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: 1. Is the income earned by a farmer under a FIT / microFIT contract considered farming income? 2. Is the income earned by a farmer for the rental of farmland to a third party who enters into FIT / microFIT contract considered farming income? 3. Would the income earned by a farmer under items 1 & 2 be considered incidental to farming income?
Position: 1. No. 2. No. 3. Not likely.
Reasons: These activities in of themselves would not meet the definition of farming contained in subsection 248(1) of the Act. In addition, the arrangements appear to be long-term in nature and involve a significant capital investment.
XXXXXXXXXX
2010-036021
Lena Holloway
Attention: XXXXXXXXXX
July 20, 2010
Dear Sir:
Re: Solar Energy Projects by Farmers- Ontario FIT and microFIT Programs
This is in reply to your e-mail correspondence of March 12, 2010, wherein you requested a technical interpretation in respect of the above-noted subject.
You have stated that many farmers are planning to purchase and install solar photovoltaic ("pv") equipment on their farms and participate in a program introduced by the Ontario Power Authority ("OPA") entitled the "microFIT" program. Under this program the farmers can enter into a contract to sell the electrical energy generated by the solar pv equipment to the OPA at a fixed rate per kilowatt hour for a 20 year term.
In your email, you described the following scenario:
1. all the electricity generated by the solar pv equipment would be sold to the OPA;
2. none of the electricity generated by the solar pv equipment would be used in the farm operation;
3. at some point during the 20 year contract term, income from the sale of the electricity would exceed the allowable capital cost allowance available for class 43.2 property; and
4. the solar pv equipment would occupy a small amount of space of the farm's total acreage.
You enquire as to whether the net income referred to item 3 above would be considered farming income. Based upon your review of Interpretation Bulletin numbers IT-206R (Separate Businesses), and IT-433R (Farming or Fishing - Use of Cash Method), it is your opinion that this net income from the sale of electricity should be considered a separate business and not part of the farming operation.
OUR COMMENTS
Written confirmation of the 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 submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency.
The FIT Program
It is our understanding that the FIT Program, which was introduced pursuant to Ontario's Green Energy Act, 2009, is designed to encourage the development of renewable energy projects in Ontario that generate more than 10 kilowatts of electricity. The microFIT Program is a stream of the FIT Program and is intended to encourage the development of "microscale" renewable energy projects which are described as very small renewable power projects that generate 10 kilowatts (kW) or less of electricity.
To qualify under the each of the FIT or microFIT Program, applicants must ensure that the project meets certain technical requirements, must be willing to make necessary investments in their facilities, and must bear the costs of connection to the electrical distribution system and metering as well as certain ongoing costs of operation and maintenance.
In addition, based on our understanding of the terms of each Program, all of the energy generated from the renewable energy project is sold to the Provincial power grid, regardless of whether such electricity is consumed by the participant. In this regard, a participant's sale of electricity to the power grid is determined by a separate meter from the participant's consumption of electricity. Accordingly, it is our view that the sale of electricity to the power grid is a separate transaction from the participant's consumption of electricity.
Income from a source
Based on our understanding of the terms and conditions of each of the FIT and microFIT Programs, it is our view that the income earned under the terms of the Contract would generally be income from a source that is a business or property for the participants of the programs, subject to section 3 of the Income Tax Act (the "Act"), provided there is a reasonable expectation of profit. The determination of whether a source of income is considered business or property income is generally a question of fact that can only be made on a case by case basis.
Farming
Pursuant to its definition in subsection 248(1) of the Act, "farming" includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising poultry, fur farming, dairy farming, fruit growing and the keeping of bees. However, this list is not exhaustive and the courts have considered that the word "farming" also includes tree farming, the operation of a wild game reserve and a mechanical hatching operation where eggs are acquired, hatched in incubators and the chicks sold within a few days of hatching. Generally, farming involves all aspects of commercial production of crop, including natural growth, but does not include the processing of goods. In this regard, it is our view that the sale of electricity in the scenario described above would not be considered a farming activity.
In addition, the CRA will generally consider income from certain activities that, by themselves would be non-farming activities, to be income from a farming business if the activities are incidental to the taxpayer's farming operations and the income generated by these activities is not material in relation to the taxpayer's farming revenue. The expression "incidental" is not defined in the Act, but implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether a particular activity is incidental to another would include the income generated and the capital or labour invested in each activity. When these factors are considered in the context of the FIT / microFIT Programs, it is our view that the income under the scenario described above would not be considered incidental to a farming business.
