The Status of Bunker C Fuel Oil for the Purpose of the Definition of "Diesel Fuel" in Subsection 2(1) of the Excise Tax Act (ETA)

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Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

ET/SL Policy Statement EP-002

Date of Issue

April 30, 2002

Subject

THE STATUS OF BUNKER C FUEL OIL FOR THE PURPOSE OF THE DEFINITION OF "DIESEL FUEL" IN SUBSECTION 2(1) OF THE EXCISE TAX ACT (ETA)

Legislative Reference(s)

Subsection 2(1) of the ETA

National Coding System File Number(s)

52100-10-3

Issue and Decision

Due to the multiple uses of bunker C fuel oil, the Canada Customs and Revenue Agency (CCRA) wishes to clarify the taxable status of this fuel oil for the purpose of the definition of "diesel fuel" in subsection 2(1) of the ETA.

During the refining process, various distillates such as naphtha, kerosene, and diesel fuel are extracted from crude oil through a number of different processes and techniques. Generally speaking, once the refiner has extracted the optimum yield of distillates from the crude oil he is left with a viscous residue which is commonly referred to as residual fuel oil. Residual fuel oils are normally semi-solid at ambient temperatures and require preheating in storage tanks to allow pumping and additional preheating at the burner to allow atomizing.

Bunker C fuel oil, which is also known as Type 6 heating fuel oil in Canada, or No. 6 fuel oil in the United States, is a grade of residual fuel oil that may be blended with smaller quantities of distillates to obtain a fuel oil with a specific viscosity as required by the end-user. Unlike some other fuel oils, bunker C fuel oil can be quite variable in composition and properties as only a few qualities are specified for it under the national standards of Canada.

Bunker C fuel oil is an inexpensive and readily available source of energy in many parts of the world. While it is commonly used as a fuel in industrial burners in large-scale heating and power-production stations (the extra equipment and maintenance required to handle this fuel oil generally makes it impracticable for use in small installations), it is also used as a fuel in internal combustion engines of the compression-ignition type aboard certain marine vessels.

Subsection 2(1) of the ETA defines "diesel fuel" to include,

The meaning of the term "heating oil" is not defined in the ETA. The CCRA's position is that the term "heating oil", for the purpose of the definition of "diesel fuel" in subsection 2(1) of the ETA, means,

Furthermore, the CCRA construes the term "oil-burning equipment" to mean,

Examples of oil-burning equipment include oil-burners, boilers and furnaces.

Historically, the CCRA has regarded any fuel oil that is able to power internal combustion engines of the compression-ignition type as "diesel fuel" for excise tax purposes. This included different grades of blended fuels, regardless of the proportions of the mix of diesel with residual fuels, that may have been known under various names throughout the industry such as marine bunker or intermediate marine fuels.

However, given that bunker C fuel oil is classified as a type of heating oil for use in oil-burning equipment under the national standards of Canada, but that it is also used in certain internal combustion engines of the compression-ignition type, the CCRA's position regarding the status of bunker C fuel oil for the purpose of the definition of "diesel fuel" in subsection 2(1) of the ETA is as follows.

Determinative Factors

The determining factors in establishing the status of bunker C fuel oil for the purpose of the definition of "diesel fuel" in subsection 2(1) of the ETA are set out in the CCRA's policy statement EP-001, The Meaning of the Term "Heating Oil" for the Purpose of the Definition of "Diesel Fuel" in Subsection 2(1) of the ETA. As discussed in that policy statement, the CCRA will consider both the intended use of the fuel oil (i.e., how it is manufactured and marketed) and the actual use of the fuel oil (i.e., how it is used by the end-user) in establishing the status of the fuel oil for excise tax purposes.

Other Factors

1. Any bunker C fuel oil that is purchased or imported without payment of excise tax and that is subsequently sold or appropriated for a purpose for which the excise tax on diesel fuel is payable (e.g., for use in internal combustion engines of the compression-ignition type) will be subject to excise tax under subsection 23(9.1) of the ETA. The tax is payable by the person who sells or appropriates the bunker C fuel oil for a purpose for which the excise tax on diesel fuel is payable at the following time:

• where the bunker C fuel oil is sold for a purpose for which the excise tax on diesel fuel is payable, at the time of delivery to the purchaser; and

• where the bunker C fuel oil is appropriated for a purpose for which the excise tax on diesel fuel is payable, at the time of that appropriation.

As a result of these diversion provisions, a licensed manufacturer or producer, as well as a licensed wholesaler or other distributor of fuel oil is required to account for excise tax on any bunker C fuel oil that he knowingly sells for use in internal combustion engines of the compression-ignition type. If the bunker C fuel oil is appropriated for use in internal combustion engines of the compression-ignition type after the time of purchase, then the person who appropriates the fuel oil is required to account for excise tax at that time.

2. A person who blends distillate fuel oil (e.g., commercial diesel fuel) with bunker C fuel oil to produce a distinct grade of fuel oil having a specific viscosity will be considered a manufacturer or producer where the blended fuel oil is considered to be "diesel fuel" for excise tax purposes. The person will be required to become licensed as a manufacturer or producer under section 64 of the ETA where the total value of goods manufactured for sale or for its own use equals or exceeds $50,000 per calendar year.

Date modified:

2002-06-14