Canada Trade
Continuous Transmission Commodities: Importing
and Exporting Electricity, Oil, Gas and Similar
Tangible Property
By Satinder Bains (KPMG) and Daniel L. Kiselbach (Miller Thomson LLP)1
The term “Continuous Transmission Commodities (“CTCs”) describes electricity, crude oil,
natural gas, and other tangible personal property
transportable by wire, pipeline or conduit.2 What
Customs Act and Excise Tax Act reporting and
accounting provisions apply? Have these provisions been judicially considered? What are the
documentary requirements? This article will cover
these questions and provides essential information
for businesses importing or exporting CTCs.
that imported goods are charged with duties from
the time of their importation at rates applicable at
the time of accounting.5 Section 23 of the Customs
Act provides that certain goods transported over
territory outside of Canada shall be treated as if
they had been transported entirely within Canada.
Section 23 states:
23. Goods that are transported from one
place in Canada to another place in Canada
The General Legislative Schemes
The Canada Border Services Agency (CBSA) is
responsible for the administration and enforcement of CTC reporting and accounting provisions.
The CBSA administers and enforces Customs Act
provisions relating to customs duties. It also administers and enforces Excise Tax Act provisions
in Division III, Part IX Goods and Services Tax
(“GST”) which is levied on imported goods. It
does so for and on behalf of the Canada Revenue
Agency. The manner in which CTCs should be
reported and accounted for has been the subject
of debate.
Duties Under the Customs Act
The CBSA is responsible for determining
whether or not customs duties are levied on the
importation CTCs into Canada. 3 The Customs
Act defines customs “duties” as including duties
levied under the Customs Tariff; not import GST.
This fact is made clear by the wording of section
2 of the Customs Act which defines the word “duties” as:
“duties” means any duties or taxes levied
or imposed on imported goods under
the Customs Tariff, the Excise Act, 2001,
the Excise Tax Act, the Special Import Measures Act or any other Act of Parliament,
but, for the purposes of subsection 3(1),
paragraphs 59(3)(b) and 65(1)(b), sections
69 and 73 and subsections 74(1), 75(2) and
76(1), does not include taxes imposed under
Part IX of the Excise Tax Act;
Section 12 of the Customs Act requires importers to report imported goods.4 Section 17 states
Section 23 of the Customs Act provides that
certain goods transported over territory outside
of Canada shall be treated as if they had been
transported entirely within Canada.
over territory or waters outside Canada in
accordance with such terms and conditions
and subject to such bonds or other security
as may be prescribed shall be treated, with
respect to their liability to or exemption
from duties, as if they had been transported
entirely within Canada.
Import GST Under the Excise Tax Act
Subsection 123(1) of the Excise Tax Act6 defines the term “continuous transmission commodity”. This section is reproduced again for
convenience:
In section 121, this Part and Schedules
V to X,
...
“continuous transmission commodity”
means electricity, crude oil, natural gas,
or any tangible personal property, that is
transportable by means of a wire, pipeline
or other conduit;...
GST is levied on imported Goods pursuant to
Part IX, “Goods and Services Tax”, Division III,
“Tax on Importation of Goods”, of the Excise Tax
Act. Section 212 imposes GST on imported goods.
Practical Trade & Customs Strategies
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It states that:
212. Subject to this Part, every person who
is liable under the Customs Act to pay duty
on imported goods, or who would be so liable if the goods were subject to duty, shall
pay to Her Majesty in right of Canada tax
on the goods calculated at the rate of 5% on
the value of the goods.
Section 214 states that the import GST shall be
paid and collected under the Customs Act as if the
GST were a customs duty levied on goods under
the Customs Tariff.7
Section 144.01 of the Excise Tax Act deals with
“property in transit”.8 Section 144.01 sets out con-
CTCs transported from Canada, into the
U.S., and back into Canada are the subject of
separate Customs Act and the Excise Tax Act
reporting and accounting requirements.
ditions under which a CTC is deemed not to be
exported or imported (and, therefore, not subject
to import GST). It states as follows:
144.01 For the purposes of this Part (other
than sections 4, 15.3 and 15.4 of Part V of
Schedule VI), if a continuous transmission
commodity is transported by means of a
wire, pipeline or other conduit
(a) outside Canada in the course of,
and solely for the purpose of, being delivered by that means from a place in
Canada to another place in Canada,
(b) in Canada in the course of, and
solely for the purpose of, being delivered by that means from a place outside Canada to another place outside
Canada,
(c) from a place in Canada to a place
outside Canada where it is stored or
taken up as surplus for a period until
further transported by that means to a
place in Canada in the same measure
and state except to the extent of any
consumption or alteration necessary or
incidental to its transportation, or
(d) from a place outside Canada to a
place in Canada where it is stored or
taken up as surplus for a period until
© Thomson Reuters/WorldTrade Executive
further transported by that means to a
place outside Canada in the same measure and state except to the extent of
any consumption or alteration necessary or incidental to its transportation,
the commodity is deemed not to be
exported or imported in the course of
that transportation or further transportation.
