9 February 2005 External T.I. 2005-0113341E5 - photovoltaic system and wind energy

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: tax treatment of a photovoltaic system and a wind energy conservation system to be used to supply electricity to a farming business.

Position: Outlined requirements of Class 43.1 and Reg. 1219 (CRCE)

Reasons: as per legislation

2005-011334
XXXXXXXXXX Catherine Bowen
(613) 957-8284
February 9, 2005

Dear XXXXXXXXXX:

Re: Class 43.1

This is in response to your facsimile dated January 26, 2005 wherein you requested our comments on the income tax treatment of certain renewable energy sources, in particular, a windmill and a photovoltaic system, that would be used to supply electricity to your farming business.

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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Although we cannot provide any comments with respect to your particular fact situation or to any specific asset, the following general comments may be of assistance.

Class 43.1

a) Solar energy

To qualify as a Class 43.1 property, fixed location photovoltaic equipment must be used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy and

? have a peak capacity of not less than 3 kilowatts of electrical output, and

? consist of solar cells, modules or array and related equipment, including:

a. control, conditioning and battery storage equipment,

b. support structures, and

c. transmission equipment up to the interface with either the distribution system or the local utility.

Assets that may be part of a photovoltaic system but are not eligible to be included in Class 43.1 are electrical distribution equipment and facilities, other back-up generating equipment (such as a diesel engine, main switch or power bar), vehicles, telephone equipment, access roads, sidewalks and other assets normally included in Class 10 or 17. Also, operating costs and costs of spare parts inventory are not eligible for inclusion in Class 43.1.

b) Wind energy

To qualify as a Class 43.1 property, a fixed location device that is a wind energy conversion system must be used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy, and must consist of a wind-driven turbine, electrical generating equipment and related equipment, including

? control, conditioning and battery storage equipment,
? support structures,
? a powerhouse complete with other ancillary equipment, and
? transmission equipment up to the interface with either the distribution system or the local utility.

Assets that may form part of a wind energy conversion system but are not eligible to be included in Class 43.1 are electrical distribution equipment and facilities, auxiliary or back-up electrical generating equipment (such as diesel engine, main switch or power bar), vehicles, telephone equipment, access roads, sidewalks and other assets normally included in Class 10 or 17. Also, operating costs and costs of spare parts inventory are not eligible for inclusion in Class 43.1.

c) Other conditions for Class 43.1 property

In addition, for any property to be eligible for inclusion in Class 43.1, it must:

? be situated in Canada;
? be acquired by a taxpayer for use by the taxpayer, or to be leased by the taxpayer to a lessee for use by the lessee, for the purpose of earning income from a business carried on in Canada or from property situated in Canada; and
? not have been used for any purpose before the taxpayer acquired the property (other than for certain used equipment that is depreciable property that was eligible for inclusion in Class 34 or 43.1 of the vendor, remains at the same location as used by the vendor and has been acquired by the taxpayer within five years from the time it became available for use to the vendor).

A property will only be considered not to have been used for any purpose where it is new at the time that it is acquired. New equipment that is demonstrated for or tested by a prospective purchaser of that particular piece of equipment will not normally be considered to have been used for a purpose. However, a property that is used regularly by the vendor for demonstration purposes is considered to have been used by the vendor. Consequently, 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.

CCA for Class 43.1

Class 43.1 provides for a capital cost allowance ("CCA") rate of 30 per cent calculated on a declining balance basis. Any property acquired in the year is subject to the 50% rule found in subsection 1100(2) of the Income Tax Regulations (the "Regulations"). This means that the rate of CCA in the year a Class 43.1 property is acquired or becomes available for use is 15% and then 30% in the subsequent years. In addition, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Income Tax Act (the "Act"), CCA for any Class 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. Note: where a depreciable property is used for both business and personal use, CCA can only be claimed on the portion or percentage of the capital cost that is used for business purposes.

Where Class 43.1 property meets the definition of "specified energy property" in subsection 1100(25) of the Regulations, the amount of CCA that may be claimed on that property is generally limited to the income earned from such property (as per subsection 1100(24) of the Regulations). However, where Class 43.1 property is acquired to be used by the owner primarily for the purpose of gaining or producing income from a business carried on in Canada (other than the business of selling energy produced by the property) or from another property situated in Canada (e.g., rental property), this restriction does not apply. In other words, as long as purchasers of a property that qualifies for inclusion in Class 43.1 are using it in their own businesses, the property will not normally be affected by these rules restricting the amount of CCA that can be claimed.

Canadian renewable and conservation expense

Certain expenses incurred in the pre-production development phase of renewable energy and energy conservation projects, where it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the project would qualify for inclusion in Class 43.1, will meet the definition of "Canadian renewable and conservation expense" ("CRCE") in section 1219(1) of the Regulations if, among other things, they are payable to

? a person or partnership with whom the taxpayer is dealing at arm's length, and
? a Canadian resident or a Canadian partnership (i.e., a partnership all of the members of which are Canadian residents). An exception to this rule is where a taxpayer purchases a test wind turbine for a qualifying project.

Examples of the types of expenses that are eligible for CRCE include:

? the cost of pre-feasibility and feasibility studies of suitable sites;
? costs related to determining the extent, location and quality of energy resources;
? negotiation and site approval costs;
? the cost of constructing a temporary access road to the project site; and
? site preparation costs that are not directly related to the installation of equipment.

Examples of the types of expenses that are not eligible for CRCE include:

? amounts that would otherwise be included in the capital cost of depreciable property including all costs directly associated with the acquisition and installation of the property, except those that are listed above as qualifying as CRCE;
? financing and interest charges;
? administration and management expenses; and
? costs related to the acquisition or use of land as well as the grading and levelling of land, except those that are listed above as qualifying as CRCE.

The determination of whether a particular expense incurred by a taxpayer will qualify for inclusion in CRCE must be made based upon a review of all of the facts relevant to a particular situation. However, where expenses do qualify as CRCE, they are added to a taxpayer's Canadian exploration expense (as per paragraph (g.1) of the definition of "Canadian exploration expense" in subsection 66.1(6) of the Act). They can be deducted entirely in the year they are incurred or carried forward indefinitely and deducted in later years. In the situation where photovoltaic equipment or a wind energy conservation system is installed to supply electricity for a farming business, if there are any expenses that do qualify as CRCE, they are likely to be insignificant.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5. We trust our comments are of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch