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A longstanding GST/HST issue in the aviation industry has been whether aviation fuel purchased for use on international commercial flights remains zero-rated when it is delivered into airport storage tanks or “fuel farms”, rather than directly “into the wing” of an aircraft. In recent roundtable discussions with the Canada Revenue Agency (“CRA”), the Agency maintained its position that fuel delivered into storage tanks is taxable because of the risk of diversion to other uses.
This report reviews how the CRA position appears to have become a live audit issue for fuel suppliers and airlines and how retroactive GST/HST billing can raise complicated input tax credit (“ITC”) issues.
Aviation Fuel: Zero Rated or Taxable?
Under section 2.1 of Part V of Schedule VI to the ETA, supplies of aviation fuel made to GST registrant commercial airlines are zero-rated where:
- The airline carries on a business of transporting passengers or property internationally; and
- The fuel is acquired “for use in the course of” so transporting passengers or property.
Section 2 of Part V of Schedule VI similarly zero-rates supplies of aviation fuel made to certain non-resident, GST non-registrant airlines (together with section 2.1, the “Zero-Rating Provisions”).
In recent industry roundtable discussions, CRA was asked generally about whether the Zero-Rating Provisions would apply to fuel purchased for delivery into a storage tank at the airport.
Regrettably, CRA confirmed that it maintains its position that the Zero-Rating Provisions only apply if the fuel is delivered “into the wing” of an aircraft, and that delivery into a “storage tank” is taxable given the possible diversion of the fuel to other uses (e.g., resale).
Why Do I Care?
The Zero-Rating Provisions require only that fuel be acquired “for use in the course of” transporting passengers or property – which appears to suggest an “intention” test rather than a “use” test. Despite these arguments, CRA has for the time being declined to change its administrative position.
While we do not agree with the CRA’s position, whether or not that position is correct, it now appears to be a live CRA audit issue. Fuel suppliers are being assessed for GST on past fuel sales and, in many cases, the fuel suppliers are accepting those CRA Assessments and passing on those costs with “GST-only” invoices to airlines.
This re-billing shifts the risk onto the airlines. Airlines receiving retroactive GST/HST invoices must carefully consider whether they continue to qualify for ITCs, as the timing rules under section 225 of the ETA are complicated. The consequences of this can be significant as cases show that at the end of the day, if this is not properly handled, those ITCs can be denied. See for example the case of National Money Mart, 2018 ONCA 812, where ITCs were disallowed where technical limitation periods were exceeded.
Takeaways
GST/HST on otherwise zero-rated sales of aviation fuel is a live CRA audit issue, and the ITC rules for retroactive billing can be complex. Experienced Indirect Tax Counsel is recommended.
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.
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