Customs and GST Treatment of CTCS
CTCs transported from Canada, into the U.S.,
and back into Canada are the subject of separate
Customs Act and the Excise Tax Act reporting and
accounting requirements. These separate legislative schemes have given rise to the following
issues:
1. Can CTCs be classified as “Canadian goods
returned” upon reentry into Canada?
2. Does the fact that CTCs are fungible and
may be commingled with foreign goods mean
that CTCs can not be classified as “Canadian
goods returned”?
3. Does a “transfer of convenience” of the
CTC from a Canadian entity to a U.S. affiliated
company (in order to transport the CTC across
the U.S. and back into Canada) affect its value
for duty?9
4. When should the movement of CTCs back
into Canada from the U.S. be treated as an importation, given section 144.01 of the Excise Tax
Act?
The Tenaska Case
Procedural History
In Tenaska Marketing Canada Division of TMV
Corp. v The Minister of Public Safety and Emergency
Preparedness (Canada)10 O’Keefe J. disposed of an
application for judicial review of two detailed
adjustment statements (“DASs”) issued in connection with a CTC matter. The CBSA issued the
DASs to Tenaska Canada in respect of shipments
of natural gas shipped by pipeline from western
Canada to eastern Canada, via pipeline passing
through the US.
The CBSA took the position that the natural
gas was subject to import GST of almost $2.7
million on reentering Canada, and that interest
was due on that amount at the prescribed rate of
approximately $555,000. The Applicant took the
position that provisions of the Customs Act and
Excise Tax Act deemed that no importation occurred and no GST was levied on the goods. Key
facts of Tenaska are outlined below.
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Canada Trade
Factual Background
Tenaska Marketing Canada (“Tenaska Canada”) was a division of Tenaska Marketing Ventures
Corp., a Nebraska corporation (“Tenaska USA”).
Tenaska Canada purchased natural gas in Western Canada in order to deliver it to customers
located in Eastern Canada. The natural gas was
transported from Western Canada to Eastern
Canada the cheapest way; via the Great Lakes
Pipeline. The Great Lakes Pipeline extends from
the Manitoba-Minnesota border, across Minnesota, Wisconsin and Michigan for movement into
Canada at Sault Ste. Marie or St. Clair, Ontario.
See figure 1 below.
In 2003, the CBSA conducted the customs
compliance verification of Tenaska Canada’s natural gas customs transactions for the previous year.
It examined documents, including a purchase and
sales contract between Tenaska Canada and its
U.S. affiliate.11 The purchase and sales contract
showed that title to the natural gas was transferred to a U.S. affiliate when the gas entered the
U.S. Title to the natural gas was transferred back
to Tenaska Marketing Canada when re-entered
Canada. Tenaska Canada described these as
“transfers of convenience” as they were made
simply in order to comply with U.S. Federal Energy
Regulatory Commission (FERC) requirements.12
Tenaska Canada took the position that 12 of
the 24 import transaction which were the subject of the verification were “Canadian goods
returned” and should be classified under tariff
item 9813.00.00.92.13 Under tariff item 9813.00.00
the natural gas was exempt from GST. The CBSA
verification officer did not agree, and issued the
DASs.
The compliance verification officer took the
position that Tenaska Canada should have paid
GST on the natural gas at the time it re-entered
Canada. He reasoned that: (1) the natural gas entered the Great Lakes Pipeline where it was combined or commingled with gas from U.S. sources
(and lost its separate identity as a Canadian
good); (2) should be classified under tariff item no.
2711.21.00.00; and (3) was subject to GST.
The verification officer also noted that even
if the in-transit gas could be verified as having
originated in Canada, the transfer of ownership
at the Manitoba border must be considered. The
natural gas was supplied outside of Canada by
way of sale to the U.S. affiliate (that is, the re-entry was a sale for export from the U.S. affiliate to
Tenaska Canada). Therefore, GST must be levied
on the re-entry of the natural gas into Canada.
