On February 19, 2015, the federal government released proposed amendments to the Income Tax Regulations which would generally allow for accelerated capital cost allowance (“CCA”) treatment in respect of certain property used in connection with liquefying natural gas. The proposed amendments are of principal significance to those in the liquefied natural gas (“LNG”) industry.
Under the current rules, equipment and structures used for natural gas liquefaction are generally included in Class 47, which carries a CCA rate of 8%. Other commercial buildings located at a facility that liquefies natural gas are generally entitled to a 6% CCA rate (the standard 4% rate applicable to Class 1 assets plus an additional 2% allowance for a building which is substantially used for a “non-residential use”).
The draft regulations (link here) would allow an additional 22% CCA claim for “eligible liquefaction equipment” (“ELE”), thereby bringing the total annual CCA rate to 30%. In general, ELE would include equipment – other than “excluded equipment” – used in connection with the liquefaction of natural gas that:
- is acquired after February 19, 2015 and before 2025;
- was not used or acquired for use for any purpose before it was acquired by the taxpayer; and
- is used as part of a liquefaction facility (i.e., a self-contained system – including buildings, structures, and equipment – that is used for the purpose of liquefying natural gas).
As such, liquefaction equipment acquired prior to the release of these proposed amendments will not be eligible for the accelerated CCA claim.
“Excluded equipment” generally means the following properties:
- pipelines (other than pipelines used to transport LNG or natural gas within a liquefaction facility during the liquefaction process);
- regasification equipment; and
- electrical generation equipment.
A separate proposed amendment will bring the CCA rate for commercial buildings that are part of liquefaction facilities up to 10%.
The new CCA rates will continue be calculated on a declining-balance basis. In addition, the usual rules regarding CCA, such as the “available for use” and “half-year” rules, will continue to apply in respect of property entitled to either of the accelerated CCA rates.
One critical aspect of the proposed amendments is that the additional CCA allowances may only be claimed against income attributable to “eligible liquefaction activities.” That term generally encompasses income that either:
- in the case of natural gas owned by the taxpayer at the time it enters their liquefaction facility, arises from the sale of LNG; or
- in any other case (e.g., where the taxpayer liquefies natural gas owned by a third party), is reasonably attributable to liquefaction services provided.
Special rules may apply if the taxpayer carries on more than one business (e.g., one business of liquefying natural gas and another business of extracting, transporting, or distributing LNG).
The proposed amendments have yet to be tabled in Parliament, but are undoubtedly welcome news to members of the LNG industry.