8 September 2006 External T.I. 2006-0195841E5 - Capital cost allowance - Class 43.1

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 wind turbine purchased to generate electricity and participate in the Ontario net metering program is eligible for inclusion in Class 43.1 and/or Class 43.2

Position: depends on the particular facts

Reasons: legislation

							2006-019584
XXXXXXXXXX 						T. Harris
(613) 957-2114
September 8, 2006

Dear XXXXXXXXXX:

Re: Capital Cost Allowance - Wind Turbines

This is in response to your letter of July 7, 2006 wherein you requested information relating to the rate of capital cost allowance ("CCA") that may be claimed with respect to a wind turbine and any limitations on a taxpayer's ability to deduct CCA in computing income for tax purposes.

XXXXXXXXXX In particular, you asked whether a home owner or a farmer that purchased a wind turbine to participate in the "Net Metering" program of the Ontario government would be entitled to a deduction for CCA in respect of the capital cost of the wind turbine.

We understand that Ontario's net metering program is available to any Ontario electrical customer who generates electricity primarily for the participant's own use from a renewable source, including wind energy, using equipment having a maximum cumulative output not exceeding 500 kilowatts. All electrical energy produced is sent to the provincial electrical grid for a credit toward the participant's energy costs relating to the electrical energy consumed by the participant. If the power supplied to the grid is more than what is taken from the grid, the participant will receive a credit that can be carried forward for up to one year to offset future energy costs. A participant will not receive any payment other than the credits reflected on its energy invoices.

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. 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.

By virtue of paragraph 1102(1)(c) of the Income Tax Regulations (the "Regulations"), the classes of property described in Schedule II to the Regulations ("Schedule II") only include property that was acquired by the taxpayer for the purpose of earning income. Provided that this requirement is satisfied, a wind energy conversion system, including a wind turbine, electrical generating equipment and related equipment, that is used primarily to generate electrical energy may be included in either Class 43.1 or Class 43.2 of Schedule II provided that the other requirements of those classes are met. Generally the requirements to be met for both classes are the same, except that property included in Class 43.2 must be acquired after February 22, 2005 and before 2012 and cannot have been included in any other class by any taxpayer before it was acquired.

In order for any property to be eligible for inclusion in Class 43.1 or 43.2 of Schedule II, 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.

Although 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, may be eligible for inclusion in Class 43.1, it will not be eligible for Class 43.2.

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.

CCA rate

Classes 43.1 and 43.2 provide for a CCA rate of 30% and 50%, respectively, calculated on a declining balance basis. However, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Income Tax Act, CCA for a Class 43.1 or Class 43.2 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 is subject to the 50% rule found in subsection 1100(2) of the Regulations. Consequently, the rate of CCA in the year such property becomes available for use and for subsequent years, computed on a declining balance basis, is:

			Year property becomes 		Subsequent
			available for use			Years        

Class 43.1			15%				30%

Class 43.2			25%				50%

Restriction 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 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. This limitation on CCA that may be claimed will not apply where any of the following conditions are met:

i) the owner of the property is a principal business corporation (as described below) or a partnership each member of which is a principal business corporation,

ii) the property is acquired to be used by the owner primarily (i.e., more than 50%) 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 includes the situation where the Class 43.1 property is used primarily to generate electricity for the owner's own existing business (e.g., farming), or

iii) the property is leased by its owner in the ordinary course of carrying on business in Canada and certain conditions relating to the business carried on by the lessor and the lessee are met.

For these purposes, a principal business corporation ("PBC") means a corporation whose principal business throughout the year was

a) manufacturing or processing,

b) mining, or

c) the sale, distribution, or production of electricity, natural gas, oil, heat, or any other form of energy or potential energy.

If none of the conditions listed above is met (e.g., where a taxpayer that is not a PBC acquires a Class 43.1 or 43.2 property primarily to generate electrical energy for sale), the property will be considered "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 doing so would create or increase a loss from all such property owned by the taxpayer.

With respect to your query concerning the Ontario net metering program, it does not appear that a homeowner who participates in the program could be considered to have acquired the property for the purpose of earning income such that the property would not be eligible for inclusion in any CCA class. In the case of a small business that has acquired an eligible wind turbine primarily to generate electricity for use in its own business, such wind turbine should be eligible for inclusion in either Class 43.1 or 43.2 provided that the requirements for inclusion in that class, as described above, have been met.

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

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch