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: Whether homeowners who participate under the FIT program can claim CCA on solar panels installed on their roof.
Position: Yes, subject to the restrictions under subsection 1100(24) of the Income Tax Regulations.
Reasons: The solar panels meet the requirements of subparagraph (d)(vi) of Class 43.1.
XXXXXXXXXX 2010-035643
Fiona Harrison
March 15, 2010
Dear XXXXXXXXXX :
Re: Solar Photovoltaic Systems and Capital Cost Allowance
This is in response to your electronic mail of February 4, 2010, requesting our comments on the income tax consequences for taxpayers who participate in the Feed-in Tariff Program offered in the province of Ontario. The Ontario Power Authority has developed a Feed-In Tariff Program (the "FIT Program") for the Province of Ontario to encourage and promote greater use of renewable energy sources. Homeowners, farmers and small business owners can participate in "micro" renewable energy projects [10 kW or less] under the microFIT Program, a stream of the FIT Program. Your specific enquiry relates to whether homeowners who install solar photovoltaic systems on their roofs under the microFIT Program can include these solar photovoltaic systems under Class 43.1 or Class 43.2 of Schedule II of the Income Tax Regulations (the "Regulations").
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 a particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
It is our understanding that 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 solar photovoltaic system and delivered to the power grid in Ontario. The amounts received by the homeowner under the microFIT Program will be considered as business or property income. By virtue of paragraph 1102(1)(c) of the Regulations, a taxpayer may claim capital cost allowance ("CCA") on the classes of property described in Schedule II to the Regulations that were acquired for the purpose of earning income from business or property.
Where the income earning requirement is met, fixed location solar 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 of Schedule II. Where the solar photovoltaic equipment is acquired after February 22, 2005 and before 2020, it may be eligible for inclusion in Class 43.2. The equipment cannot have been included in any other class by any taxpayer before it was acquired.
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 Income Tax Act (the "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 is subject to a limitation of 50% 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 homeowners who acquire solar photovoltaic systems under the microFIT Program acquire such property primarily for the purpose of selling the energy generated from the photovoltaic systems. Accordingly, these solar photovoltaic systems would be considered to be "specified energy property" and, pursuant to subsection 1100(24) of the Regulations, the homeowners' CCA claim 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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