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: What are the income tax consequences for participants in the Ontario FIT/microFIT and Net Metering Programs?
Position: See below.
Reasons: Application of the law.
XXXXXXXXXX Boriana Christov
2017-068534
January 17, 2020
Dear XXXXXXXXXX,
Re. Ontario Fit/microFit and Net Metering Programs
This is in response to your electronic inquiry of January 17, 2017 requesting general information with regard to the federal income tax consequences to participants in the Feed-in Tariff (“FIT”) and microFIT programs (collectively the “FIT/micro-FIT Programs”) (footnote 1) and the Net Metering Program administered by the Ontario Power Authority (the “OPA”). We apologize for the delay in responding to your letter.
I. 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 70-6R9 dated April 23, 2019 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.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada) (footnote 2) or to the Income Tax Regulations. (footnote 3)
II. GENERAL DESCRIPTION OF THE PROGRAMS
A. FIT/microFIT Programs
We understand that the OPA has developed a FIT Program for the Province of Ontario to encourage and promote greater use of renewable energy sources. These include wind, waterpower, renewable biomass, bio-gas, landfill gas, and solar photovoltaic electricity generating projects in Ontario. The microFIT Program is a stream of the FIT Program and allows for the participation in “micro” renewable energy projects (10 kW or less).
Participants in the FIT/microFIT Programs include individuals, sole proprietorships, partnerships, and corporations that meet the eligibility requirements described under each program. For more information on the programs, please refer to the webpages of the Ontario Independent Electricity System Operator and the Ontario Ministry of Energy.
Under the FIT/microFIT Programs, a participant with an approved renewable energy project will enter into a contract with the OPA to supply the electricity generated from the renewable energy project to the provincial electricity distribution system. The terms of the contract generally provide that the participant will be paid for each kWh of electricity generated from the renewable energy project and supplied to the provincial electricity distribution system, regardless of whether electricity is subsequently consumed by the participant. The price of electricity is typically guaranteed for the duration of the contract.
B. Net Metering Program
The Net Metering Program is available to participants in Ontario who generate electricity primarily for their own use from a renewable energy source. The goal of the program is for participants to satisfy all or part of their own consumption needs with the excess electricity, if any, to be supplied to the provincial electrical distribution system. This is achieved through the method of “net billing” under which the participant is billed only for the difference between the value of the electricity consumed by the participant and the value of the electricity supplied to the provincial electrical distribution system. Where the value of the participant’s electricity consumption is less than the value of the excess electricity supplied, the participant will accumulate a credit.
It is our understanding that the participant will not receive an actual payment for the value of the accumulated credit. The credit is available for use against the participant’s future electricity consumption in the next billing period. (footnote 4) If the accumulated credit is outstanding and cannot be used in its entirety within a given 12-month period, it will be forfeited as of the next billing period. (footnote 5)
III. INCOME TAX CONSIDERATIONS
A. Overview
There are two principal issues that arise under the Act with respect to the involvement by a participant in the FIT/MicroFIT Program or in the Net Metering Program:
(a) whether amounts or credits earned by a participant for electricity supplied by the participant to the provincial electricity grid are required to be included in computing the income of the participant under the Act; and
(b) whether the participant is entitled to claim capital cost allowance (“CCA”) with respect to the renewable energy equipment acquired by the participant and, if so, whether the specified energy property rules would apply to limit the amount of CCA the participant is entitled to claim.
B. Income Inclusion – Overview
Pursuant to the Act, a taxpayer, who is resident of Canada, is subject to income tax on all items of revenue received from all sources inside or outside of Canada. Section 3 and other sections of the Act describe various sources of income such as income from office, employment, business and property. If a receipt has no recognized source, it is not considered income and therefore not subject to tax. For more information on the tax treatment of various receipts, please refer to Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime. (footnote 6)
1. FIT/MicroFIT Program
Amounts earned by a participant under a contract for the supply of electricity to the provincial energy grid are considered income from a source that is either business or property. A participant in the FIT/microFIT Program will therefore be required to include in computing its income all amounts earned under the contract with the OPA from the supply of electricity generated by the renewable energy project. However, the participant would generally be entitled to claim CCA on the cost of the renewable energy equipment subject to certain limits, as discussed below. (footnote 7)
2. Net Metering Program
The tax treatment of the accumulated credit that may be received by a participant in the Net Metering Program would depend on the specific facts and circumstances of each case and could only be determined after a complete review of the particular situation. Nonetheless, we can provide you with some general comments that may assist you in making this determination.
