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 the taxpayer's income under Renewable Biomass Energy Program of Ontario would qualify as active business income.
Position: Depends on the facts of the case.
Reasons: Question of mixed fact and law
XXXXXXXXXX
2011-042297
Lata Agarwal
613-957-8968
April 3, 2012
Dear XXXXXXXXXX :
Re: Biomass Operation
This is in response to your email dated September 30, 2011, concerning your request for our views on the income tax treatment of certain payments received by a participant from the Ontario Power Authority ("OPA"). The payments are for the production of electrical energy using an approved renewable energy biomass system ("system") under the Province of Ontario's Feed-In Tariff ("FIT") Program or microFIT Program.
In particular, you want to know whether the amounts received by the participant under the FIT or microFIT program would qualify as active business income where the participant is a corporation that is "Canadian-controlled private corporation" as that term is defined in subsection 125(7) of the Income Tax Act ("Act").
You further indicate that pursuant to the terms of the contract with the OPA, the corporation is required to sell all of the electricity it generates to the OPA at a fixed per kilowatt hour rate of $.138/kwh (assuming a 250 kwh/hour capacity). The corporation is responsible for the acquisition and proper operation of the system. In this particular case, this will involve building the gasifier, acquiring and feeding the fuel (i.e., wood waste) into it and then cleaning it of the wood ashes weekly at a minimum. Also, the gasifier must be monitored at least three times a day to ensure proper functioning of the system. On behalf of the corporation, its sole shareholder, an individual, will perform all of the above functions including building the gasifier, and have the system connected to the electricity grid. The shareholder will also be responsible for the monitoring and maintenance of the system including any small repairs.
It is your view that since operating this particular system requires significant time, attention and continuous effort by the corporation's sole shareholder as well as risks for the corporation in terms of costs and other operation issues, the income earned by the corporation should be considered business income, that is, active business income.
Our Comments
The Canada Revenue Agency ("CRA") has taken the general position that the income earned under the FIT and microFIT programs would be income from a source that is either from a business or from a property under section 9 of the Act. The following link on CRA's website, http://www.cra-arc.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html contains some useful frequently asked questions and answers on these programs.
The determination as to whether a particular source of income is considered to be from a business (or an active business), or from a property is one of mixed fact and law which must be determined based on all the relevant facts and circumstances of each case. Therefore, as such, we are unable to provide any definitive views on your particular situation; however, we are prepared to provide the following additional general comments which may be of assistance.
Subsection 248(1) defines the term "active business" in relation to any business carried on in Canada, as meaning any business carried on by the taxpayer other than a "specified investment business" or a "personal services business". Similarly, subsection 125(7) of the Act defines "active business carried on by a corporation" as meaning any business other than a "specified investment business" or a "personal services business" and includes "an adventure in the nature of trade". Paragraph 125(7)(a) of the Act also provides that the term "income of the corporation for the year from an active business" means the total of the corporation's income for the year from an active business carried on by it, including any income for the year pertaining to or incident to that business, other than income for the year from a source in Canada that is a property. For additional comments on the meaning of these defined terms please refer to Interpretation Bulletin IT-73R6, The Small Business Deduction.
It follows from the above, that in order to fall into the definition of active business, the activity should first qualify as business (other than specified investment business or personal services business). The word "business" is also defined in 248(1) of the Act to include a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment. For additional comments on the meaning of "business" you can also refer to Income Tax Technical News #41.
While there is a general and rebuttable presumption that a corporation earns business income, very generally speaking active business income is distinguished from property income or income from a specified investment business on the basis that such income, assuming it is not otherwise incidental to an active business, is not passive in nature (for example, income from interest, dividends, rents, and royalties).
As noted above, while the determination of this issue would require a complete consideration of all of the relevant facts and circumstances of the particular situation, it is possible for a corporation that is producing electrical energy using an approved renewable energy biomass system under the FIT or microFIT program to be considered as carrying on a business that is an active business.
We trust that these comments will be of assistance.
Yours truly,
Michael Cooke
Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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