4 February 2008 External T.I. 2007-0261111E5 - geoexchange equipment

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: CCA classification of geoexchange equipment that is used to provide space heating or cooling

Position: general comments provided

Reasons: classification depends on facts of a given situation

								2007-026111
XXXXXXXXXX 							T. Harris
(613) 957-2114
February 4, 2008

Dear XXXXXXXXXX ,

Re: Eligibility of Geoexchange Equipment as Property of Class 43.1

This is in response to your electronic message of November 29, 2007 wherein you requested clarification concerning the proper capital cost allowance class for geoexchange or ground source heat pump systems acquired by a commercial enterprise for purposes other than for use in an industrial process or a greenhouse.

It is our understanding that a geoexchange system involves a heat pump that extracts heat from the ground, compresses it and then distributes it to provide space heating or cooling for residential or commercial buildings. The benefit of these systems is that the heat extracted from the ground substantially exceeds the energy that is required to extract and distribute it.

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.

None of the classes of depreciable property described in Schedule II of the Income Tax Regulations (the "Regulations") refers specifically to equipment relating to a geoexchange or ground source heat pump system. Consequently, the proper classification of such property for capital cost allowance purposes will generally depend on the facts of a particular situation. It should, however, be noted that by virtue of paragraph 1102(1)(c) of 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.

To the extent that a ground source heat pump system may be considered a component part of a building, it may be included in Class 1 (4% capital cost allowance rate) pursuant to paragraph (q) thereof, which describes property that is a building or other structure, or a part of it, including any component parts such as air-conditioning equipment and heating equipment.

As described in Section 1.3.2 of the Class 43.1 Technical Guide and Technical Guide to Canadian Renewable and Conservation Expenses published by the Department of Natural Resources, certain ground source heat pumps that use the ground as the solar energy collector may qualify as active solar heating equipment and may be included in Class 43.1 (30% capital cost allowance rate) by reason of paragraph (d)(i) thereof provided that

(i) the equipment is not an integral part of a building;

(ii) 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 or in a greenhouse, and

(iii) the other requirements described in paragraph (e) of Class 43.1 are met.

Furthermore, a ground source heat pump that is acquired after February 22, 2005 and before 2012 that would otherwise be included in Class 43.1 may qualify for Class 43.2, having a 50% capital cost allowance rate. The 2007 Federal Budget proposes to extend eligibility for Class 43.2 to assets acquired before 2020.

It should also be noted that the 2007 Federal Budget proposes to extend eligibility for certain active solar systems under Class 43.1 and Class 43.2 to include other commercial and residential applications, such as space heating of commercial and apartment buildings, and hot water heating for laundries, car washes and hotels (but not including the heating of water for a swimming pool). The 2007 Federal Budget also proposes to clarify that certain active solar equipment that may be treated as part of a building for capital cost allowance purposes (e.g. solar collectors that are integrated into the building) may qualify for inclusion in Class 43.1 and Class 43.2. These proposals, when promulgated, will apply to eligible assets acquired on or after March 19, 2007. However, since the 2007 Federal Budget proposal refers to active solar systems involving an above-ground solar collector, it does not appear that these proposals were intended to apply to geoexchange equipment. Any uncertainty relating to their possible application to geoexchange equipment cannot be resolved until the proposed regulations are released.

The equipment relating to a ground source heat pump system that is not described in either Class 43.1 or 43.2 may be eligible for inclusion in Class 17 (8% capital cost allowance rate) by virtue of subparagraph (a.1)(ii) thereof if:

(i) it is acquired after February 27, 2000 and has not been used for any purpose before February 28, 2000 and

(ii) it is production and distribution equipment of a distributor of water or steam used for heating or cooling (including, for this purpose, pipe used to collect or distribute an energy transfer medium but not including equipment or pipe used to distribute water that is for consumption, disposal or treatment).

Finally, if the equipment relating to a ground source heat pump system is not described in any of Classes 1, 43.1, 43.2 or 17 as described above, it should be included in Class 8 (20% capital cost allowance rate) pursuant to paragraph (i) of that class, which includes tangible capital property that is not included in any other class in Schedule II (other than certain property that is not relevant to your enquiry).

You have also requested advice as to how capital expenditures related to solar energy conversion equipment (i.e. heat pump, compressor) should be prorated where some of the equipment that is part of the system is eligible for inclusion in Class 43.1 or 43.2 (i.e. above ground solar energy collection equipment) and other equipment that is part of the system may not be eligible for inclusion in those classes (i.e. below-ground solar energy collection equipment).

We regret that we are unable to provide any definitive comments on this issue, as the determination will depend on the facts of a specific situation. For example, paragraph (d)(i) of Class 43.1 currently requires that the eligible equipment be used primarily for the purpose of heating a liquid or gas for use in an eligible activity. For these purposes, the word "primarily" means more than 50%. Consequently, if more than 50% of the heat energy produced by the shared solar energy conversion equipment is used in an eligible activity, such as an industrial process or a greenhouse, the full cost of such equipment may be eligible for inclusion in Class 43.1 or 43.2, as the case may be.

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