Generally, where the accumulated credit, which is not transferable or redeemable and that cannot be carried forward beyond a limited period, is received by a participant who generates electricity for purely personal consumption (i.e., a participant that does not receive such credit in connection with a commercial activity that is carried on with a view to earning a profit), the amount of the credit would typically not be subject to tax under the Act. In this case, the participant will not be engaged in a commercial activity with a view of earning a profit. Therefore, the supply of electricity by the participant will not be considered to be a source of income of that participant for income tax purposes.
On the other hand, where a participant in the Net Metering Program generates electricity that is consumed in the course of carrying on a business or earning income from another property (such as a rental building), the value of such a credit would be included in the participant’s income from such business or property. This income inclusion will be realized in the taxation year in which the credit is applied against the participant’s electricity consumption costs and it will be equal to the value of the credit applied. However at that time, the participant would typically be entitled to an offsetting deduction for the cost of the electricity consumed by the participant, being an expenditure incurred for the purpose of earning income from the business or property. Further, the participant would generally be entitled to claim CCA on the cost of the renewable energy equipment subject to certain limits, as discussed below. (footnote 8)
The above conclusions may vary if, based on the applicable provincial regime, the credit can be carried forward indefinitely or it is transferable or redeemable for value.
C. CCA – Overview
A taxpayer may claim CCA only on property described in Schedule II of the Regulations that was acquired for the purpose of earning income. (footnote 9) Class 43.1 and Class 43.2 of Schedule II to the Regulations provide accelerated CCA rates for qualifying investments in clean energy generation and energy conservation equipment situated in Canada.
The CCA rate for Class 43.1 is 30% per year and the CCA rate for Class 43.2 is 50% per year, computed on a declining balance basis and subject to the “available for use” rules and the “half-year” rule in the Act. (footnote 10) Most of the equipment that is described in Class 43.1 will qualify for the 50% CCA rate under Class 43.2 if the property is acquired before 2025. (footnote 11)
The Government of Canada’s 2018 Fall Economic Statement adopted additional measures to encourage certain capital investments. In particular, the measures include accelerated investment incentives that, among other things, allow businesses to immediately deduct the full cost of specified clean energy equipment which is described in Classes 43.1 and 43.2, and which is subject to certain conditions and limitations. The eligible property must be acquired after November 20, 2018 and it must be available for use before 2024 in order to qualify for this full expensing measure. For eligible property that is available for use after 2023 but before 2028, there is an enhanced CCA which will gradually decrease to nil for eligible property that becomes available for use in 2028 or thereafter. (footnote 12)
In order for the property to qualify for an inclusion in Class 43.1 or 43.2 the depreciable property must:
- be situated in Canada;
- be acquired by a taxpayer for use by the taxpayer for the purpose of earning income from a business carried on in Canada or from property situated in Canada, or the property must be acquired by a taxpayer in order to be leased to a lessee who will use the property for the same income earning purpose; and
- subject to certain exceptions, not have been used for any purpose before the taxpayer acquired the property.
For more information relating to Class 43.1 and 43.2, please refer to the Income Tax Folio S3-F8-C2, Tax Incentives for Clean Energy Equipment which can be found at the CRA webpage http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s3/f8/s3-f8-c2-eng.html.
1. FIT/MicroFIT Program
Generally, costs associated with the purchase and installation of renewable energy property eligible for the FIT/microFIT Programs are considered to be the capital cost of depreciable property. A participant would include the capital cost of a renewable energy property in Class 43.1 or 43.2 for CCA purposes, provided that the property meets all of the requirements of these classes.
2. Net Metering Program
Where the participant in the Net Metering Program uses a renewable energy property for personal consumption which is not related to an income earning purpose, the property would not be a depreciable property and thus would not be eligible for inclusion in any class, including Class 43.1 or 43.2.
On the other hand, if a participant in the Net Metering Program uses the renewable energy property for the purpose of producing income from a business or a property (such as a rental property), the renewable energy property may fall within Class 43.1 or 43.2 if it meets all the other requirements of those classes.
D. Specified Energy Property Rules – Overview
The specified energy property rules contained in subsections 1100(24) to (29) of the Regulations limit the amount of CCA that may be claimed on property that is “specified energy property.” A “specified energy property” generally includes all property included in Class 43.1 and 43.2 and certain similar properties included in other classes, (footnote 13) subject to certain exceptions. One such exception is property that is acquired to be used by the owner primarily (i.e., more than 50%) for the purpose of gaining or producing income from either: (i) a business of the owner carried on in Canada (not including the business of selling the energy generated by the particular property); or (ii) another property held in Canada by the owner of the property. (footnote 14) The determination of whether a given property is a specified energy property would require a complete review of the facts of a particular situation.
There is a limit to the amount of CCA that may be claimed in respect of a property that is a specified energy property. (footnote 15) Generally, subsection 1100(24) of the Regulations limits the amount of CCA that a taxpayer may deduct under subsection 1100(1) of the Regulations in respect of a specified energy property to the income of the taxpayer from specified energy property and certain other similar energy conservation properties, subject to certain adjustments.
Lastly, the CCA deduction limitation does not apply to certain corporations (and certain partnerships described in subsection 1100(26) of the Regulations) whose principal business is: (i) manufacturing or processing; (ii) mining; or (iii) the sale, distribution, or production of energy. (footnote 16)
FIT/MicroFIT Program and Net Metering Program
Generally, the specified energy property rules would apply to a participant in a FIT/microFIT Program or a Net Metering Program that is otherwise eligible to claim CCA in respect of a renewable energy property unless:
(a) the participant carries on a business in Canada (other than the business of selling electricity) or earns income from another property situated in Canada and the amount of electricity consumed in carrying on that business or earning income from that other property, as applicable, exceeds 50% of the electricity generated by the renewable energy property for the taxation year;
(b) the participant is a corporation (or a partnership described in subsection 1100(26) of the Regulations) whose principal business is:
(i) manufacturing or processing; (ii) mining; or (iii) the sale, distribution, or production of energy or potential energy; or
(c) the property is leased by the participant and all the requirements of paragraph 1100(25)(b) of the Regulations are met.
Where the conditions for the application of the specified energy property rules are met and as a result, the amount of CCA that could be deducted in a given taxation year is limited, the accelerated investment incentive is limited accordingly. For more information relating to Class 43.1 and 43.2, please refer to the Income Tax Folio S3-F8-C2, Tax Incentives for Clean Energy Equipment.
We hope that these comments will be of assistance.
Yours truly,
Kimberley Wharram
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Formerly known as the Renewable Energy Standard Offer Program.
2 R.S.C. 1985, c. 1 (5th suppl.) as amended (the “Act”).
3 C.R.C c. 945 as amended (the “Regulations”).
4 See subsection 8(7) of the Net Metering Regulation.
5 See subsection 8(8) of the Net Metering Regulation.
6 Income Tax Folio S3-F9-C1 can be found on the CRA’s Webpage: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plans-fo....
7 Infra, see Part D below.
8 Infra, see Part D.
9 See paragraph 1102(1)(c) of the Regulations.
10 For more information on the “available for use” rules, which are found in subsections 13(26) to (31) of the Act and the “half-year” rule, which is found in subsection 1100(2) of the Regulations, please refer to Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance, which can be found on the CRA Webpage https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plans-fo....
11 Certain exceptions apply which are not relevant here.
12 During the phase-out period the enhanced CCA rates are as follows: for eligible properties that are available for use in:
- 2024 and 2025 the rate is 75%;
- 2026 and 2027 the rate is 55%; and
- 2028 the enhanced CCA rate is nil.
13 These include energy conservation equipment described in Classes 34, 47 and 48.
14 A somewhat similar exception is applicable to property that is leased for use by a lessee for similar purposes: see paragraph 1100(25)(b) of the Regulations.
15 See subsections 1100(24) to (29) of the Regulations.
16 Such as electricity, natural gas, oil, steam, heat or any other form of energy or potential energy, see subparagraph 1100(26)(a)(iii) of the Regulations.
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