On February 19, 2015, the Canadian federal government announced proposed amendments to the Income Tax Regulations (Canada) (theIncome Tax Regulations) that would generally allow for accelerated capital cost allowance (CCA) for certain capital properties used in connection with liquefied natural gas (LNG) facilities. This update briefly summarizes some of the key features of the proposed regulations.
The CCA rules in the Income Tax Act (Canada) and the Income Tax Regulations are intended to allow taxpayers to recover the cost of their capital investment in depreciable property over the useful life of the property. Accelerated CCA treatment allows taxpayers to more quickly recover the cost of their capital investment.
Under current CCA rules, equipment and structures used in connection with the liquefaction of natural gas are generally included in Class 47, which carries a CCA rate of 8%, and non-residential buildings located at an LNG facility are generally entitled to a 6% CCA rate. The proposed amendments provide for accelerated CCA for property used in connection with an eligible liquefaction facility and further provide that the accelerated CCA will be deductible only against income attributable to eligible liquefaction activities.
The proposed amendments will allow an additional 22% CCA claim under Class 47 for “eligible liquefaction equipment,” bringing the CCA rate for such equipment up to 30%. In general, eligible liquefaction equipment will include equipment used in connection with the liquefaction of natural gas that (i) is acquired after February 19, 2015, and before 2025; (ii) was not used or acquired for use for any purpose before it was acquired by the taxpayer; and (iii) is used as part of an eligible liquefaction facility (i.e., a self-contained system located in Canada – including buildings, structures, and equipment – that is used for the purpose of liquefying natural gas).
Eligible liquefaction equipment will not include property that is:
- acquired for the purpose of producing oxygen or nitrogen,
- a breakwater, dock, jetty, wharf or similar structure, or
- a building.
In addition, "eligible liquefaction equipment" will not include "excluded equipment," which is defined as:
- pipelines (other than pipelines used to move natural gas within an eligible liquefaction facility during the liquefaction process or liquefied natural gas),
- equipment used exclusively to regasify liquefied natural gas, and
- electrical generation equipment.
A separate proposed amendment will bring the CCA claim rate up to 10% for an “eligible liquefaction building” that is acquired after February 19, 2015, and before 2025 and was not used or acquired for use for any purpose before it was acquired by the taxpayer.
The new CCA rates will continue to be calculated on a declining-balance basis. In addition, the available-for-use and half-year rules will continue to apply in respect of property entitled to the accelerated CCA rates.
One critical aspect of the proposed amendments is that the accelerated CCA can only be claimed against a taxpayer's income from “eligible liquefaction activities” in respect of the “eligible liquefaction facility.” Income from eligible liquefaction activities generally encompasses income that either:
- in the case of natural gas owned by the taxpayer at the time it enters the eligible liquefaction facility, arises from the sale of LNG (whether sold as LNG or regasified natural gas); or
- in any other case (for example, where the taxpayer liquefies natural gas owned by a third party), is reasonably attributable to the liquefaction of natural gas at the eligible liquefaction facility.
Where the natural gas is owned by the taxpayer, the taxpayer will be deemed to have acquired the natural gas at a cost equal to fair market value at the time it enters the liquefaction facility. Under the proposed regulations, special rules may apply for the purpose of calculating income from eligible liquefaction activities if the taxpayer carries on more than one business.
Where the facility in question is a “peak shaving facility,” the calculation of the income reasonably attributable to the liquefaction of natural gas is to be determined based only on the natural gas liquefied and distributed by the taxpayer. A peak shaving facility is defined as an eligible liquefaction facility where the taxpayer distributes natural gas that it liquefied and regasified, which is subsequently commingled with natural gas that has not been liquefied.
The proposed amendments have not yet been enabled, but are welcome news to the LNG industry. The Department of Finance (Canada) has invited interested parties to provide comments on the proposed amendments by March 27, 2015.