On June 27, 2018, the Department of Finance released draft technical changes to the GST/HST rules applicable to sales of carbon emission allowances (cap-and-trade systems).
Prior to these changes, a purchaser of carbon emission allowances on the secondary market was expected to pay the applicable GST/HST to the seller, who was responsible for remitting it.
A purchaser will now be responsible for self-assessing and remitting any applicable GST/HST on such sales.
Finance’s draft measures
Summary
As Canada’s carbon emissions regime continues to develop, issues of taxation periodically arise that require refinements to related tax rules. To better align Canadian carbon taxation with international standards, the Department of Finance announced an adjustment to the rules for GST/HST collection from the sale of carbon emission allowances. This legislative proposal essentially shifts the responsibility for collecting GST/HST from the vendor to the purchaser in secondary market transactions.
In the context of cap-and-trade systems, vendors will often sell their surplus carbon emission allowances to purchasers who require additional allowances beyond the initial supply obtained from a Canadian government entity. Prior to the June 27 announcement, the vendor was required to collect and remit the GST/HST payable on these secondary market transactions. The draft legislative proposals shift the burden of tax collection and remittance from the vendor to the purchaser. Going forward, the purchaser will be required to self-assess GST/HST payable and remit it to the Canada Revenue Agency. Of course, purchasers who are registered for GST/HST purposes and are acquiring carbon emission allowances for use or supply in a commercial activity should generally be able to offset the self-assessed GST/HST through the input tax credit mechanism.
It is important to note that this change only applies to the secondary market. The initial supply allotted by governmental entities remains exempt from GST/HST.
‘Emission allowance’ definition
The proposed new definition of “emission allowance” under subsection 123(1) of the Excise Tax Act, only describes an “emission allowance” that satisfies the following three criteria:
- The allowance must have been issued or created by a government or international organization, or by a body established by one of these entities;
- The allowance must be capable of being used to satisfy requirements under a scheme implemented by a government or international organization, such as a cap-and-trade system; and
- The allowance must specify a specific quantity of greenhouse gas emissions.
Retroactive effect
Such draft proposals were expected to be effective as of June 27, 2018. However, the changes may also have a retroactive effect in some circumstances—GST/HST payable before June 27, but not yet collected by the vendor is subject to the new rules, meaning the purchaser will be responsible for self-assessing the GST/HST.
Potential pitfalls
- New proposed subsection 261(2.1) of the Excise Tax Act now provides for restrictions on the payment of a rebate for tax paid in error in respect of a supply of an “emission allowance.” Under the proposed rule, a rebate will not be paid to a person in respect of an amount paid in respect of an “emission allowance” unless (i) the person paid the amount to the Receiver General, or (ii) circumstances prescribed by regulation exist or conditions prescribed by regulation are met (no such circumstances or conditions are expected to be prescribed for now).
- The proposed measures, as currently drafted, could create uncertainty vis-Ã -vis reporting requirements for transactions involving an unregistered non-resident vendor. That is because the proposed self-assessment mechanism is only applicable with respect to the tax payable under Division II of the Excise Tax Act and not with respect to the “tax on imported taxable supplies” imposed under Division IV of the Excise Tax Act. We understand that this potential problem has been raised with the Department of Finance and may be corrected prior to the enactment of the final rules.
Next steps
The Department of Finance was accepting submissions on the draft changes until July 27, 2018.
Jean-Guillaume Shooner and Julie D’Avignon are with Stikeman Elliott LLP
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