On October 21, 2014, the British Columbia government introduced Bill 6, the Liquefied Natural Gas Income Tax Act (LNGITA). The LNGITA proposes a two-tier tax on income derived from liquefaction activities at liquefied natural gas (LNG) facilities in British Columbia starting in 2017. Bill 6 is the legislative framework for the tax regime announced in the 2014 British Columbia budget. While the draft legislation offers rate concessions compared to the 2014 budget announcements and a new corporate income tax credit for qualifying taxpayers, the deemed pricing provisions of the LNGITA are unclear and the investment allowance for capital costs remains to be determined by regulation, resulting in continued uncertainty for LNG project proponents.

Liquefaction Activities

The tax will apply to income earned from liquefaction activities at an LNG facility in British Columbia, which include proceeds and deemed proceeds from LNG sales, income from LNG processing and rental income from a facility. The tax is therefore aimed at the plant operator but extends to anyone who owns natural gas at the plant inlet or LNG at the plant outlet. This will have important implications for the deemed pricing rules under the LNGITA.

Tax Rates & Investment Allowance

The LNGITA provides for a two-tier tax with escalating tax rates, first on "net operating income" until capital investment costs and losses are recovered and thereafter on "net income".

Tier 1 Tax Rate

Following the commencement of commercial operations, "net operating income" will be taxed at 1.5 percent. No deduction for interest or other financing costs is permitted in calculating net operating income nor is depreciation; however, an investment allowance based on the cost of tangible capital property is permitted as a deduction at a prescribed rate. The plant operator is eligible for the 1.5-percent Tier 1 rate until it recovers operating losses and capital investment costs, after which the Tier 2 tax, at 3.5 percent, will apply. Tier 1 tax paid is creditable against Tier 2 taxes as they become payable.

Capital Investment Account

Capital investment costs are credited in a notional "capital investment account". Eligible costs includes capital costs of the physical LNG facility and intangible personal property used or exploited for liquefaction activities carried out at or in respect of the LNG facility.

Tier 2 Tax Rate

After recovery of net operating losses and the capital investment account, "net income" from LNG sources will be taxed at 3.5 percent, increasing to five percent in 2037. This represents a decrease from the seven percent tax rate proposed in the 2014 British Columbia budget and appears to be a concession by the provincial Finance Ministry that declining LNG selling prices and anticipated construction cost increases have reduced projected returns for LNG developers.

Net income is computed with reference to deemed rules for purchase and sale of natural gas at the plant inlet and LNG at the plant outlet unless there are actual purchase and sale transactions with an arm’s length party.

Purchase & Sale Deeming Rules

The deemed inlet price is calculated based upon a reference gas price set monthly by the provincial Minister of Natural Gas Development with adjustments for transportation costs between a prescribed reference point and the feedstock pipeline inlet.

The deemed LNG sale price is determined based, inter alia, on transfer pricing rules using the arm’s length principle. While the arm’s length principle is a cornerstone of transfer pricing methodologies, it can be difficult to apply in practice to arrive at a specific price. The LNGITA does not elaborate on the applicable transfer pricing rules in detail. However, the Supreme Court of Canada ruled in a federal income tax case on transfer pricing (Canada v GlaxoSmithKline Inc, 2012 SCC 52) that it is necessary to consider all the economically relevant factors in applying the arm’s length principle and in particular when using the gold standard in transfer pricing of a "comparable uncontrolled price" (i.e., a third party comparison price) and furthermore, that the respective returns to parties in a transaction should be reasonable having regard to their respective functions, assets and risks. The deeming rules at LNG plant outlet represent a considerable source of uncertainty in the design of the LNGITA and project proponents should consider their transfer pricing arrangements carefully in light of the tax.

Additional Changes from the 2014 Budget

Corporate Income Tax Natural Gas Credit

The LNGITA introduces a corporate income tax credit for LNG income taxpayers with a permanent establishment in British Columbia equal to 0.5 percent of the cost of natural gas acquired at the LNG facility inlet, to a maximum reduction of a taxpayers' effective BC Corporate Income Tax rate from 11 percent to eight percent. The credit is determined based on the total cost of actual and deemed purchases of gas at the inlet.

Investment Allowance

An "investment allowance" is introduced, allowing for a deduction from net operating income or giving rise to a net operating loss from an LNG source, which in turn will reduce the amount of Tier 1 tax paid. The deduction will be calculated at a prescribed rate with application to 75 percent of the average balance of the taxpayer's annual capital investment account adjusted to exclude intangible personal property. The prescribed rate has not been announced.

Closure Tax Credit

A taxpayer under the LNGITA is entitled to a credit for up to five percent of expenditures relating to facility closure (limited to applicable taxes paid under to the LNGITA). Expenditures eligible for the credit are those required to comply with federal or provincial legislation or in relation to the restoration, reclamation or remediation of the LNG facility site.

Legislative Status

Bill 6, the proposed LNGITA, will be considered at the current sitting of the legislature. Various amendments to the Income Tax Act (British Columbia) are included in Bill 6. The LNGITA follows introduction on October 20, 2014, of a proposed LNG emissions regulation regime by the provincial Minister of Environment.


The LNGITA has important implications for the development of LNG facilities in British Columbia and uncertainty remains about key aspects of the computation of the tax. Taxpayers potentially affected by the proposed regime need to understand the financial implication of the additional taxes to be paid in respect of LNG facilities, and how to mitigate the adverse impacts. Bennett Jones LLP has a dedicated group of energy, regulatory and tax lawyers, with experience in all aspects of LNG project development. If you would like advice on how these changes will impact your current or planned operations, please contact one of the contacts or any other member of our Energy or Tax Department.