15 January 2009 External T.I. 2008-0301331E5 - Solar Water heater

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: 1. Will solar water heater be eligible for class 43.2 on business use portion where taxpayer receives a grant on personal/residential use.

Position: 2. Depends on facts-- but generally yes

Reasons: 2. as long as all the requirements are met & taxpayer claims CCA on cost net of grant per 13(7.1)

XXXXXXXXXX 								2008-030133
									Lena Holloway
January 15, 2009

Dear XXXXXXXXXX :

This is in response to your electronic mail of November 21, 2008, wherein you requested our comments in respect of class 43.2 of Schedule II of the Income Tax Regulations (the "Regulations").

Your letter explained that you work with a small renewable energy company which provides small scale wind and solar systems to homeowners and small businesses and that you have a potential customer who runs a small bed and breakfast/spa out of her home. You have advised that she wishes to acquire a solar hot water heating system to reduce energy costs for her home and business. Specifically you had asked if she is entitled to classify the solar hot water heating system under class 43.2 which has a capital cost allowance ("CCA") rate of 50% if she also receives a rebate for the same solar water heater under the ecoEnergy thermal incentive for homeowners. That is, given that she is eligible for an incentive available to residential property owners, you ask if she can also avail herself of the class 43.2 write-off with respect to the same hot water heating system for the business use portion of the equipment.

Our Comments

Written confirmation of the 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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency. Note that we cannot comment on whether the ecoEnergy program that your client has applied for has restrictions on the use of the equipment in determining eligibility for assistance. In particular we have noted from the EcoAction website (http://www.ecoaction.gc.ca/ecoenergy-ecoenergie/heat-chauffage/index-eng.cfm) that different incentives are offered for the residential versus the commercial consumer. For the purpose of this letter we shall assume that your client's eligibility for the residential grant is not affected by the fact that part of her residence is used in a business.

By virtue of paragraph 1102(1)(c) of the Regulations, the classes of property described in Schedule II to the Regulations only include property that was acquired by the taxpayer for the purpose of earning income. Where a person cannot be considered to have acquired a particular property for the purpose of earning income (which is a question of fact), the property would not be eligible for inclusion in any CCA class. The February 26, 2008 Budget Measures introduced draft amendments to the Regulations that would see a solar water heater added to class 43.1 in paragraph (d) as follows:

"Subparagraph (d)(i) of Class 43.1 in Schedule II is replaced by the following:

(i) property that meets the following conditions:

(A) it is used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of heating an actively circulated liquid or gas and is

(I) active solar heating equipment, including such equipment that consists of above ground solar collectors, solar energy conversion equipment, solar water heaters, energy storage equipment, control equipment and equipment designed to interface solar heating equipment with other heating equipment"

Provided that this requirement is satisfied, and presuming this legislation is enacted in substantially the same format as it currently appears in the draft legislation, a solar water heater may qualify for inclusion under paragraph (d) of Class 43.1 if it otherwise meets the requirements of a particular subparagraph thereto. Property that would otherwise be included in Class 43.1 because of paragraph (d) of that class may also be included in Class 43.2 of Schedule II provided that the other requirements of that class 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.

The February 26, 2008 Draft Regulations will amend Class 43.2 to extend its application to eligible equipment acquired before 2020.

Classes 43.1 and 43.2

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.

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.

Eligibility of the property for inclusion in Class 43.1 or 43.2 must generally be determined annually based on the use of the property in the particular taxation year. If, in a particular taxation year, a property included in Class 43.1 or 43.2 no longer satisfies the conditions for inclusion therein, subsection 13(5) of the Income Tax Act (the "Act") requires that the undepreciated capital cost of the property be transferred from Class 43.1 or 43.2, as the case may be, to the class in which the property would otherwise have been included as of the commencement of the particular taxation year. Similarly, if in a subsequent year, the property again satisfies the requirements for inclusion in Class 43.1 or 43.2, subsection 13(5) would apply to reclassify the property into the particular class as of the commencement of that year. For more detailed comments concerning the application of subsection 13(5), refer to the current version of Interpretation Bulletin IT-190, Capital Cost Allowance - Transferred and Misclassified Property.

Property included in Class 43.2 is eligible for a CCA rate of 50 per cent, while property included in Class 43.1 is eligible for a CCA rate of 30 per cent. However, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the 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 which would effectively reduce the write-off rate to one half the eligible amount in the first year of use. Where a depreciable property is used for both personal and business use, CCA can only be claimed on the portion or percentage of the capital cost that is used for business purposes. Subsection 13(7.1) of the Act provides that the capital cost of depreciable property will be reduced where the taxpayer has received, or is entitled to receive, assistance from a government, municipality or other public authority in respect of, or for the acquisition of, depreciable property. Therefore, in the scenario you have presented, CCA could be taken on the business use portion of the total cost of the solar water heater reduced by the amount of any grant received.

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