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 waste water treatment equipment is included under Class 43.1.
Reasons: Waste water treatment equipment may be included under Class 1 or 8.
April 3, 2013
RE: Capital Cost Allowance
We are writing in reply to your email dated November 15, 2012 requesting our view as to whether certain waste water treatment equipment owned by your client and leased to another taxpayer should be included under Class 43.1 under Schedule II to the Income Tax Regulations (the "Regulations").
It is our understanding that this water treatment equipment is being used to treat waste water that is a by-product of a process to convert municipal waste from an eligible landfill site or an eligible waste management facility into electrical energy. The expressions "municipal waste", "eligible landfill site", "eligible waste management facility" and "eligible waste fuel" are defined in subsection 1104(13) of the Regulations. We understand that the municipal waste being used in this process will meet the definition in the Regulations and will therefore be considered as "eligible waste fuel".
Written confirmations of the tax implications inherent in particular transactions are provided by the Income Tax Rulings Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.
Taxpayers that own depreciable property that is used in qualifying renewable energy and energy conservation projects may be eligible to have their depreciable property used in the project included in either Class 43.1 or 43.2 of Schedule II to the Regulations. Class 43.2 provides an accelerated capital cost allowance rate of 50% (on a declining balance) for properties acquired after February 22, 2005 and before 2020 and that are otherwise described in Class 43.1, which is eligible for a 30% rate.
Paragraph (a) of Class 43.1 includes property that is electrical generating equipment or property that generates both electricity and heat, including ancillary equipment, where the equipment is part of a system that is used to generate electricity only or electricity and heat (co-generation) and, as described in paragraph (c) of Class 43.1, the system only uses eligible waste fuel, fossil fuel or spent pulping liquor. While an electrical generation system may qualify for inclusion under paragraph (c) of Class 43.1, water treatment equipment is not eligible under subparagraphs (a)(i) to (a)(v) of that Class. Consequently, the waste water treatment equipment is not eligible for inclusion under Class 43.1 or Class 43.2.
The final determination of the classification of the equipment cannot be made without a review of all the relevant documentation. However, we will provide some general information that may be of use in your situation. Class 1 provides a capital cost allowance rate of 4% and includes, under paragraph (q), a building or other structure (except property described in any of paragraph (k) and (m) to (p) of this Class or in any of paragraphs (a) to (e) of Class 8). While the term "structure" is not defined in the Regulations, the courts have considered the meaning in several cases (see British Columbia Forest Products Limited v. Minister of National Revenue, 71 DTC 5178). Class 8 provides a capital cost allowance rate of 20% and includes, under paragraph (i), tangible capital property that is not included in any other class in Schedule II. It is a question of fact as to whether your equipment will qualify under Class 1 or 8.
We trust our comments will be of assistance.
Fiona Harrison, C.A.
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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