in an amount equal to the corporation’s share of the partnership’s natural gas cost. Implementing this calculation appears to be relatively straightforward for a corporate partner of a single-tier partnership, but the analysis is more complex for a corporate partner of a multi-tier partnership.

Adam Power
Ernst & Young LLP, Calgary
adam.power@ca.ey.com

Canadian Tax Focus
Volume 5, Number 1, February 2015
©2015, Canadian Tax Foundation