Tenaska Canada paid the assessment and
later recovered the GST portion by taking an
input tax credit (“ITC”). It could not, however,
claim the assessed interest as an ITC. There was
a casus omissus in the Customs Act and the Excise
Tax Act in the sense that neither provided a right
of appeal. Tenaska Canada therefore commenced a
Imports, continued on page 6
Figure 1 – Great Lakes Pipeline
Image used with permission of Great Lakes Gas Transmission Company
Source: http://www.glgt.com/pipeline/pipe_map.htm
Source: http://www.glgt.com/pipeline/pipe_map.htm
Practical Trade & Customs Strategies
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Canada Trade
Imports from page 5
judicial review application respecting the interest
assessment decision, pursuant to section 18.1 of
the Federal Courts Act.
Findings and Order
O’Keefe, J. disposed of the application on the
basis of section 114.01 of the Excise Tax Act. He
found that: (1) section 144.01 applies to natural
gas, even though it is commingled with other
natural gas; (2) the verification officer should
have considered section 144.01 of the Excise Tax
Act in order to determine whether or not the sale
of the natural gas (transfer of convenience) to the
US affiliate and back to Tenaska Canada met the
requirements of section 144.01; (3) the verification
officer erred in not applying section 144.01 of the
Excise Tax Act in the circumstances; and (4) the
decision respecting the facts must be made by the
verification officer and not by the court. Given his
The Customs Act defines customs “duties”
as including duties levied under the Customs
Tariff; not import GST.
decision and findings, he did not deal with section
23 of the Customs Act.
Reasons
The courts reasons for the decision included
the following. There was no dispute in this case
that natural gas: (1) is a CTC; and (2) is a fungible
commodity, in that once it has been delivered to
a pipeline for transport, it becomes commingled
with, and can not be distinguished from, other
natural gas in the pipeline.
The verification officer’s assessment did not
refer to section 144.01 of the Excise Tax Act or section 23 of the Customs Act, and the officer did not
apply these sections to the facts. Section 144.01
refers to CTCs transported by pipeline; precisely
what happened in this case. If the requirements of
section 144.01 are met, the natural gas is deemed
not to be imported or exported, and no GST is
levied.
The Minister took the position that section
144.01 did not apply because of the commingling
of the gas. However, the court noted that the
Minister’s Backgrounder to section 144.01 contemplated that natural gas would not be identifiable
from other gas in the pipeline given its fungible
© Thomson Reuters/WorldTrade Executive
nature. An excerpt of the Minister’s Backgrounder
is reproduced below:
Another important aspect of this arrangement is that Revenue Canada’s administration recognizes the fungible nature of
continuous transmission commodities - i.e.,
if gas is purchased from different suppliers during a period it may not be possible,
because of the sameness of the product, to
track the destination of a particular purchase. In these circumstances, Revenue
Canada will compare the amount of product purchased under certificate with the
amount actually exported during a period
by a purchaser. (emphasis added)
Further, the court referred to explanatory
notes to the bill which brought in section 144.01
which stated:
“[CTCs] … may be transported across the
Canadian border more than once en route
to a delivery point in or outside Canada
solely because of the route the pipeline or
power-line must take. In this situation, the
administrative position has been to base
the tax treatment on the origin and ultimate
destination of the commodity and not on
the in-transit border crossings. In other
words, tax does not apply where such a
commodity crosses the border solely for the
purpose of being transported by pipeline
from a place outside Canada to another
place outside Canada or from a place in
Canada to another place in Canada. Section
144.01 is added to codify the administrative
practice for greater certainty.
The Federal Court of Appeal upheld O’Keefe,
J’s decision to remit this matter back to the CBSA
for reconsideration.14
CBSA’s Draft Customs Memorandum15
In 2012, the CBSA circulated a document titled
“Memorandum D17-1-xx, Draft, Procedures for the
Importations of Continuous Transmission Commodities” (the Draft D Memorandum) for review and
comments. It appears to take into account the
requirements of section 144.01 of the Excise Tax
Act. For example, it defines “in-transit CTCs”
as CTCs that are “transported from one place in
Canada to another place in Canada over territory
or waters outside Canada in accordance with the
requirements of the Customs Act.” This is similar
to the section 144.01 definition for “property intransit.”
The Draft D Memorandum also indicates that
in-transit CTCs under certain conditions would
February 28, 2013
Canada Trade
not be regarded as importations and, therefore, not
subject to reporting and accounting requirements.
