24 February 2010 External T.I. 2009-0352781E5 - Class 43.2

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) Whether a ground mount solar tracker is eligible for inclusion in Class 43.2; and 2) whether the specified energy property rules would apply to deny a deduction for CCA in excess of income generated from the sale of electricity

Position: 1) Yes, 2) Yes

Reasons: 1) the solar tracker should qualify as a support structure, 2) legislation

									2009-035278
XXXXXXXXXX 								T. Harris
(613) 957-8284
February 24, 2010

Dear XXXXXXXXXX :

Re: Capital Cost Allowance - Class 43.2

We are writing in response to your facsimile of December 23, 2009, wherein you enquired as to whether a ground mount solar PV tracker would qualify for inclusion in Class 43.2 of Schedule II to the Income Tax Regulations (the "Regulations"). In addition, you have asked whether a farmer may deduct capital cost allowance from the solar tracker to offset income from other sources, including the farming business.

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's tax returns are filed and it is not the practice of the Canada Revenue Agency (the "CRA") 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.

Depreciable Property

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. 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.

Pursuant to paragraph (b) thereof, Class 43.2 includes property acquired after February 22, 2005 and before 2020 that would otherwise be included in Class 43.1 because of paragraph (d) of that class and that has not been included in any other class by any taxpayer before it was acquired.

Classes 43.1 and 43.2

In order for any property to be eligible for inclusion in Class 43.1 and, therefore, Class 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. However, certain used equipment that is depreciable property that

A) was eligible for inclusion in Class 34, 43.1 or 43.2 of the vendor,

B) remains at the same location as used by the vendor, and

C) 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. Used equipment meeting the requirements in B) and C) above may only be included in Class 43.2 if it was included in Class 43.2 by the vendor.

Pursuant to subsections 1102(21) and (22) of the Regulations, the capital cost of any used equipment that qualifies for inclusion in Class 43.1 or Class 43.2 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 or Class 43.2, as the case may be.

Property that is 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 in subparagraph (d)(vi) of Class 43.1 if the equipment consists of solar cells or modules and related equipment, including:

(a) inverters, control, conditioning and battery storage equipment (designed to store electrical energy),

(b) support structures, and

(c) transmission equipment up to the interface with either the distribution system or the local utility.

Assets that may be part of a photovoltaic system that are not eligible to be included in Class 43.1 are a building or a part of a building (other than a solar cell or module that is integrated into a building), electrical distribution equipment, auxiliary electrical generating equipment and other assets normally included in Class 10 or 17 (except electrical generating equipment described in subparagraph (a.1)(i) of Class 17 as noted above).

Although the determination of whether a particular property may be included in Class 43.1 or Class 43.2 can only be made following a review of all of the facts relating to a particular situation, it is our view that a ground mount solar tracker would qualify as a support structure referred to in paragraph (b) above.

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 depreciable property 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 deducted 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 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), 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 the principal business of which throughout the year was:

• manufacturing or processing,
• mining, or
• the sale, distribution, or production of electricity, natural gas, oil, heat, or any other form of energy or potential energy.

Where a taxpayer that is not a PBC acquires a Class 43.1 or 43.2 property primarily to generate electrical energy for sale and not to be consumed in the taxpayer's business, the property will be a "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 it would create or increase a loss from all specified energy property owned by the taxpayer. For example, where a taxpayer who operates a farming business acquires a Class 43.2 property to participate in the MicroFIT program operated by the Ontario Power Authority, rather than for use in the taxpayer's farming business, CCA on the property would not be available to be deducted against the taxpayer's income from other sources, including the farming business.

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