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. Can a business that installs solar panels on its roof include income earned from the sale of the electricity generated from the solar panels as part of its income? 2. Which class under Schedule II of the ITR are solar panels included in?
Position: 1. Maybe 2. Likely Class 43.2
Reasons: 1. Depends on the facts whether the income earned is from a separate business. 2. Schedule II of the ITRs.
February 29, 2012
Dear XXXXXXXXXX :
Re: Solar Panels
This is in response to your e-mail dated January 27, 2012, in which you asked whether income earned by an individual taxpayer from the sale of electricity generated from a solar photovoltaic system can be included with the business income earned by the taxpayer from operating a roofing business. In addition, you asked whether solar photovoltaic systems are included in Class 43.1 or Class 43.2 of Schedule II to the Income Tax Regulations (the "Regulations"). In this regard, we understand that the taxpayer entered into a microFIT contract to sell the electricity generated from the solar photovoltaic system to the Ontario Power Authority. We also acknowledge our telephone discussion with respect to these issues (Harrison/XXXXXXXXXX).
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 (the "CRA"). A fee is charged for this service. Although we are unable to provide any comments with respect to the specific situations that you have described, otherwise than in the form of an advance income tax ruling, we will provide the following general comments.
The CRA will generally consider income from activities undertaken outside the normal business operations of a taxpayer to be from the same business if the activities are incidental to the taxpayer's normal business operations and the income generated by these activities is not material in relation to the taxpayer's business revenue. The expression "incidental" is not defined in the Income Tax Act (the "Act"), but implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether a particular activity is incidental to another would include the income generated and the capital or labour invested in each activity. If the particular activities constitute a separate business, the income from those activities must be reported separately. Whether the other activities are part of one or a separate business is a question of fact, which depends upon the circumstances of the case.
Capital cost allowance ("CCA")
By virtue of paragraph 1102(1)(c) of the Regulations, a taxpayer may claim CCA only on the classes of property described in Schedule II to the Regulations that were acquired for the purpose of earning income. Where the income earning requirement is met, fixed location photovoltaic equipment that is used by a taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy may qualify for inclusion in Class 43.2 under paragraph (b) of that Class.
Components of a solar photovoltaic system that qualify for inclusion in this CCA class would generally include solar cells or modules and related equipment, including:
(b) control, conditioning and battery storage equipment (designed to store electrical energy),
(c) support structures, and
(d) transmission equipment up to the interface with either the distribution system or the local utility.
Assets that may be part of a solar photovoltaic system that are not eligible to be included in Class 43.2 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 and auxiliary electrical generating equipment.
Property included in Class 43.2 is eligible for a CCA rate of 50 per cent, on the declining balance basis. However, pursuant to the "available for use rules" contained in subsections 13(26) to (31) of the Act, CCA for a Class 43.2 property that was acquired and 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 pursuant to subsection 1100(2) of the Regulations.
Limitation on CCA
Subsections 1100(24) to (29) of the Regulations limit the amount of CCA that may be claimed on property that is "specified energy property". Generally, "specified energy property" includes property that is described in Class 43.2 such as a solar photovoltaic system.
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.
The CCA deduction limitation would not apply where it is expected that more than 50% of the energy produced by the solar photovoltaic system is to be used or consumed in earning income from either
(a) another business of the owner carried on in Canada (not including the business of selling the energy generated by the particular property); or
(b) another property operated in Canada by the owner of the property.
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. Generally, where a participant in the microFIT Program carries on a business in Canada (other than the business of selling electricity) and the amount of electricity consumed in carrying on that business exceeds 50% of the electricity generated by the Class 43.2 property, we would generally consider that the Class 43.2 property is not a specified energy property. However, such a determination is a question of fact that can only be made on a case by case basis.
We trust that these comments will be of assistance.
Fiona Harrison C.A.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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