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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: 1. Whether an active solar system is eligible for inclusion in Class 43.1 2.Whether a cogeneration system installed in a greenhouse is eligible for inclusion in Class 43.1
Position: 1. No. 2. Yes.
Reasons: 1. The purpose of the active solar system is to meet space heating needs of a greenhouse. Class 43.1 states that solar heat energy captured by active solar systems be used directly in industrial process. CCRA does not consider greenhouse space heating, or space heating in general, to be an industrial process. Consequently, the active solar system installed by the Company does not qualify for Class 43.1.
2. Each of the four micro-turbine units and the eligible service connections can be included in Class 43.1 by virtue of meeting the requirements of paragraphs (a), (b), and (c) of Class 43.1.
2002-018095
XXXXXXXXXX David Shugar
(613) 957-2134
January 24, 2003
Dear XXXXXXXXXX:
Re: Eligibility for Class 43.1
We are writing in response to your correspondence of March 5, 2002, to Natural Resources Canada (NRCan), wherein you requested their views regarding the eligibility for Class 43.1, of an active solar system and a cogeneration system installed in XXXXXXXXXX (the "Company's") greenhouse at XXXXXXXXXX. A detailed description of each system was provided to NRCan by the Company.
For the purpose of determining whether a property is eligible for inclusion in Class 43.1 the Technical Guide to Class 43.1 (the "Technical Guide") as published by NRCan applies conclusively with respect to engineering and scientific matters. In making our determination whether a property meets the requirements for inclusion Class 43.1, Canada Customs and Revenue Agency ("CCRA") consults with NRCan, who have expertise regarding technical matters. NRCan has provided us with their views on the eligibility of the active solar system and the cogeneration system.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Active Solar System
The Company's active solar system closely resembles the horizontal-loop ground source heat pump described in the Technical Guide. The system is comprised of XXXXXXXXXX heat pumps of XXXXXXXXXX ton refrigeration capacity, and various other components. The system transfers heat from water in an outdoor solar pond to a hot-water heating system inside a greenhouse. In order to be included in Class 43.1, the Technical Guide and the requirements of Class 43.1 both stipulate that the solar heat energy captured by active solar systems be used directly in an industrial process. Subparagraph (d)(i) of Class 43.1 includes property that is:
"active solar heating equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of heating a liquid or gas used directly in an industrial process, ...."
The term "industrial process" generally means an operation in which goods are manufactured or processed. CCRA does not consider greenhouse space heating, or space heating in general, to be an industrial process. Therefore, in our view, the active solar heating equipment installed by the Company does not qualify for Class 43.1.
Cogeneration System
The cogeneration system uses XXXXXXXXXX natural gas burning, micro-turbine units of 70 kW electrical-generating capacity each to generate electricity and to heat water. Each micro-turbine cogeneration unit is similar in function to the natural gas fired turbine system in the Technical Guide. NRCan has determined that each of the micro-turbines is a cogeneration system. The micro-turbines are only operated when heat is required in the greenhouse. The hot water produced is circulated in the primary hot water heating system of the greenhouse to provide part of the space heating requirements. The electricity generated is used to power grow lights and ancillary equipment in the greenhouse. Electricity generated in excess of the greenhouse operating requirements may be sold to the local electrical grid. Each system has a heat rate on an annual basis not exceeding 6,000 BTU per kilowatt-hour.
To function as a cogeneration system, each micro-turbine requires a connection to the gas supply, electrical, primary heating and control systems of the greenhouse. With regard to the electrical connection, the cost of the electrical components from the electrical output terminals of each micro-turbine up to and including the utility generator disconnect switch is an eligible cost under Class 43.1. With regard to the control system, subparagraph (a)(iv) of Class 43.1 stipulates that controls that are ancillary to the electrical and heat generation equipment are eligible. In our view, the cost of the programmable logic control required to coordinate the operation of the micro-turbine units and interface them to the existing greenhouse climate control system is an eligible cost under Class 43.1.
In our view, each of the four micro-turbine units and the above connections can be included in Class 43.1 by virtue of meeting the requirements of paragraphs (a), (b), and (c) of Class 43.1.
With regard to the heat distribution system and the cost of buildings and structures that support and house the micro-turbine units, the postamble of paragraph (a) of Class 43.1 describes property that cannot be included in the class under that paragraph, namely:
".... buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), transmission equipment, distribution equipment, fuel storage facilities and fuel handling equipment,"
Since distribution equipment is specifically excluded, in our view, none of the components of the heat distribution system is eligible for inclusion in Class 43.1. The costs of the XXXXXXXXXX concrete platform, sound barriers and the shelter roof are not eligible for Class 43.1 because they are 'buildings or other structures'.
With regard to the natural gas connection, the gas main to the greenhouse does not only serve the micro-turbine units, and the system boundary for the gas connection is where the gas enters the micro-turbine units. Therefore, in our view, none of the costs of the gas supply connections are eligible for Class 43.1.
We trust these comments will be of assistance.
Yours very truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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