On February 19, 2015, the Canadian government announced new proposed tax incentives intended to encourage investment decisions with respect to liquefied natural gas ("LNG") projects. The tax incentive takes the form of an enhanced rate of capital cost allowance ("CCA", being the tax version of depreciation) of:
- 30% for equipment used in natural gas liquefaction; and
- 10% for buildings at a facility that liquefies natural gas,
in each case for capital assets acquired between February 19, 2015 and the end of 2024 (the "Incentive Period"). This will allow a faster recovery of the capital costs of these assets. The Department of Finance is accepting comments on these proposals until March 27, 2015.
Scope of Incentives
The incentives generally apply only to equipment and buildings used in respect of an "eligible liquefaction facility", which is defined as "a self-contained system located in Canada – including buildings, structures and equipment – that is used or intended to be used by the taxpayer for the purpose of liquefying natural gas."
The enhanced deductions can generally be claimed only against income from the taxpayer's eligible liquefaction activities in respect of the eligible liquefaction facility, calculated as though it were a separate business. This will include income from:
- providing liquefaction services in respect of natural gas owned by third parties;
- the sale of by-products from the LNG liquefaction process; and
- where the taxpayer was the owner of the natural gas when it entered the facility, the sale of LNG that was liquefied by the taxpayer at that facility.
For these purposes, if the taxpayer's business includes activities other than operating the facility (e.g. gas extraction, transportation or distribution), the taxpayer's income from the liquefaction facility will be calculated as though the cost to the taxpayer of the natural gas at the time that it entered the facility was equal to its fair market value. This requirement will create an incentive, at least in the early years of a project, for integrated companies to seek to generate additional income from the LNG facilities themselves, in order to claim the additional CCA.
Equipment
The new 30% CCA rate will generally apply to "eligible liquefaction equipment" that is acquired by the taxpayer during the Incentive Period. Qualifying equipment is that which is used in connection with the liquefaction of natural gas and that is currently included in paragraph (b) of Class 47 of the CCA regulations, which includes controls, cooling equipment, compressors, pumps, storage tanks, vaporizers and ancillary equipment, as well as loading and unloading pipelines on the facility site used to transport LNG between a ship and the facility.
The incentives will generally not apply to other pipelines, equipment used exclusively to regasify liquefied natural gas, electrical generation equipment or used equipment.
The existing CCA rate for this type of equipment is generally 8%, so the new incentives will increase this by 22% per year.
Buildings
The new 10% CCA rate will generally apply to an "eligible liquefaction building" acquired during the Incentive Period. An eligible liquefaction building is generally defined as one that currently falls within paragraph (q) of Class 1 of the capital cost allowance regulations (excluding residential buildings and used property) and that is used as part of an eligible liquefaction facility.
The existing CCA rate for these types of buildings is 6% (4% plus an additional 2% allowance for non-residential buildings).
Concluding Remarks
One of the government's objectives is to further encourage LNG players to make final investment decisions with respect to LNG projects on British Columbia's west coast. These projects require billions of dollars of capital investment, and if they proceed they would enhance Canada's impact as an exporter of LNG to growing international markets. It is anticipated that, over the long-term, these projects will generate significant economic activity and billions of dollars of tax revenue for Canada and its provinces. British Columbia Premier Christie Clark has stated that she believes that they are on-target for three liquefied natural gas projects to be up and running by 2020. Those contemplating LNG projects will now have an opportunity to determine how the newly proposed incentives can enhance their competitive position and ability to make final investment decisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
