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 depreciable property of a proposed small hydro installation is eligible for inclusion in Class 43.1
Position: general comments provided
Reasons: practice in paragraph 22 of IC 70-6R5
2005-016234
XXXXXXXXXX T. Harris
(613) 957-2114
January 31, 2006
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Your request of November 8, 2005 for an opinion on whether a small-scale hydroelectric installation to be developed by your company will be eligible for inclusion in Class 43.1 of Schedule II of the Income Tax Regulations (the "Regulations") sent to Natural Resources Canada ("NRCan") has been forwarded to us for reply. This proposed installation will be located on XXXXXXXXXX.
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. A fee is charged for this service. Although, we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
Class 43.1
In order for any property to be eligible for inclusion in Class 43.1, it must:
i) be situated in Canada;
ii) 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
iii) 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).
Pursuant to subsection 1102(21) of the Regulations, the capital cost of any used equipment that qualifies for inclusion in Class 43.1 as described in iii) above cannot exceed the original capital cost of the property to the person from whom the property was acquired. Any excess should be included in the class in which the particular property would have been included if it were not eligible for inclusion in Class 43.1.
A property will not be considered to have been used for any purpose where it is new at the time that it is acquired but has been demonstrated for or tested by a prospective purchaser of that particular piece of equipment. In other words, 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. However, a property that has been used regularly by the vendor for demonstration purposes is considered to have been used by the vendor.
A hydroelectric installation that is acquired after December 10, 2001 and that has a rated capacity not exceeding 50 MW at the hydroelectric installation site will qualify for inclusion in Class 43.1 under clause (d)(ii)(A) of that class.
Schematic EH 1.1 of the Class 43.1 Technical Guide and Technical Guide to Canadian Renewable and Conservation Expenses (CRCE) (the "Technical Guide") which is available from NRCan indicates that the following depreciable property relating to a small-scale hydroelectric facility of a producer of hydroelectric energy may be included in Class 43.1 by virtue of subparagraph (d)(ii) thereof:
a) a dam,
b) an overflow spillway,
c) a gate between the overflow spillway and the surge chamber,
d) a surge chamber to regulate the water flow to the turbine,
e) a penstock to convey water to the powerhouse,
f) a turbine with a generator (including controls and turbine inlet valve/gate),
g) a powerhouse and related ancillary systems,
h) a transmission line up to the interface with the local electrical distribution system or the isolation switch of the local electrical utility system, and
i) a metering station.
In addition, NRCan has advised us that one or more intakes (generally consisting of a support structure, a weir/dam of some sort, screen(s) and gate(s)) to feed the penstock will also be eligible for inclusion in Class 43.1 under this provision.
For greater certainty, property comprising a switchyard, including a utility isolation switch (a disconnect switch located at the point of interconnection with the local electrical distribution line) and other distribution equipment is not eligible for inclusion in Class 43.1. In addition, property otherwise included in Class 10 or 17 (other than certain electrical generating equipment described in subparagraph (a.1)(i) thereof) is not eligible for in subparagraph (d)(ii) of Class 43.1.
It should be noted that the February 23, 2005 federal budget announced that renewable energy generation equipment, including small-scale hydroelectric facilities, that would otherwise be included in Class 43.1 and that is acquired on or after the date of the budget and before 2012 will qualify for proposed new Class 43.2, having a 50% capital cost allowance rate ("CCA"). Should this change be promulgated, any reference to "Class 43.1" in this letter should be read as a reference to "Class 43.1 or Class 43.2".
The specified energy property rules found in subsection 1100(24) of the Regulations may apply to restrict the amount of CCA that may be claimed for property included in Class 43.1. Where a capital asset 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. However, subsection 1100(26) of the Regulations provides, among other things, that the specified energy property rules will not apply to a corporation whose principal business throughout the year was the sale, distribution or production of electrical energy.
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
Legislative Policy and Regulatory Affairs Branch
c.c. Micheline Brown
Engineering, Research and Technical Team
Industrial Programs Division
Office of Energy Efficiency
Natural Resources Canada
580 Booth St., 18th Floor
Ottawa ON K1A 0E4
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