17 May 2006 External T.I. 2006-0169361E5 - photovoltaic system - Class 43.1

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 photovoltaic array on the roof of a building that generates electrical energy to be sold to the provincial power company would be eligible for inclusion in Class 43.1

Position: Where the photovoltaic array is removable and remains a separate asset from that of the building, it will qualify for inclusion in Class 43.1. Where there is a building integrated photovoltaics system installed at the time a building is constructed such that the solar cells become an integral and component part of the roof, it is our opinion that it would not be eligible for inclusion in Class 43.1 because it would be considered to be a part of the building (Class 1(q)) which is excluded from Class 43.1(d)(vi). Also indicated the requirements of Class 43.1(d)(vi) and the restrictions under Reg. 1100(24) to (26) on CCA that can be claimed.

Reasons: As per the law.

							2006-016936
XXXXXXXXXX 						Catherine Bowen
(613) 957-8284
May 17, 2006

Dear XXXXXXXXXX:

Re: Photovoltaic Equipment

We are writing in response to your electronic request of February 1, 2006 concerning the eligibility of photovoltaic electrical generation systems for inclusion in Class 43.1 of Schedule II ("Class 43.1") to the Income Tax Regulations (the "Regulations"). In particular, you asked whether a photovoltaic array installed on the roof of a commercial building that generates electrical energy would be eligible for inclusion in Class 43.1 or 43.2 (once promulgated). The electrical energy produced would be metered, and sold to the provincial electrical company. Some of that electrical energy would then be re-purchased by the taxpayer for use in its business operations.

We also acknowledge the additional information provided by you in our telephone conversations (XXXXXXXXXX/Bowen) of May 9 and 15 in which you indicated that where a photovoltaic array is attached to the roof of an existing building, the array is generally held onto the roof by weights if the roof is flat, or bolted to the roof if the roof is at an angle. In commercial buildings, a storage battery would not normally be required. However, a power inverter is required and that could be stored in a number of places including a small box on the roof attached by plastic fasteners, in a closet in the building or in the basement. An electric wire would connect the array to the power inverter. An electric wire would also connect the photovoltaic array to a meter where the quantity of electrical energy generated and sold is measured. Then the majority, if not all, of the electricity would be sent back to the building for use in the taxpayer's business. The photovoltaic array is removable from the roof and due to its cost; a person installing such an array would generally remove it before moving from the building. It is your view that such an array would be considered a separate and distinct asset and would not be considered to be an integral or component part of the building. Hence, it should qualify for inclusion in Class 43.1.

Solar cells that are integrated into roofing material (e.g., shingles) and normally installed at the time of constructing a new building are referred to as building integrated photovoltaics ("BIPV"). While this method is not popular in Canada at this time, it is expected to be more widely used in the future. You indicated that the BIPV system would be considered to be a component or integral part of the building and hence would not likely qualify for inclusion in Class 43.1. This appears to be an unintended result since you believe that there is no apparent policy rationale for both systems (removable and BIPV) not qualifying for inclusion in Class 43.1.

Our Comments

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.

Inclusion in Class 43.1

Types of Assets

To qualify as a Class 43.1 property by virtue of subparagraph (d)(vi) thereof, fixed location photovoltaic equipment must be used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy and

i) have a peak capacity of not less than 3 kilowatts of electrical output, and

ii) consist of solar cells, modules or array and related equipment, including:

a. control, conditioning and battery storage equipment (designed to store electrical energy),

b. support structures for the solar array, and

c. transmission equipment up to the interface with either the distribution system or the local utility.

Assets that may be part of a photovoltaic system but are not eligible to be included in Class 43.1 are buildings, electrical distribution equipment and facilities, other back-up electrical generating equipment (such as a diesel engine, main switch or power bar), vehicles, telephone equipment, access roads, sidewalks and other assets normally included in Class 10 or 17. However, electrical generating equipment described in subparagraph (a.1)(i) of Class 17 is eligible for inclusion in Class 43.1.

