December 5th, 2023
CPAs, Public Service Bodies, Financial institutions
There are several ways to acquire natural gas for your facilities, and the application of GST/HST/QST varies according to the method of acquisition.
Most commonly, natural gas is purchased and transported directly from the local natural gas distributor. For instance, from Energir, the natural gas distributor for most of Quebec. This is the simplest method of acquisition, and generally requires no special GST/HST/QST treatment.
It is also possible to purchase natural gas from a natural gas supplier or an intermediary specializing in the purchase and sale of natural gas. In this case, natural gas must still be delivered to your facilities via the authorized distributor in your area. There may be different acquisition methods, and different GST/HST/QST treatments depending on the method chosen.
Fixed-Price Purchasing
There are generally two buyers for natural gas delivered by the gas supplier: the customer and the natural gas distributor. The customer bears the difference between the price agreed with the supplier and the spot price paid by the distributor. When this natural gas is delivered by the supplier in an HST-participating province, the HST will be payable to the natural gas supplier. Then, when the natural gas is transported by the distributor to the customer’s facilities in Quebec, the GST and QST will be billed to the customer by the distributor on the price of the same natural gas.
Some fixed price purchasing contract will however, specify that the customer acquires natural gas from a supplier and only the natural gas transportation service from the distributor. In this case, the customer pays HST if the natural gas is delivered in an HST-participating province and will have to self-assess QST on the value of natural gas consumed in Quebec that is not used exclusively in commercial activities. To avoid duplicate application of HST/QST (provincial portion of HST and QST payable on the same natural gas), a rebate application for the provincial portion of HST must be made using a prescribed form.
Resale purchase Agreement
This is a contract under which the customer acquires the natural gas at the supplier’s delivery point and then sells it to the distributor at the same point for transportation to its facilities in Quebec. This method can be problematic for public service bodies, particularly if the direct cost exemption applies when the natural gas is resold to the distributor, or if the special quick method of accounting for public service bodies is used by the public service body acquiring the natural gas.
Contract for Difference (Rarer)
This is a contract where the customer acquires natural gas at a fixed price from an intermediary who pays a variable price according to the market.
The natural gas distributor then delivers the natural gas to the customer’s facilities at the spot price (variable price) and collects GST/QST on the price of natural gas delivered in Quebec.
The intermediary sends an invoice to the customer calculated as follows: contract price minus spot price. When the amount is positive, the customer must pay the difference to the intermediary, and when the amount is negative, the intermediary must pay the difference to the customer, such that the customer pays the contract price for natural gas.
According to a CRA interpretation, the contract described above is an “energy price swap”, i.e. a financial contract where the parties exchange a series of cash flows in the future. The customer pays a fixed price for natural gas, and the intermediary pays a floating price. The difference between the fixed price and the floating price is settled each month by a payment from the intermediary to the customer, or vice versa. The swap is a financial instrument as defined in 123 (1) ETA, and is subject to the very specific tax rules that apply to it.
As you can see, the application of GST/HST/QST varies depending on how natural gas is acquired, and the terms of a contract can have costly consequences, particularly for public service bodies using the special quick accounting method, or where a direct cost exemption applies. If in doubt about the application of GST/HST/QST when purchasing natural gas, we strongly advise you to check with a commodity tax specialist.
Please contact us; we’ll be happy to help.
