Budget 2016 – Restricting the Relief of Excise Tax on Diesel Fuel and Aviation Fuel

June 2016

The Excise Tax Act (the Act) contains provisions that relieve the excise tax imposed on diesel fuel when it is used in specific instances such as heating oil and to generate electricity. The budget tabled by the Minister of Finance on March 22, 2016 proposes measures restricting the relief of excise tax, effective July 1, 2016. These measures are included in Bill C-15, the Budget Implementation Act, 2016, No. 1, which received Second Reading and Referral to Committee in the House of Commons on May 10, 2016.

Fuel used as heating oil

As currently administered, the excise tax exemption for heating oil applies to diesel fuel that is consumed to produce heat for any purpose, including in an industrial process. The budget proposes that the exemption for fuel oil purchased as heating oil for use in industrial processes would no longer apply after June 30, 2016. Under the proposals, heating oil would be defined as fuel oil that is consumed exclusively for providing heat to a home, building or similar structure.

This measure would apply to fuel oil delivered or imported after June 30, 2016. It would also apply to fuel oil delivered or imported before July 1, 2016 that is not used, or not intended to be used, after June 30, 2016, as heating oil within the meaning of the new proposed definition, as follows:

“Heating oil” would mean any fuel oil that is consumed exclusively for providing heat to a home, building or similar structure and that is not consumed for generating heat in an industrial process, including any commercial process that involves removing moisture from a good.

With the addition of this new definition, “heating oil” would remain clearly excluded from the definition of “diesel fuel”.

The term “exclusively” would be interpreted as meaning solely or 100% for these purposes.

Some examples of homes and buildings are apartments, condominiums, factories, mobile homes, office buildings and warehouses.

Following are examples where fuel oil would no longer qualify for an excise tax exemption or refund on or after July 1, 2016:

• diesel fuel for use in the refrigeration units (i.e., reefers) of trucks used to transport food;
• diesel fuel used for heating aggregate rock in the manufacture of asphalt; and
• diesel fuel used as part of an industrial process in the manufacture of explosives.

Transitional period and refunds

With the new definition of “heating oil”, a transitional rule would apply to refund payments under paragraph 68.01(1)(a) of the Act. Proposed amendments to subparagraphs 68.01(1)(a)(i) and (ii) of the Act would provide refund eligibility for vendors and purchasers of diesel fuel, both during and after the transitional period of March 23, 2016 to June 30, 2016. In order for a vendor to be eligible for a refund, they must obtain a certificate of exemption from the purchaser that certifies that the diesel fuel is for use exclusively as heating oil before July 1, 2016 or exclusively for use after June 30, 2016, as heating oil within the meaning of the new definition. In addition, the vendor must reasonably believe that the purchaser will use the diesel fuel as certified by the purchaser. The use of such certificates has been a long-standing practice. The Minister may pay a refund to the purchaser if no application for refund can be made by the vendor.

Diesel fuel and aviation fuel used to generate electricity

Diesel fuel and aviation fuel consumed for motive purposes is subject to excise tax. Currently, paragraph 23(8)(c) of the Act exempts “diesel fuel for use in the generation of electricity, except where the electricity so generated is used primarily in the operation of a vehicle.”

Under the proposed amendment, paragraph 23(8)(c) of the Act would read as follows after June 30, 2016: “diesel fuel for use in the generation of electricity, unless the diesel fuel is used in or by a vehicle, including a conveyance attached to the vehicle, of any mode of transportation.” Therefore, no excise tax relief would apply to fuel used to produce electricity in any vehicle, regardless of the purpose for which the electricity is used. This would eliminate excise tax exemptions or refunds currently available for the portion of fuel consumed in a vehicle for the purpose of “hotel services”, on or after July 1, 2016.

The term “vehicle” is not defined in the Act. Some examples of vehicles include airplanes, boats, buses, ferries, forklifts, self-propelled barges, ships, locomotives, railway rolling stock, trucks and tractor-trailers.

Refunds

The proposed amendment to paragraph 68.01(1)(b) of the Act would authorize a refund “to a purchaser who applies for the payment and who uses the diesel fuel to generate electricity, unless the diesel fuel is used in or by a vehicle, including a conveyance attached to the vehicle, of any mode of transportation.” Refund applicants must be able to provide supporting documents showing the amount of diesel fuel used to generate the electricity.

Diversion to a taxable sale or use

Persons who purchase (domestic) or import fuel before July 2016, which is exempt from the excise tax and hold it in inventory would be required to self-assess when the fuel is diverted, after June 2016, to a taxable purpose under the proposed legislative amendments explained above for diesel fuel used as heating oil and diesel fuel and aviation fuel used to generate electricity.

The excise tax shall be payable by the person who sells or appropriates the fuel after June 2016:

• where the fuel is sold, at the time of delivery to the purchaser, and
• where the fuel is appropriated, at the time of that appropriation.

Remitting the excise tax

Persons who must remit excise tax need to file Form B200, Excise Tax Return, and send it to the address indicated on the form. 

Further information