These conditions appear to be consistent with the
provisions of section 144.01 of the Excise Tax Act.
The Draft D Memorandum also refers to
“transfers of convenience” which the Court in its
decision in Tenaska Marketing Canada v the CBSA
did not elaborate or provide adequate clarification. The Draft D Memorandum indicates that
in order to establish that a transfer is a “transfer
of convenience” the importer or exporter must
provide verifiable evidence demonstrating that a
change of title occurred for the purpose of facilitating the transportation of the goods. An excerpt
of the Draft D memorandum is reproduced here
for convenience:16
A change of ownership contemplated in
a contract between Canadian and U.S.
affiliates (also referred as a “transfer of
convenience”) does not in itself preclude
the good from being considered “in-transit”, as described in paragraphs 18 to 21
above. If the sole purpose of the change of
ownership is used to facilitate the transportation of goods, the CBSA may accept
documentary evidence as sufficient proof
that a given quantity and quality of a good
was in-transit. The transportation of the
good at issue must demonstrate a logical
connection between the two cross-border
movements of goods, as determined by
the CBSA. This logical connection must
include the correct chronological order of
border crossings for the goods at issue (i.e.
a good must be transported into Canada
prior to being transported out of Canada
to be considered to be moving in-transit
through Canada. Similarly, a good must be
transported out of Canada prior to being
transported into Canada to be considered
to be moving in-transit through a foreign
country).” (emphasis added)
The excerpt outlines CBSA’s position that
a transfer of convenience is a contract between
Canadian and U.S. affiliates changing ownership
for the purpose of facilitating the transportation
of the goods. 17 In order to establish that change
of ownership took place in order to facilitate the
transportation of the goods, and to establish the
nature and extent of that change in ownership,
it would likely be necessary to provide the following:
1. Documentary evidence establishing the
reason for the export of the CTCs from western
Canada to eastern Canada.
2. The contracts between the Canadian and
U.S. companies evidencing the transfer(s) of convenience necessary to move the CTCs into the US
and back into Canada.
3. Documentary evidence of the quantity of
the CTCs that have been transferred into the US
and back into Canada (e.g. natural gas measurement meter readings with corresponding dates
in chronological order).18
4. Reference to the U.S. legislation that requires a transfer of convenience to take place in
order for the CTC to be transported across the
U.S.
The Draft D Memorandum also indicates that
an importer or exporter of CTCs may be required
to establish the following:
1. Evidence that that the change of ownership is a “transfer of convenience” (see points
1- 4 above).
2. Evidence that the CTCs were not stored
in the U.S., or in situations where CTCs must be
stored, that the storage will not last longer than
30 days (being the period specified in the Draft D
memorandum).
3. Evidence that the CTCs exported from
Canada into the U.S. are of the same quantity as
the natural gas being transported into Canada
(that is, there is no net reporting involving the
subtraction of exported quantities from imported
quantities over a time period).
The CBSA has not provided a time frame
within which the Draft D Memorandum must be
finalized. In the meantime, the Draft D Memorandum seems to provide some comfort to importers
and exporters that compliance verification officers
will be alive to the requirement of section 144.01 of
the Excise Tax Act and the considerations identified
by the Federal Court in Tenaska Marketing Canada
v Canada (Minister of Public Safety and Emergency
Preparedness.
Conclusion
This article has outlined some essential information for businesses importing or exporting
CTCs. The manner in which CTCs should be reported and accounted for has been the subject of
debate. Section 23 of the Customs Act provides that
certain goods transported over territory outside of
Canada shall be treated as if they had been transported entirely within Canada. Section 144.01 of
the Excise Tax Act deals with “property in transit”.
Section 144.01 sets out conditions under which a
CTC is deemed not to be exported or imported
(and, therefore, not subject to import GST).
Practical Trade & Customs Strategies
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Canada Trade
Imports from page 7
In Tenaska Marketing Canada Division of TMV
Corp. v The Minister of Public Safety and Emergency
Preparedness (Canada), O’Keefe J. disposed of an
application for judicial review of two detailed
adjustment statements (“DASs”) issued in connection with a CTC matter. O’Keefe, J. disposed
of the application on the basis of section 114.01
of the Excise Tax Act. He found amongst other
things that: (1) section 144.01 applies to natural
gas, even though it is commingled with other
natural gas; and (2) the verification officer should
have considered section 144.01 of the Excise Tax
Act in order to determine whether or not the sale
of the natural gas (transfer of convenience) to the
US affiliate and back to Tenaska Canada met the
requirements of section 144.01.
