3 April 2013 External T.I. 2013-0475491E5 - CRCE Expenses for Photovoltaic System

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 completion and performance security payments to the OPA would qualify as CRCE expenses.

Position: No

Reasons: These refundable expenses are similar to a deposit, thus "not incurred" for the purposes of Regulation 1219.

XXXXXXXXXX 2013-047549
J. Nichols

April 3, 2013

Dear XXXXXXXXXX:

RE: CRCE Expenses for Photovoltaic Systems

We are writing in reply to your email dated January 21, 2013 requesting our views as to whether certain Completion and Performance Security Payments ("security payments") made to the Ontario Power Authority ("OPA") in connection with a photovoltaic system would qualify as Canadian renewable and conservation expense ("CRCE") under subsection 1219(1) of the Income Tax Regulations (the "Regulations"). It is our understanding that, while the contract with the OPA requires the security payments at various stages of the photovoltaic project, the security payments are refundable where the taxpayer fulfils certain conditions.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this 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 Ruling, 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. Under subsection 1219(1) of the Regulations, where a taxpayer undertakes the development of a project for which it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the project would be capital cost of property that is included in Class 43.1 or Class 43.2, certain expenses incurred by the taxpayer for the development of the project may be eligible as CRCE.

In our view, the security payments described in your email are similar to the security deposits that were considered by the Federal Court of Appeal (FCA) in the case of The Queen v. Nomad Sand and Gravel Limited, 91 DTC 5032. That case involved a taxpayer that carried on the business of operating a sand and gravel pit and was required to pay a levy that was refundable upon discharge of the taxpayer's obligation to rehabilitate the pit site. The FCA determined that the deposits did not have the characteristics of deductible expenses for tax purposes, in that they were not made once and for all, without recourse.

As a result, it is our view that the refundable security payments required under the contract with the OPA would not be "an expense incurred by the taxpayer" for the purposes of subsection 1219(1) of the Regulations.

We trust our comments will be of assistance.

Yours truly,

Fiona Harrison, C.A.
Manager
Resources Section
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch