On October 21, 2014, Minister of Finance, Michael De Jong, tabled the proposed Liquefied Natural Gas Income Tax Act (the “LNG Act”) for first reading in the BC legislature. The LNG Act imposes taxation on net income derived from natural gas liquefaction activity in respect of liquefied natural gas (“LNG”) facilities in BC. The new regime will apply to taxation years beginning on or after January 1, 2017.
The text of the proposed LNG Act can be found here. An overview of the LNG Act’s application, published by the Province of BC, can be found here. Some of the key features of the LNG Act are as follows:
- Taxation under the LNG Act is separate from income tax levied under the Income Tax Act (Canada) and the provincial BC Income Tax Act. For some taxpayers all three taxation regimes will be applicable, but it is also possible for a taxpayer to be subject only to the LNG Act, and not the federal/provincial regimes.
- Taxation under the LNG Act is determined on a per-LNG facility basis. That is, a taxpayer may file a single return under which multiple income streams are consolidated at a single LNG facility. However, where a taxpayer generates income at more than one LNG facility, the taxpayer must file a separate return in respect of the income from each such LNG facility. The LNG Act contains detailed provisions on what constitutes liquefaction activities and LNG facilities.
- A taxpayer under the LNG Act is any person (corporation, individual or trust) that engages in or has income derived from liquefaction activities at an LNG facility in BC, whether or not the person is liable for any tax under the LNG Act. Such a taxpayer need not be resident in Canada nor is a permanent establishment in BC required. Partnerships are taxed at the partner level.
- The taxation base under the LNG Act is divided into two general schemes: taxation on net income and taxation on net operating income. A 3.5% rate of taxation is imposed on net income (this rate will be increased to 5% on net income for taxation years beginning on or after January 1, 2037). A 1.5% rate of taxation is imposed on net operating income.
- Net operating income (taxed at 1.5%) is based on a taxpayer’s profit or loss from business or property derived from liquefaction activities at, or in respect of, an LNG facility in BC. The computation of net operating income is similar to the computation of a taxpayer’s income under the Income Tax Act (Canada), adjusted for various inclusions and exclusions specific to the LNG context. Of particular relevance is the investment allowance deduction in respect of a taxpayer’s ‘adjusted capital investment account’ for an LNG facility.
- Net income (taxed at 3.5%, and rising to 5% in 2037) is a taxpayer’s net operating income plus any proceeds of the disposition of capital investment property that results in recapture, less certain deductions in respect of net operating losses and capital investment account balances (where applicable).
- The LNG Act contains a transfer pricing regime that is modeled on the transfer pricing regime under the Income Tax Act (Canada). A summary of the LNG transfer pricing regime, published by BC, can be found here. While both regimes rely on a similar application of the ‘arm’s length principle’, there are some key difference which should be observed. Most notably, under the federal regime, the transfer pricing rules apply to non-arm’s length transactions between taxpayers and non-resident taxpayers, while under the LNG Act, the transfer pricing rules apply to all non-arm’s length transactions (subject only to specific exclusions).
The LNG Act is not yet passed into law; however, persons active in the LNG sector should familiarize themselves with its potential application. The LNG Act should be carefully considered prior to carrying out investment or activity in BC’s LNG sector to ensure that such efforts are carried out in a tax-efficient manner.
The above points do not represent an exhaustive summary of the proposed LNG Act. Over the coming months, the new legislation will likely be the subject of increased commentary as it progresses through the BC legislature.