In 2012, the CBSA circulated a document titled
“Memorandum D17-1-xx, Draft, Procedures for the
Importations of Continuous Transmission Commodities” (the Draft D Memorandum) for review and
comments. It appears to take into account the
requirements of section 144.01 of the Excise Tax
Act. Going forward, the result should be fewer
disputed GST assessments respecting CTCs. o
1 The authors welcome comments to this article. Please
see end of article for contact information.
2 Excise Tax Act, RSC, 1985, c. E-15, Part IX, “Goods
And Services Tax”, Division I “Interpretation” section
123 defines “continuous transmission commodity” to
mean: “electricity, crude oil, natural gas, or any tangible personal property, that is transportable by means
of a wire, pipeline or other conduit”
3 Canada Customs Notice (N-438) – Procedures for the
Importation of Continuous Transmission Commodities defines the term “continuous transmission commodity”
to mean: “crude oil, natural gas and their derivatives
and other liquids and gases transported through a
pipeline, and electricity transported over an electric
transmission line.”
4 Subsection 12(1) states: Subject to this section, all goods
that are imported shall, except in such circumstances
and subject to such conditions as may be prescribed,
be reported at the nearest customs office designated
for that purpose that is open for business.
5 Section 17 states: 17. (1) Imported goods are charged
with duties thereon from the time of importation
thereof until such time as the duties are paid or the
charge is otherwise removed.
Marginal note: Rates of duties
(2) Subject to this Act, the rates of duties on imported
goods shall be the rates applicable to the goods at the
time they are accounted for under subsection 32(1), (2)
or (5) or, where goods have been released in the circumstances set out in paragraph 32(2)(b), at the time
of release.
6 This section is set out in Part IX, “Goods and Services
Tax”, Division I, “Interpretation”.
© Thomson Reuters/WorldTrade Executive
7 Section 214 states: Tax on goods under this Division
shall be paid and collected under the Customs Act, and
interest and penalties shall be imposed, calculated,
paid and collected under that Act, as if the tax were a
customs duty levied on the goods under the Customs
Tariff and, for those purposes, the Customs Act, with
such modifications as the circumstances require, applies subject to this Division.
8 This section is set out in Part IX, “Goods and Services
tax”, Division I, “Interpretation”.
9 Transfers of convenience are discussed in detail below.
10 2006 FC 583
11 The CBSA noted that the U.S. affiliate was a genuine gas marketing company and the transfer was conducted in a manner to make the natural gas potentially
available for sale in the U.S.
12 15 USC § 717 – Regulation of Natural Gas Companies
describes the persons that are to be engaged in the
interstate transportation, importation and exportation
of natural gas.
13 Schedule to the Customs Tariff. For the remaining
12 entries, Tenaska Canada conceded that the importations originated from the U.S. and should be subject
to GST.
14 See paragraph 34 of the Federal Court of Appeal’s
decision.
15 Appendix A provides the CBSA’s Draft Customs
Memorandum.
16 See paragraph 22 of the Draft D Memorandum
17 The change of ownership would have implications
in regards to customs valuation (section 48, Customs
Act). However, the policy stated in the draft customs
memorandum appears to indicate that customs legislation (i.e. sale for export to a purchaser in Canada) in
regards to in-transit CTCs would not be enforced.
18 Appendix D of the Draft D-memo defines “Release
point” for Natural Gas to mean: “The release point for
the deemed release of natural gas is the interconnect point
in Canada nearest to the border. The shipper at that physical location is considered to be the importer of the good
at issue.” The CBSA auditor, to establish chronological order, may request documentation regarding the
measurements taken at the release points (export and
import).
Santinder Bains ([email protected]) is a Senior
Manager in the Trade & Customs group at KPMG in
Vancouver. Mr. Bains joined KPMG in 2006, after
spending five years with CBSA as a Trade & Customs
Verification Officer. He is well versed and experienced
in the administration of the CBSA’s customs programs
for tariff classification, valuation and origin of good
imported into Canada as well as customs programs for
controlled goods and exports. Dan Kiselbach ([email protected]) is a Partner in the Litigation
group of Miller Thomson LLP in Vancouver, Canada.
He has provided advice and representation to corporations, individuals and government agencies in customs,
excise, trade and taxation matters.
February 28, 2013