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In the 2014 provincial budget, the B.C. government announced its intention to introduce income tax legislation applicable to the Liquefied Natural Gas (LNG) industry. Draft legislation (LNG Act) was released on October 21, 2014, imposing an income tax on net income from liquefaction activities at or in respect of an LNG facility in British Columbia.
The proposed LNG Income Tax will be a two-tier tax with a Tier 1 rate of 1.5% until net operating losses and capital costs have been recovered, and a Tier 2 rate thereafter at a rate of up to 3.5% for taxation years beginning on or after January 1, 2017. The Tier 2 rate will increase to 5% for taxation years beginning in 2037 or later.
Who May Be Subject to LNG Income Tax?
Any person that engages in or has income derived from liquefaction activities at an LNG facility may be subject to LNG income tax. To be an LNG income tax taxpayer, a person is not required to be a resident of Canada or to have a permanent establishment in British Columbia. An LNG income tax taxpayer can be a corporation, an individual or a trust. The tax applies to an LNG income tax taxpayer on an LNG facility by LNG facility basis.
What Are Liquefaction Activities?
As defined in the LNG Act, the main liquefaction activities are the following:
• Operating all or part of an LNG facility (or a right to use all or part of an LNG facility);
• Acquiring, owning or disposing of liquefied natural gas, natural gas liquids or natural gas that is at an LNG facility (or the right to acquire, own or dispose of these commodities that are at an LNG facility);
• Acquiring, owning or disposing of all or part of an LNG facility, or a right to use all or part of an LNG facility;
• Disposing of electrical power generated at the LNG facility; and
• Acquiring, owning or disposing of intangible personal property (or a right to that intangible property) that is used or exploited for the operations of the LNG facility or the above described liquefaction activities.
What is an LNG Facility?
For purposes of the LNG Act, an LNG facility is defined to include:
• a single LNG plant (as defined in the LNG Act) located in British Columbia;
• the land underneath the LNG plant and land that is contiguous with the land underneath the LNG plant that is used or held for the purposes of the operation of the LNG plant (including any foreshore or land covered by water); and,
• any tangible personal property or improvements on that land if that tangible personal property or those improvements are used for activities that support the construction, administration, operations and maintenance of the LNG plant.
What is the Tax Base?
The tax is imposed for a taxation year on an LNG taxpayer’s net income or net operating income derived from liquefaction activities carried out at, or in respect of, a particular LNG facility.
The computation of net operating income is modeled on the computation of income for federal income tax purposes, but adjusted to exclude recapture, interest, dividends and hedging gains and losses. No deduction is allowed for capital cost allowance or financing charges such as interest.
Furthermore, a taxpayer may deduct an investment allowance based on the adjusted capital investment account for the LNG facility in determining net operating income (or loss) for a taxation year. The adjusted capital investment account is computed as the total acquisitions of tangible capital investment property less dispositions of tangible capital investment property.
Net operating income is the amount on which the Tier 1 rate of 1.5% tax is payable. Deductions for the balances in the net operating loss account and the capital investment account are then mandatory to the extent they are applicable; such deductions serve to compute net income.
Net income is the amount on which the Tier 2 rate of 3.5% (increasing to 5% in 2037) tax is applied. The amount of the Tier 1 tax paid by a taxpayer on net operating income is added to a tax paid pool, the balance of which is credited against Tier 2 tax. This effectively results in a reduced Tier 2 tax rate until such time as the tax paid pool is fully depleted.
MNP can assist your company with incorporating the LNG income tax into existing financial models, as well as with related compliance. For further information on the proposed LNG income tax, please contact your nearest MNP office.
Client Groups:Oilfield Services
Related Topics:Legislation; Budget Announcements; Tax Rates
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