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: Does a Ground Source Heat Pump ("GSHP") system, when designed for residential use, meet the definition of an exempt property pursuant to paragraph 1100(1.13)(a) of the Income Tax Regulations?
Position: Yes
Reasons: The internal distribution system would be exempt property pursuant to Regulation 1100(1.13)(a)(vi) and, when designed for use by a self contained domestic establishment, the in-ground piping and heat exchanger main component parts of a GSHP system, would be exempt property pursuant to Regulation 1100(1.13)(a)(ii). Therefore the specified leasing property CCA restriction would not apply to the GSHP system described by the taxpayer.
XXXXXXXXXX 2008-028469
Lori Carruthers, CA
May 4, 2009
Dear XXXXXXXXXX :
Re: Specified Leasing Property - Exempt Property
This is in reply to your facsimile of June 26, 2008, wherein you requested a technical interpretation of subparagraph 1100(1.13)(a)(ii) of the Income Tax Regulations (the "Regulations") as it relates to a Ground Source Heat Pump ("GSHP") System. Regulation 1100(1.13)(a) defines exempt property for purposes of the specified leasing property rules and it is inferred from your submission that the GSHP system you described would be leased to residential home owners for the purpose of home heating.
Our Comments
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular IC-70-6R5. As stated in paragraph 22 of IC-70-6R5, technical interpretations are not advance tax rulings and, accordingly, are not binding on the Canada Revenue Agency (the "CRA"). The following comments are, therefore, of a general nature only.
Based on a review of the Natural Resources Canada documentation you provided with your submission, a typical GSHP system is made up of three main component parts: an internal distribution system, in-ground piping, and a heat exchanger. The warmth available in the ground surrounding the home heats fluid in the in-ground piping. The fluid is moved to the heat exchanger where the warmth is extracted and distributed throughout the house via the internal distribution system.
The internal distribution system, in our view, would be Class 1 property and, where the in-ground piping and heat exchanger main component parts are used by the owner for the purpose of gaining or producing income from a business, that being the business of leasing property, and the requirements of paragraph 43.1(e)(iii) of the Regulations are met, in our view, they would be Class 43.2 property pursuant to the recent amendment to Class 43.1(d)(i)(A)(II) which is applicable to property acquired on or after March 19, 2007.
Specified leasing property is defined in Regulation 1100(1.11) to be leasing property (other than exempt property as defined in Regulation 1100(1.13)), which is subject to an arm's length lease of a term of more than one year, and which has a value in excess of $25,000 at the time the lease is entered into.
Leasing property is defined in Regulation 1100(17) to be most depreciable property owned by a taxpayer used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. Exceptions in the leasing property definition are noted in paragraphs 1100(17)(a) - (c) of the Regulations and the post-amble to Regulation 1100(17). The main component parts of a GSHP system meet none of these exceptions and, thus, where a GSHP system is leased, all three main component parts, in our view, would be leasing property pursuant to Regulation 1100(17). Therefore, unless the GSHP system's main component parts meet the definition of exempt property in Regulation 1100(1.13), they would be specified leasing properties.
Pursuant to Regulation 1100(1.13)(a), for purposes of section 1100, exempt property includes, inter alia:
"(ii) furniture, appliances, television receivers, radio receivers, telephones, furnaces, hot-water heaters and other similar properties, designed for residential use,"
"(vi) a building or part thereof included in Class 1, 3, 6, 20, 31 or 32 in Schedule II (including component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators) other than a building or part thereof leased primarily to a lessee that is
(A) a person who is exempt from tax by reason of section 149 of the Act,
(B) a person who uses the building in the course of carrying on a business the income from which is exempt from tax under Part I of the Act by reason of any provision of the Act, or
(C) a Canadian government, municipality or other Canadian public authority,
who owned the building or part thereof at any time before the commencement of the lease (other than at any time during a period ending not later than one year after the later of the date the construction of the building or part thereof was completed and the date the building or part thereof was acquired by the lessee),"
The internal distribution system, in our view, would be exempt property pursuant to Regulation 1100(1.13)(a)(vi) and, when designed for use by a self-contained domestic establishment, the in-ground piping and heat exchanger main component parts of a GSHP system, in our view, would be exempt property pursuant to Regulation 1100(1.13)(a)(ii). Therefore, in our view, the specified leasing property CCA restriction would not apply to the GSHP system you described.
We trust that our comments will be of assistance.
Yours truly,
R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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