Capital cost allowance ("CCA")
By virtue of paragraph 1102(1)(c) of the Income Tax Regulations (the "Regulations"), only property that was acquired by a taxpayer for an income earning purpose would be eligible for CCA and included in the Classes described in Schedule II to the Regulations ("Schedule II"). Where a taxpayer cannot be considered to have acquired a particular property for the purpose of earning income, the property would not be eligible for inclusion in any CCA class.
Where the income earning requirement is met, fixed location photovoltaic equipment (e.g. a solar pv system) acquired after February 22, 2005 and before 2020, not included in another CCA class and that is used by a taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy may qualify for inclusion under paragraph (b) of Class 43.2. Acquisitions of such property on or before February 22, 2005 would qualify for inclusion in Class 43.1 by virtue of subparagraph (d)(vi) of that Class.
Components of a solar pv system that qualify for inclusion in Class 43.2 / Class 43.1 would generally include solar cells or modules and related equipment, including:
(a) inverters, control, conditioning and battery storage equipment (designed to store electrical energy),
(b) support structures, and
(c) transmission equipment up to the interface with either the distribution system or the local utility.
Examples of assets that may be part of a solar pv system but would not be eligible for inclusion in Class 43.2 / Class 43.1 are buildings or parts of a building (other than a solar cell or module that is integrated into a building), electrical distribution equipment, and auxiliary electrical generating equipment.
In addition, for any property to be eligible for inclusion in Class 43.2 or Class 43.1, the property must:
- be situated in Canada; and
- not have been used for any purpose before the taxpayer acquired the property.
Property included in Class 43.2 is eligible for a CCA deduction rate of 50 percent, while property included in Class 43.1 is eligible for a CCA deduction rate of 30 percent, each on the declining balance basis. However, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Act, CCA for a Class 43.2 or 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 of acquisition is subject to a limitation of 50 percent of the CCA otherwise deductible in that first year as required by subsection 1100(2) of the Regulations. Where a depreciable property is used for both personal and business use, CCA can only be claimed on the portion or percentage of the capital cost that is used for business purposes.
Limitation on CCA
The specified energy property rules found in subsections 1100(24) to (29) of the Regulations may apply to restrict the amount of CCA that may be claimed for property included in Class 43.1 or 43.2. Where a depreciable property is specified energy property, CCA cannot be deducted to the extent that it would create or increase a loss from all such property owned by the taxpayer.
The CCA deduction restriction would not apply:
(a) where it is expected that more than 50% of the energy produced by the Class 43.1 / 43.2 property is to be used or consumed in earning income from either
- another business of the owner carried on in Canada (not including the business of selling the energy generated by the particular property); or
- another property operated in Canada by the owner of the property;
(b) to certain leasing situations where certain conditions are met; or
(c) to certain corporations (and partnerships each member of which was an eligible corporation) whose principal business is:
(i) manufacturing or processing,
(ii) mining, or
(iii) the sale, distribution, or production of energy.
Where a taxpayer who is not a corporation or partnership described in paragraph (c) above, acquires a Class 43.1 or 43.2 property primarily to generate electrical energy for sale and not to be consumed in the taxpayer's business, the property will be a "specified energy property" for purposes of subsection 1100(24) of the Regulations and CCA on that property can not be deducted to the extent that it would create or increase a loss from all specified energy property owned by the taxpayer. For example, where a taxpayer who operates a farming business acquires a Class 43.2 property primarily to participate in the microFIT program operated by the OPA, rather than for use in the taxpayer's farming business, CCA on the property would not be available to be deducted against the taxpayer's income from other sources, including the farming business.
However, where a taxpayer acquires a solar pv system with the intention of using more than 50% of the electrical energy produced by the solar pv system for the purpose of earning income from a farm business in Canada and participates in the FIT or microFIT Programs, the solar pv system would not generally be considered a "specified energy property". However, such a determination is a question of fact that can only be made on a case by case basis.
The foregoing comments represent our general views with respect to the subject matter of your letter and, in accordance with Information Circular 70-6R5, are not binding on the Canada Revenue Agency.
Yours truly,
Fiona Harrison
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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