2013-0498841E5 149(1.2)(b) - Meaning of Distributor

Principal Issues: Is an electricity transmitter a "distributor" within the meaning of "distributor" in paragraph 149(1.2)(b) of the Income Tax Act?

Position: No.

Reasons: Industry specific terms are the intended in that provision. See analysis.

Author: Burnley, Pamela
Section: 149(1.2)(b), 149(1)(d.5), 149(1)(d.6), 149(1)(c)

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                                                                                                                                                    2013-049884
                                                                                                                                                    P. Burnley
                                                                                                                                                    (613) 670-9027

May 14, 2015

Dear XXXXXXXXXX:

Re: Distributor in Paragraph 149(1.2)(b) of the Income Tax Act

This is in response to your letter dated August 9, 2013, in which you asked if a “distributor” includes a “transmitter,” particularly in the electricity industry, for the purpose of subparagraph 149(1.2)(b)(ii) of the Income Tax Act (“Act”).  

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations. 

Paragraphs 149(1)(d.5) and (d.6) of the Act exempt from tax certain municipal corporations and their subsidiaries provided that those entities do not derive more than 10% of their income for the period from activities carried on outside the geographical boundaries of the municipality or public body performing a function of government (or municipalities or public bodies, whichever is the case).  Subsection 149(1.2) of the Act excludes, in assessing income derived from activities carried on outside the relevant geographical boundaries for the purposes of those paragraphs, income from certain activities (referred to as “excluded activities” in this letter). 

We note that the application of subsection 149(1.2) of the Act to activities of a particular entity does not necessarily mean that the entity will be tax exempt pursuant to paragraphs 149(1)(d.5) and (d.6) of the Act.  A factual analysis is necessary to determine whether or not the corporation derives more than 10% of its income for the period from activities carried on outside the geographical boundaries of the municipality or public body (other than excluded activities). 

Pursuant to paragraph 149(1.2)(b) of the Act, the activities in a province of a producer of electrical energy or natural gas, or a distributor of electrical energy, heat, natural gas or water, are excluded activities where the activities are regulated under the laws of the province.  The terms “producer,” “distributor” and “regulated” are not defined for the purposes of section 149 of the Act.  That being said, we understand that the concepts of a “producer” and a “distributor” are well understood within the natural gas and electricity industries and you would like to know whether these industry-specific concepts are intended to be applied for the purposes of paragraph 149(1.2)(b) of the Act, or whether there are more general, ordinary usage concepts that should be applied in this context.

It is our view that the references to “producer” and “distributor” within the meaning of paragraph 149(1.2)(b) are intended to be ascribed their industry-specific meanings such that a transmitter would not be a “distributor” within the meaning of that provision.  We note, in this respect, that the provision is drafted to apply only to entities carrying on businesses in those markets and hence the industry-specific language would be well understood by those persons. 

Our understanding is that the legislative objective of the “geographical boundaries” income test set out in paragraphs 149(1)(d.5) and (d.6) is to ensure that generally, municipal corporations enjoy the tax exemption only in circumstances where the municipality limits its business activities to supplying or servicing its own residents.  If a municipal corporation seeks to compete outside its own geographical boundaries, it must do so on the same footing as its private sector competitors, i.e., as a taxable entity.  In our view, the adoption of industry-specific terminology in applying subsection 149(1.2) is consistent with this intent.

We trust the above comments are of assistance. 

Yours truly,

Roger Filion
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate

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