11 June 2012 External T.I. 2012-0433611E5 - Geothermal Heating and Cooling Systems

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: Can the purchaser of a building that contains a geothermal heating and cooling system include the system in Class 43.2 of Schedule II?

Position: Likely yes.

Reasons: Position taken in 1998 "Class 43.1 Technical Guide and Technical Guide to Canadian Renewable and Conservation Expenses (CRCE)". Will depend on whether the system is used. If the system has been used then the purchaser must acquire the property within 5 years from the date the property became available for use to the vendor. XXXXXXXXXX

XXXXXXXXXX
				2012-043361
				L. Zannese
				(613) 941-0782
June 11, 2012

Dear XXXXXXXXXX:

Re: Geothermal Heating System and Class 43.2

This is in response to your email dated January 18, 2012 in which you ask for our views as to whether certain equipment would qualify for inclusion in Class 43.2 of Schedule II to the Income Tax Regulations (the “Regulations”). In particular, you ask whether a taxpayer that acquires a building which contains a geothermal heating and cooling system can include the geothermal equipment in Class 43.2 of Schedule II.

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 (“CRA”). A fee is charged for this service. Although, we are unable to provide any comments with respect to a particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.

Class 43.2 Renewable Energy Property

By virtue of paragraph 1102(1)(c) of the Regulations, the classes of property described in Schedule II only include property that was acquired by the taxpayer for the purpose of earning income. Provided that this requirement is met, certain property situated in Canada that generates or conserves electrical and /or heat energy by using renewable energy sources may qualify for inclusion under paragraph (d) of Class 43.1 of Schedule II if it otherwise meets the requirements of a particular subparagraph. Property that would otherwise qualify for Class 43.1 of Schedule II because of paragraph (d) of that class will be included in Class 43.2 of Schedule II if the property was acquired after February 22, 2005. To be eligible for inclusion in Class 43.2, the property must not have been used for any purpose before it was acquired by the taxpayer. However, subparagraph (e)(iii) of Class 43.1 provides an exception to this rule for certain used property that meets the following conditions. The property must be depreciable property that was eligible for inclusion in Class 43.1 or 43.2 of the vendor; the property must remain at the same location at which it was used by the vendor; and the property must be acquired by the purchaser within five years from the time it became available for use to the vendor. We note that a property will not be considered to have been used for any purpose where it is new at the time that it is acquired but has been demonstrated for or tested by a prospective purchaser of the particular piece of equipment. In other words, 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.

Exclusion from Class 43.2 of Schedule II—Property that is Part of a Building

Clause (d)(i)(A) of Class 43.1 includes equipment that is part of a ground source heat pump system that transfers heat to and from the ground or groundwater and that, at the time of installation, meets the standards set by the Canadian Standards Association for the design and installation of earth energy systems.

Clause (d)(i)(B) of Class 43.1 provides that property that is a building or a part of a building is excluded from Class 43.1 or 43.2. Where the geothermal heating and cooling system is part of the building at the time the building is purchased, the issue is whether this system is considered to be “part of the building” for purposes of clause (d)(i)(B). Generally, the parts of a ground source heat pump system that are an integral part of a building will be excluded from Class 43.2. For example, equipment that facilitates the transfer of heat within the building may properly be considered an integral part of the building and included in Class 1. On the other hand, the outdoor well tubing, the heat pump, the energy conversion equipment and the energy storage equipment would be considered to be separate from the building as it would be possible to remove and replace them without modifying the building. Consequently, these items would be eligible for inclusion in Class 43.2

We trust that these comments will be of assistance.

Yours truly,

Fiona Harrison, CA
Manager
Resources Section
Reorganization & Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch