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: The taxpayer is asking for clarification of the restrictions limiting the deduction of CCA on Class 43.1/43.2 property.
Position: General comments provided.
Reasons: See response.
XXXXXXXXXX
Dear XXXXXXXXXX:
The office of the Honourable Christian Paradis, Minister of Industry and Minister of State (Agriculture), sent me a copy of your correspondence, which I received on August 24, 2012, concerning income tax rules associated with the acquisition, use, and sale of renewable energy property.
You feel that an Industry Canada Web page dated May 4, 2009, describing the benefits of accelerated depreciation or capital cost allowance (CCA) on Class 43.1 and Class 43.2 property did not adequately address how the CCA rules work in connection with your acquisition of solar photovoltaic panels to be used in the Province of Ontario's microFIT Program. You state that as a result, for the XXXXXXXXXX and XXXXXXXXXX tax years, you deducted CCA in excess of what the Income Tax Act allows. You are concerned that you will now have to return part of the tax savings. You ask for clarification of the restrictions limiting the deduction of CCA and want to know what will happen if you sell your home. You also want to know if any consideration will be given to taxpayers who relied on the information from Industry Canada.
The Act has incentives to encourage investments in energy efficiency and renewable energy projects. Classes 43.1 and 43.2 in Schedule II of the Income Tax Regulations provide a higher rate of CCA than would otherwise be available as an incentive to encourage investment in equipment designed to produce energy in a more efficient way or from alternative renewable sources.
To claim CCA on a particular property, a taxpayer must meet certain conditions prescribed by the Regulations. For example, the taxpayer must have acquired the property for the purpose of gaining or producing income. Renewable energy property, such as solar photovoltaic panels, are also subject to other limitations, like the specified energy property rules. These rules were originally introduced in 1988 to limit the amount of CCA that could be deducted in respect of specified energy property to the income generated by such property. In other words, a taxpayer is not allowed to deduct CCA in respect of a specified energy property that exceeds the taxpayer's income from that property. Therefore, the taxpayer cannot use the CCA claim to create or increase a loss that can be used to reduce other sources of income.
The specified energy property rules do not apply to certain corporations, or taxpayers who use the property primarily (more than 50%) for the purpose of earning income from their own business (other than the business of selling the energy produced from that property) or to earn income from property (other than the specified energy property). This means that a homeowner who acquires a solar photovoltaic system and enters into a contract under the microFIT Program will be subject to the specified energy property rules, because the homeowner is not consuming the electricity produced in another business.
You can find more information on the income tax consequences associated with the microFIT Program on the CRA Web site at www.cra.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html. The answer to question 13 explains that when a taxpayer sells his or her residential home that has had a solar photovoltaic system installed, a reasonable part of the sale price must be allocated as proceeds of disposition of the renewable energy property. If the allocated amount of the proceeds is greater than the undepreciated capital cost, the taxpayer must include the excess amount in income. The undepreciated capital cost is the amount left over after you deduct all the CCA claimed to date from the capital cost of a depreciable property. The amount included in income, if any, will depend on a number of factors, including the fair market value of the solar photovoltaic equipment and the total CCA claimed up until the time of sale. For more information on CCA and the sale of depreciable property, go to www.cra.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng /cptl.
The CRA is responsible for administering and enforcing the Income Tax Act and is committed to applying the tax legislation consistently and fairly. A taxpayer's obligations and entitlements are based on the law in force at the time. The CRA does not have the discretion to change the law. Once the CRA reassesses an income tax and benefit return, it may cancel or waive penalties or interest charges. However, it cannot cancel or waive the taxes themselves if the penalty or interest charges resulted from CRA actions like errors made in the material available to the public that may have led a taxpayer to file returns or make payments based on incorrect information. The CRA may also cancel or waive penalties or interest charges based on inability to pay or financial hardship.
If you are in one of these situations and you think you have a valid reason to ask for cancelling or waiving penalty or interest charges, please send the CRA a letter explaining why you feel the penalty or interest charges should be cancelled or waived. You can also use Form RC4288, Request for Taxpayer Relief, to make your request. You can find a copy of this form at www.cra.gc.ca/E/pbg/tf/rc4288 or order it by phone at 1-800-959-2221. More information about the taxpayer relief provisions and detailed instructions on how to fill out the form and where to send it are available at www.cra.gc.ca/fairness.
I trust that the information I have provided is helpful.
Yours sincerely,
Gail Shea, P.C., M.P.
Tom Posadovsky
2012-046071
October 16, 2012
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