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 use of a ground source heat pump to produce energy to heat residential units is use in an industrial process?
Position: No.
Reasons: An "industrial process" generally means an operation in which goods are manufactured or processed.
2003-005102
XXXXXXXXXX Marc Edelson, LL.B.
(613) 957-2123
February 16, 2004
Dear XXXXXXXXXX:
Re: Class 43.1 - Ground Source Heat Pump Utility
We are writing in reply to your letter of November 28, 2003 wherein you asked us to confirm that certain ground source heating / cooling equipment would be included in Class 43.1 of Schedule II to the Regulations to the Income Tax Act (Canada) (all further statutory references in this letter are to the Act).
The situation in your letter may be briefly described as follows:
Your company owns ground source heating / cooling systems that are installed in multi-unit residential dwellings and in residential subdivisions. The heat energy produced by the heating / cooling system is sold to tenants.
Your question is whether the ground source heating / cooling system qualifies as a property described in Class 43.1. In this regard, you have suggested that the use of a ground source heating / cooling system in the production of heat for sale to third parties is an industrial process.
Your request appears to relate to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to your local tax services office. We can, however, provide the following general comments.
Property described in Class 43.1 of Schedule II to the Regulations includes various depreciable capital properties that are used to recover heat or to generate heat energy. The descriptions of each of the types of qualifying properties are quite detailed and specific. In addition, there are conditions regarding the location of the equipment and their use that must be satisfied.
Assuming that the property you described constitutes "active solar heating equipment" the property may be included in Class 43.1 by reason of paragraph (d)(i). Certain ground source heat pumps which use the ground as the solar energy collector qualify as active solar heating systems. However, without knowing more about the nature of the equipment and systems you own and install we are unable to confirm to you whether your equipment would, in fact, be active solar heating equipment. In addition, active solar heating equipment is only eligible for inclusion in Class 43.1 if the equipment is 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.
In this respect, we consider that the term "industrial process" generally means an operation in which goods are manufactured or processed (see our Document
2002-0180955, dated January 24, 2003). Also, at pages 11 and 12 of Section 1 of the Technical Guide to Canadian Renewable and Conservation Expenses, published by the Department of Natural Resources (November, 1994), they state:
"Active solar systems used to heat a gas or liquid not directly connected with an industrial process, such as building services (e.g. heating, ventilation or domestic hot water) ... are ineligible."
In the circumstances described in your letter, we would not consider that your ground source heating / cooling equipment is being used in an industrial process. Accordingly, based on information in your letter, the ground source heating / cooling equipment does not appear to qualify for inclusion in Class 43.1.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.
Yours truly,
Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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