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: Can a taxpayer claim CCA on the cost of depreciable property in respect of rooftop solar energy panels on a principal residence that are used to generate electricity that is sold to the Ontario Power Authority pursuant to the Feed-In Tariff program?
Position: Yes, provided that 1) the panels were acquired for an income earning purpose, and 2) the CCA claim does not exceed the income for the year from the sale of energy pursuant to the specified energy property provisions of the Income Tax Regulations.
2009-034388
XXXXXXXXXX Bob Naufal
(613) 957-2097
November 25, 2009
Dear XXXXXXXXXX :
Re: Tax Treatment of Rooftop Solar Electricity Generation Projects
We are writing in response to your e-mail of October 9, 2009 wherein you requested our comments on the tax consequences for homeowners who participate in the Feed-in-Tariff Program (the "FIT Program") that has been introduced by the Province of Ontario under the Green Energy Act, 2009. In particular, you enquire as to whether the homeowners are eligible to claim capital cost allowance ("CCA") in respect of the cost of property acquired for their "micro" rooftop solar electricity generation projects.
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 of an advance income tax ruling request, as described in Information Circular 70-6R5, dated May 17, 2002. The review of fact situations involving specific taxpayers and transactions or events that have already taken place is the responsibility of the local tax services office where the taxpayer resides and it is not the practice of the Canada Revenue Agency (the "Agency") to comment on such situations when the identity of the taxpayers is unknown. We can, however, provide the following general comments which we hope will be of assistance to you.
The FIT Program
It is our understanding that the FIT Program is designed to encourage the development of renewable energy projects in Ontario. The microFIT Program is a stream of the FIT Program and is intended to encourage the development of "microscale" renewable energy projects which are described as very small renewable power projects that generate 10 kilowatts (kW) or less of electricity. The specific details and limitations of the microFIT Program for small electricity generation projects are available at the following website: http://microfit.powerauthority.on.ca/pdf/microFIT-Program-Overview.pdf.
Based on our understanding of the microFIT Program, a renewable energy project must satisfy certain eligibility criteria as follows:
- The project must have a capacity that does not exceed 10 kW and must be located in Ontario;
- The homeowner must work with a local distribution company to ensure that the project is connected to the electricity grid;
- The project must have a separate meter so that the electricity produced by the project can be accurately measured.
Under the microFIT Program, the homeowner will be paid a guaranteed price of 80.2 cents per kWh over a 20 year term for the electricity produced from the project and delivered to the electricity grid. The local distribution company will create a separate account, the "generator account", for the project in addition to the "customer account" that is created for the home.
To qualify under the microFIT Program, applicants must ensure that the project meets certain technical requirements, must be willing to make necessary investments in their facilities, and must bear the costs of connection to the electrical distribution system and metering as well as certain ongoing costs of operation and maintenance. Based on our understanding of the terms of the microFIT Program, all of the energy generated from the renewable energy project is sold to the Provincial power grid. Moreover, the participant's sale of electricity to the grid is a separate transaction from the participant's personal consumption of electricity.
Capital cost allowance
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. We are not providing any comments as to whether these particular individuals who propose to participate in the microFIT Program will meet the requirements under paragraph 1102(1)(c) of the Regulations. Where a person cannot be considered to have acquired a particular property for the purpose of earning income, the property would not be eligible for inclusion in any CCA class.
Where the income earning requirement is met, fixed location photovoltaic equipment that is used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy may qualify for inclusion under subparagraph (d)(vi) of Class 43.1 of Schedule II of the Regulations. The requirements for inclusion in Class 43.2 are generally the same as for Class 43.1 provided that the property was acquired after February 22, 2005 and before 2020, and was not included in any other class by any taxpayer before it was acquired.
Property included in Class 43.1 is eligible for a CCA rate of 30 percent, while property included in Class 43.2 is eligible for a CCA rate of 50 percent. 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 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 of acquisition is subject to a limitation of 50 percent of the CCA otherwise deductible in that first year as required by subsection 1100(2) of the Regulations. 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.
Restrictions on CCA
Subsections 1100(24) to (29) of the Regulations restrict the amount of CCA that may be claimed on property that is "specified energy property". Generally, "specified energy property" includes inter alia property that is described in Class 43.1 or 43.2. Under subsection 1100(24) of the Regulations, the amount of CCA that may be claimed by a taxpayer in a taxation year for a specified energy property is limited to the lesser of:
- the amount of CCA otherwise determined for such property, or
- the taxpayer's net income (after deducting all expenses, other than CCA, related to earning such income) from all specified energy property of the taxpayer.
As a result of this restriction, CCA cannot be deducted to the extent that it would create or increase a loss from all specified energy property owned by the taxpayer.
However, where Class 43.1 or 43.2 property is acquired to be used by the owner primarily for the purpose of gaining or producing income from a business carried on in Canada (other than the business of selling the energy produced by the property) or from another property situated in Canada (e.g., rental property), the CCA restriction does not apply. In addition, the CCA restriction would not apply to a corporation or a partnership each member of which is a corporation whose principal business is
(i) manufacturing or processing,
(ii) mining, or
(iii) the sale, distribution, or production of electricity, natural gas, oil, heat, or any other form of energy or potential energy.
The determination of whether a particular property is a specified energy property can only be made following a review of the facts of a particular situation. It is our view that participants who acquire rooftop photovoltaic solar panels under the FIT Program or the microFIT Program acquired such property primarily to generate energy for sale from the solar panels. Accordingly, the rooftop photovoltaic solar panels would be considered a "specified energy property". Therefore, pursuant to subsection 1100(24) of the Regulations, CCA on the rooftop photovoltaic solar panels would be restricted in the manner described above.
We trust that our comments, provided in accordance with paragraph 22 of Information Circular 70-6R5, will be of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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