The recent British Columbia budget (the budget) included a basic framework for a new income tax on the liquefaction of natural gas at LNG facilities in the province (LNG Tax). The LNG Tax will apply to LNG that is to be exported from B.C. or consumed in B.C. and to the liquefaction in B.C. of gas produced in B.C. or elsewhere. However, the information on the LNG Tax released in the budget is at a high level and, as noted in this bulletin, questions remain as to how the income from liquefaction will be determined for purposes of the LNG Tax and at what rate the income will be taxed. Further details are not scheduled to be released until the fall of 2014 with administrative and enforcement provisions to be introduced in 2015.

This is a summary of what was disclosed in the budget:

  • the LNG Tax will be a two-tier tax;
  • the Tier 1 tax will be 1.5% of net proceeds (revenue less expenses) once commercial production begins;
  • the Tier 2 tax will be (up to) 7% of the amount by which aggregate net proceeds exceeds the amount of the capital investment account, meaning that no Tier 2 tax will be payable until the capital investment account has been recovered. The Tier 2 rate has not been finalized and will be announced in the fall of 2014 along with other details of the LNG Tax. The province has committed to ensuring that the rate of the LNG tax will be competitive with other regimes;
  • the Tier 1 tax paid will be deductible against the Tier 2 tax. Thus, the final tax paid will be the Tier 2 tax;
  • the capital investment account will consist of the costs associated with constructing the LNG facility including storage tanks and marine loading systems. The account may also include costs related to support functions for the liquefaction process such as control rooms, warehousing and maintenance facilities and infrastructure facilities; and
  • the LNG Tax will be calculated on a facility-by-facility basis.


The following is a discussion of some considerations that will have to be taken into account in designing the final structure of the LNG Tax. It is not comprehensive but serves to illustrate the complexity of the issues the province will face in creating and administering – and the producers of LNG in complying with – an ostensibly provincial tax in which issues of provincial and federal jurisdiction may arise.

Comparison to the B.C. Mineral Tax

The structure of the LNG Tax is very similar to the B.C. Mineral Tax, which imposes a two-tier tax on income from the production of mines in B.C. This style of tax provides the province with an ongoing level of tax from current income with a higher level of tax once a project’s costs have been recovered. Apart from the merits of such a tax structure, basing the LNG Tax on a similarly structured existing tax may make some aspects of the design and administration of the LNG Tax easier for the province.

While the structure of the LNG Tax and the B.C. Mineral Tax may be similar, the purposes of the two taxes are quite different. Broadly, the purpose of the B.C. Mineral Tax is to arrive at a value of a mineral at the mine mouth, as it was designed and intended to be a crown royalty in the traditional sense of that term. Thus, in theory, all costs incurred in producing the product sold – ore, concentrate or refined mineral – should be deducted from revenue. In contrast, the LNG Tax will be applicable to income associated with the liquefaction of natural gas, as the province intends this to be a tax on processing of a resource, making the LNG Tax rather unique relative to other provincial taxing regimes related to the resource industry.

How will the cost of gas be determined?

A significant component of the determination of the income from the liquefaction of gas will be the cost of the gas being liquefied. Presumably the cost of the gas (at the plant gate?) will be a deduction in computing net proceeds for the Tier 1 tax. This raises the following questions: Where natural gas is purchased by the producer, will the cost of the gas include transportation costs to bring the gas to the facility? If capital assets are acquired to bring gas to the facility, will these be included in the capital investment account? If the producer of LNG is also a producer of the natural gas, what will the producer’s cost of gas be for purposes of determining income from the liquefaction process? 

How will revenue from the LNG facility be determined?

Similar issues will be relevant in determining the proceeds of sale of LNG. For example, what is the value of the LNG at the LNG plant? Will transportation costs incurred to transport the LNG to the place of sale be a deduction from revenue? How will proceeds of sale (and related costs) be measured if LNG is regasified before sale? The determination of the ultimate price actually received for the LNG may be difficult and potentially represents a verification issue in administering the LNG Tax.

How will interest expense be treated?

Another question relates to the treatment of interest associated with constructing an LNG facility. The B.C. Mineral Tax does not allow a deduction for interest expense in computing the amounts subject to tax but instead increases the capital investment account by an amount of imputed interest – at a rate equal to 125% of the bank rate of the Bank of Canada. In contrast, the federal Income Tax Act generally allows a deduction for interest on funds borrowed for the purpose of earning income from a business.

What are the implications where an LNG facility is subject to a lease?

Rent received for the use of an LNG facility will be subject to the LNG Tax. It is not clear if this means rent will be taxable only where the entire facility is rented or if any property that is part of a facility is rented. In either case, lessors will have to consider the impact on their returns from a lease where the income will be subject to the LNG Tax. It is not completely clear why rental income would be subject to the LNG Tax since leasing is generally a form of financing. It may be that subjecting leased property of a lessor to the LNG Tax results in the capital invested in the leased property ultimately bearing financing costs at the rate prescribed for the capital investment account rather than bearing the actual financing costs incurred by a lessor.

How does the LNG Tax apply where the LNG facility processes someone else’s gas for a fee?

The use of an LNG facility owned by a person for custom liquefaction of gas owned by another person raises a number of potentially difficult issues. For example, is it intended that the liquefier only be subject to the LNG Tax on the fee charged for processing? Would this mean that such LNG would not be subject to the LNG Tax since the owner of the natural gas is not actually liquefying it? 

Will the LNG Tax be deductible for federal income tax purposes?

Assuming that the LNG Tax is an income tax, as stated by the province, this raises an issue with respect to its deductibility for federal income tax purposes. Provincial income taxes are not usually deductible from income for federal income tax purposes as they are considered a tax on income and not a deductible expense in earning income. In contrast, the B.C. Mineral Tax is prescribed as deductible for federal income purposes. There is a significant difference between the B.C. Mineral Tax and the LNG Tax in that the former is effectively akin to a royalty payable on minerals that are mined while the LNG Tax is described as a tax on income. Thus, the federal tax deductibility of the LNG Tax is questionable.