Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: whether a boiler fuelled by wood pellets to generate heat for use in a greenhouse will qualify for inclusion in Class 43.1
Position: General comments provided
Reasons: question of fact
2005-015161
XXXXXXXXXX T. Harris
(613) 957-2114
November 25, 2005
Dear XXXXXXXXXX,
We are writing in response to your email enquiry of September 20, 2005, in which you requested our opinion as to whether a boiler acquired to provide heat for a greenhouse operation would be eligible for inclusion in Class 43.1 of Schedule II of the Income Tax Regulations (the "Regulations").
According to the information that you submitted to us, the property consists of a wood pellet multi fuel boiler. It is our understanding that, in addition to wood pellets, this boiler may consume other fuels, including coal, to generate the heat energy. In addition, the boiler is not attached to the greenhouse, which is the company's main building, but is housed in a separate building constructed specifically for it. You have not indicated whether the boiler is also used to provide heat to the company's other business operations, being a florist and nursery.
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Although we cannot provide any comments with respect to your particular fact situation or to any specific asset, the following general comments may be of assistance.
As noted in Regulations Amending the Income Tax Regulations (Capital Cost Allowance - Energy Conservation Equipment and Alternative Energy Sources) that was published in the Canada Gazette Vol. 138, No. 51 on December 18, 2004, it is proposed that Class 43.1 be amended to include certain equipment acquired by a taxpayer to be used primarily to generate heat energy from the consumption of certain waste fuels (including wood waste), if the heat energy is used directly in a greenhouse operation of the taxpayer. Once promulgated, these changes will apply to equipment acquired by a taxpayer after February 18, 2003. Specifically, the relevant portions of subparagraph (d)(ix) of Class 43.1 will be amended to read as follows:
equipment used by the taxpayer...primarily for the purpose of generating heat energy from the consumption of wood waste, ... if the heat energy is used directly in ....a greenhouse, of the taxpayer or lessee, including such equipment that consists of fuel handling equipment used to upgrade the combustible portion of the fuel and control, feedwater and condensate systems, and other ancillary equipment, but not including buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), fuel storage facilities, other fuel handling equipment and electrical generating equipment, and property otherwise included in Class 10 or 17.
We have confirmed with an official of Natural Resources Canada that wood pellets qualify as wood waste as that term is defined in subsection 1104(13) of the Regulations. According to section 1.3.8 of the Class 43.1 Technical Guide published by Natural Resources Canada, a system whose primary purpose is to produce heat energy for use in an eligible activity primarily from the combustion of an eligible fuel, such as wood waste, will be eligible for inclusion in Class 43.1 under subparagraph (d)(ix) thereof. For these purposes, the word "primarily" means more than 50%. In other words, in the situation you describe more than 50% of the heat energy produced in any period must be generated from the combustion of wood pellets, or another specified waste fuel, and more than 50% of the heat energy produced must be used in a greenhouse operation of the taxpayer or its lessee. For greater certainty, coal or other non-waste fuels are not eligible fuels for these purposes.
In addition, for a property to be eligible for inclusion in Class 43.1, it must:
(a) be situated in Canada;
(b) be acquired by a taxpayer for use by the taxpayer, or to be leased by the taxpayer to a lessee for use by the lessee, for the purpose of earning income from a business carried on in Canada or from property situated in Canada; and
(c) not have been used for any purpose before the taxpayer acquired the property (other than for certain used equipment that is depreciable property that was eligible for inclusion in Class 34 or 43.1 of the vendor, remains at the same location as used by the vendor and has been acquired by the taxpayer within five years from the time it became available for use to the vendor).
New equipment that is demonstrated for or tested by a prospective purchaser of that particular piece of equipment will not normally be considered to have been used for a purpose. However, a property that is used regularly by the vendor for demonstration purposes is considered to have been used by the vendor. Consequently, the testing and commissioning of an otherwise new system prior to the purchaser taking possession will not normally result in a finding that the property has been used prior to its acquisition.
Eligibility of the property for inclusion in Class 43.1 must generally be determined annually based on the use of the property in the particular taxation year. In other words, a property described in subparagraph (d)(ix) of Class 43.1 must be used in the particular taxation year primarily to produce heat energy for use in an eligible activity and the primary fuel used must be an eligible fuel, such as wood waste. If, in a particular taxation year, a property included in subparagraph (d)(ix) of Class 43.1 no longer satisfies the conditions for inclusion in Class 43.1 either because the heat energy is not being used primarily for an eligible purpose or is not being generated primarily from an eligible fuel, subsection 13(5) requires that the undepreciated capital cost of the property be transferred from Class 43.1 to another class as of the commencement of the particular taxation year. Similarly, if in a subsequent year, the property again satisfies the requirements for inclusion in Class 43.1, subsection 13(5) would apply to reclassify the property into Class 43.1 as of the commencement of that year. For more detailed comments concerning the application of subsection 13(5), you should refer to the current version of IT-190, Capital Cost Allowance - Transferred and Misclassified Property.
CCA for Class 43.1
Class 43.1 provides for a capital cost allowance ("CCA") rate of 30 per cent calculated on a declining balance basis. Any property acquired in the year is subject to the 50% rule found in subsection 1100(2) of the Regulations. This means that the rate of CCA in the year a Class 43.1 property is acquired or becomes available for use is 15% and then 30% in the subsequent years. In addition, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Income Tax Act (the "Act"), CCA for any Class 43.1 property that has been acquired and which is not considered available for use at the end of a taxation year may be restricted until such time as the property becomes available for use. Also, where a depreciable property is used for both business and personal use, CCA can only be claimed on the portion or percentage of the capital cost that is used for business purposes.
Where Class 43.1 property meets the definition of "specified energy property" in subsection 1100(25) of the Regulations, the amount of CCA that may be claimed on that property is generally limited to the income earned from such property (as per subsection 1100(24) of the Regulations). However, where Class 43.1 property is acquired to be used by the owner primarily for the purpose of gaining or producing income from a business carried on in Canada (other than the business of selling energy produced by the property) or from another property situated in Canada (e.g., rental property), this restriction does not apply. In other words, as long as purchasers of a property that qualifies for inclusion in Class 43.1 are using it in their own businesses, the property will not normally be affected by these rules restricting the amount of CCA that can be claimed.
Our comments, which we trust will be of assistance, are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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