Attached to or Part of a Building

As noted above, a building does not qualify for inclusion in Class 43.1. However, where a photovoltaic array is attached or held (e.g., by bolts or by weights) to the roof of an existing building such that

i) it would be considered to have a separate existence from that of the building as movable capital property, and

ii) it does not form an integral and component part of the building

it is our opinion that it would not be considered part of the building and the photovoltaic system would qualify for inclusion in Class 43.1 provided the other criteria are met. Similarly, where a tenant that is leasing a building incurs the cost of installing such a photovoltaic system and it remains the property of the tenant that can be removed by the tenant, it is our opinion that such a system would also qualify for inclusion in Class 43.1 provided the other criteria are met.

On the other hand, where a BIPV system is installed at the time a building is constructed, or renovated, and it becomes an integral and component part of the roof, it is our opinion that the BIPV system would not be eligible for inclusion in Class 43.1 because it would be considered to be part of the building (Class 1(q)) which is excluded from subparagraph (d)(vi) of Class 43.1. As it is your view that this may not be the intended result from a policy perspective, we have advised the Department of Finance of your concern.

Use of Property

In addition, for any property to be eligible for inclusion in Class 43.1, it must:

i) be situated in Canada,

ii) 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

iii) 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).

Pursuant to subsection 1102(21) of the Regulations, the capital cost of any used equipment that qualifies for inclusion in Class 43.1 as described in (iii) above cannot exceed the original capital cost of the property to the person from whom the property was acquired. Any excess should be included in the class in which the particular property would have been included if it were not eligible for inclusion in Class 43.1.

A property will not be considered to have been used for any purpose where it is new at the time that it is acquired. 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. 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. However, a property that is used regularly by the vendor for demonstration purposes is considered to have been used by the vendor.

CCA for Class 43.1

CCA rate

Class 43.1 provides for a capital cost allowance ("CCA") rate of 30 per cent calculated on a declining balance basis. However, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Income Tax Act, CCA for a 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 is available for use. A property that becomes available for use 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 becomes available for use is 15% and then 30% in the subsequent years.

Restriction on CCA claim

The amount of CCA that may be claimed on a Class 43.1 property (as discussed above) is limited to the income earned from such property (as per subsection 1100(24) of the Regulations) unless certain conditions are met. This limitation on CCA that may be claimed will not apply where any of the following conditions are met:

i) the owner of the Class 43.1 property is a principal business corporation (as described below) or a partnership each member of which is a principal business corporation,

ii) the Class 43.1 property is acquired to be used by the owner primarily (i.e., more than 50% of the time) 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 includes the situation where the Class 43.1 property is used primarily to generate electricity for the owner's own existing business (e.g., farming, car wash, etc.), or

iii) the Class 43.1 property is leased by its owner in the ordinary course of carrying on business in Canada and certain conditions relating to the business carried on by the lessor and the lessee are met.

For these purposes, a principal business corporation ("PBC") means a corporation whose principal business throughout the year was

i) manufacturing or processing,

ii) mining, or

iii) the sale, distribution, or production of electricity, natural gas, oil, heat, or any other form of energy or potential energy.

If none of the conditions listed above is met (e.g., where a taxpayer that is not a PBC acquires a Class 43.1 property primarily to generate electrical energy for sale), the Class 43.1 property will be considered "specified energy property" for purposes of subsection 1100(25) of the Regulations and CCA on that property can not be deducted to the extent that doing so would create or increase a loss from all such property owned by the taxpayer.

New Class 43.2

It should be noted that the February 23, 2005 federal budget announced that renewable energy generation equipment, including fixed location photovoltaic equipment, that would otherwise be included in Class 43.1 and that is acquired on or after the date of the budget and before 2012, will qualify for a new capital cost allowance class (Class 43.2) with a 50% capital cost allowance rate. Should this change be promulgated, such equipment will qualify for inclusion in Class 43.2. The Budget Plan 2006 tabled in the House of Commons on May 2, 2006 confirmed that it was the federal government's intention to enact the Regulations to implement this change. Other than the increased CCA rate, all comments relating to Class 43.1 property in this letter will apply to property that will be included in proposed Class 43.2.

We trust that our comments will be of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch