LNG Income Tax Calculation Examples

The Liquefied Natural Gas (LNG) Income Tax is applied on a facility-by-facility basis. You must file separate tax returns for each facility, but you can consolidate income from different liquefaction activities at a single facility.

The basic rules for calculating the LNG income tax are:

Rule 1

When your net income is zero and your net operating income is greater than zero, you must pay 1.5% tax on your net operating income.

Rule 2

When your net income is the same as your net operating income, meaning you take no net operating loss account deduction and no capital investment account deduction for the year, the higher tax rate on net income applies.

Rule 3

When you must pay tax at the higher rate, you can reduce the tax due on your net income by any amount available in your tax pool, but you still have to pay a minimum amount equal to 1.5% of your net operating income.

Rule 4

When your net income and net operating income are both positive in a year, and your net operating loss account and capital investment account are reduced to zero, you calculate both the tax on net operating income and the tax on net income.

Rule 5

When your capital investment account has a negative balance at the end of a taxation year, the negative amount is recaptured and is included in net income.

Calculation Examples

Rule 1 Example

You have the following:

  • Net operating income = $1,000
  • Net operating loss account balance = $300
  • Capital investment account balance = $3,000
  • Tax pool balance = $0
  • Net income = $0

Net income = net operating income minus net operating loss account balance minus allowable capital investment account balance

  1. Deduct your net operating loss account balance from your net operating income: $1,000 - $300 = $700
  2. Deduct your capital investment account balance from the resulting amount, up to the amount that would reduce your net income to zero ($700, in this case):
    $700 - $700 = $0
  3. Net income = $0

Since your net income becomes $0, the 1.5% tax on net operating income applies: $1,000 x 1.5% = $15

LNG income tax = $15

  • Your tax pool balance becomes $15 (the amount of tax paid)
  • Your net operating loss account balance becomes $0
  • Your capital investment account balance becomes $2,300 (reduced by the amount that you used to reduce your net income to $0)

Rule 2 Example

You have the following:

  • Net operating income = $1,000
  • Net operating loss account balance = $0
  • Capital investment account balance = $0
  • Tax pool balance = $0
  • Net income = $1,000
  1. Calculate 3.5% of your net income:
    $1,000 x 3.5% = $35

The 3.5% tax rate applies because net income is the same amount as net operating income. No deduction is available in calculating the tax owing because the tax pool balance is zero.

LNG income tax = $35

Rule 3 Example

You have the following:

  • Net operating income = $1,000
  • Net operating loss account balance = $0
  • Capital investment account balance = $0
  • Tax pool balance = $90
  • Net income = $1,000
  1. Calculate 3.5% of your net income:
    $1,000 x 3.5% = $35
  2. Calculate 1.5% of your net operating income:
    $1,000 x 1.5% = $15 (this is the minimum amount of tax you have to pay)
  3. Calculate the difference between your net income and net operating income calculations:
    $35 - $15 = $20
  4. Deduct that amount ($20) from your tax pool balance to reduce your tax payable on net income:
    $35 - $20 = $15 tax owing

In this case, your tax pool balance is reduced by the amount required to bring your tax on net income to the amount that would have been payable at the 1.5% rate.

LNG income tax = $15

  • Your tax pool balance becomes $70 ($90 - $20)

Rule 4 Example

You have the following:

  • Net operating income = $1,000
  • Net operating loss account balance = $300
  • Capital investment account balance = $600
  • Tax pool balance = $0
  • Net income = $100
  1. Calculate 3.5% of your net income:
    $100 x 3.5% = $3.50
  2. Calculate 1.5% of your net operating income:
    $1,000 x 1.5% = $15
  3. The minimum tax you have to pay is $15
  4. The difference of $11.50 is added to the tax pool balance for next year

The $15 tax paid on net operating income is added to the tax pool. The $3.50 tax due on net income is then deducted from the tax pool, leaving a tax pool balance of $11.50. The net change to the tax pool balance is an increase of $11.50 for the next taxation year.

LNG income tax = $15

  • Your tax pool balance becomes $11.50 ($15 - $3.50)

Rule 5 Example

You have the following:

  • Net operating income = $1,000
  • Net operating loss account balance = $0
  • Capital investment account balance = $100
  • Tax pool balance = $0
  • Proceeds from the disposition of capital investment property = $800
  • Net income = $1,700
  1. Deduct the proceeds from the capital investment property disposition from your capital investment account balance: $100 - $800 = $(700) (this negative amount represents your recapture and is added to your net income)
  2. Add the recapture amount ($700) to your net income:
    $1,000 + $700 = $1,700
  3. Calculate 3.5% of net income ($1,700 x 3.5%) = $59.50

LNG income tax = $59.50

  • Your capital investment account balance becomes $0

Multi-Year Example

The following table shows the calculation of LNG income tax for a single taxpayer over five years. It doesn't include all features of the tax but is representative of its general structure.

Example: LNG Income Tax Calculation (before 2037)

  Year 1 Year 2 Year 3 Year 4 Year 5
Net operating income or loss          
Net operating income   $4,500 $4,500 $4,500 $4,500
Loss $100        
Tax rate on net operating income 1.5% 1.5% 1.5%    
Minimum amount of tax 0 67.50 67.50 n/a n/a
 
Net operating loss account          
Opening balance 0 100      
Operating loss for the tax year 100        
Drawdown   100      
Closing balance 100 0      
 
Capital investment account          
Opening balance 7,000 7,000 2,600    
Drawdown   4,400 2,600    
Closing balance 7,000 2,600 0    
 
Net income          
Net income     1,900 4,500 4,500
Tax rate on net income     3.5% 3.5% 3.5%
Tax on net income before
tax pool deduction
    66.5 157.5 157.5
 
Tax pool deduction          
Opening balance for tax pool 0 0 67.5 68.5  
Tax pool additions   67.5 67.5    
Tax pool drawdown     66.5 68.5  
Closing balance for tax pool 0 67.5 68.5    
 
Tax on net income after
tax pool deduction
n/a n/a n/a 89.0 157.5
 
Total LNG income tax $0 $67.5 $67.5 $89.0 $157.5