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 ITR 1100(16) exempts a corporation from the CCA restrictions imposed by ITR 1100(15) where the leasing asset is Solar PV Electrical Generating Equipment?
Position: Question of Fact.
Reasons: See below.
July 25, 2013
XXXXXXXXXX
John Parker CMA
2013-047809
Dear XXXXXXXXXX:
Re: CCA Restrictions on Leasing Properties
We are writing in response to your query dated February 11, 2013 wherein you asked our opinion as to whether subsection 1100(16) of the Income Tax Regulations ("ITR") exempts a corporation from the CCA restrictions imposed by subsection 1100(15) of the ITR where the leasing asset is Solar PV Electrical Generating Equipment? Our understanding of the facts in your hypothetical situation, are as follows:
1) A corporation ("Canco") owns solar photovoltaic electric generating equipment (the "Equipment").
2) The fair market value of the Equipment is in excess of $25,000.
3) Canco leases the Equipment to an arm's length person for a period greater than one year.
4) Canco will use the Equipment principally for the purpose of producing gross revenue that is leasing revenue.
Our Comments
Written confirmation of the 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 submitted in the manner set out in Information Circular IC-70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.
Solar photovoltaic generating equipment, as described above, would normally be included into Class 43.1 or Class 43.2 of Schedule II of the Income Tax Regulations (the "Regulations") which has accelerated capital cost allowance rates ("CCA") of 30% and 50% respectively. Since the property would be included into Class 43.1 or Class 43.2 (depending of the date of acquisition) it would be subject to the "Specified Energy Property" rules found in subsections 1100(24) to (29) of the Regulations. Subsection 1100(24) of the Regulations limits the amount of CCA that may be used by passive investors in respect of specified energy property. Subsection 1100(24) of the Regulations purpose is to prevent passive investors from sheltering other sources of income with losses that might otherwise arise due to the accelerated CCA.
Specified Energy Property is defined in subsection 1100(25) of the Regulations to be property included in Class 34, 43.1, 43.2, 47 or 48 in Schedule II, other than a particular property:
"(a) acquired to be used by the owner primarily for the purpose of gaining or producing income from a business carried on in Canada (other than the business of selling the product of the particular property) or from another property situated in Canada, or
(b) leased in the year, in the ordinary course of carrying on a business of the owner in Canada, to
(i) a person who can reasonably be expected to use the property primarily for the purpose of gaining or producing income from a business carried on in Canada (other than the business of selling the product of the particular property) or from another property situated in Canada, or
(ii) a corporation whose principal business was, throughout the year,
(A) the renting or leasing of leasing property or property that would have been leasing property but for subsection (18), (19) or (20),
(B) the renting or leasing of property referred to in clause (A) combined with the selling and servicing of property of the same general type and description, or
(C) the manufacturing of property described in Class 34, 43.1, 43.2, 47 or 48 in Schedule II that it sells or leases,
and the gross revenue of the corporation for the year from that principal business was not less than 90 percent of the gross revenue of the corporation for the year from all sources, or
(iv) a partnership each member of which was a corporation described in subparagraph (iii) or Paragraph (26)(a)."
Exceptions to this rule can be found in Regulation 1100(26) of the Act which states:
"Subsection (24) does not apply to a taxation year of a taxpayer that was, throughout the year,
(a) a corporation whose principal business throughout the year was
(i) manufacturing or processing
(ii) mining operations, or
(iii) the sale, distribution or production or electricity, natural gas, oil, steam, heat
or any other form of energy or potential energy; or
(b) a partnership each member of which was a corporation described in paragraph (a)"
Whether the property is specified energy property is a question of fact. If it is, then it would be subject to the CCA restrictions mentioned above. If it is excluded from the definition of Specified Energy Property it would still be subject to the "Specified Leasing Property Rules" described below.
In addition, subsection 1100(15) of the Regulations limits the amount of CCA that can be claimed on leasing property owned by a taxpayer, with certain exceptions, in order to prevent a taxpayer from creating or increasing a loss to shelter non-leasing income. Regulation 1100(15) does not apply, by virtue of Regulation 1100(16), to a corporation whose principal business is renting or leasing of leasing property including property that would be leasing property were it not excluded under Regulations 1100(18), (19) or (20), or the renting or leasing of such property combined with the sale and service of property of the same general type and description. Such a corporation will qualify for exclusion if its gross revenue for the year from such a principal business was not less than 90% of its gross revenue from all sources.
The term "leasing property" is defined in subsection 1100(17) of the Regulations. Leasing Property of a taxpayer is depreciable property of a prescribed class other than the specific exclusions set out in subsection 1100(17) (i.e., rental property, computer tax shelter property, and property referred to in Class 10(w) and Class 12(n)), that is used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. Leasing Property does not include a property leased by a taxpayer in the ordinary course of selling goods or rendering services under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer's goods or services.
A subset of the Leasing Property rules are the "Specified Leasing Property Rules". These rules effectively split the lease market into leasing of "exempt assets" and the leasing of all other assets that are non-exempt. The rules contained in Regulations 1100(1.1) and (1.2) are effective for leases entered into after April 26, 1989. Under the specified leasing property rules, the lease is reclassified as a loan, with the lease payments recharacterized as blended payments of principal and interest. In such cases, the lessor's claim for CCA on the leased property is restricted to the lesser of the amount of the CCA that would otherwise be deductible and the amount of rent received less notional interest for the year. In effect, the specified leasing property rules puts lessors in the same position as other lenders who receive blended payments of principal (non-taxable) and interest which is taxable. Lessees of property subject to the specified leasing property rules may elect to be treated as if they had acquired the property and may, if they so elect pursuant to subsection 16.1(1) of the Act, to be treated as if they had acquired the property. As a result they can claim CCA on the property and interest in respect of the notional loan.
Specified leasing property is defined in subsection 1100(1.11) of the Regulations and generally means depreciable property (other than exempt property) of a taxpayer that is used by the taxpayer or a non-arm's length person principally for the purposes of earning gross revenue that is rent or leasing revenue; is subject to an arm's length lease of a term of more than one year; and is the subject of a lease of property where the tangible property (other than exempt property) that is the subject of the lease has an aggregate fair market value in excess of $25,000 at the time the lease is entered into. Specified Leasing Property excludes intangible property (including systems software and property referred to in Class 10(w) and Class 12(n) or (o)).
Exempt property is defined in subsection 1100(1.13) of the Regulations and generally includes:
- general purpose office furniture or equipment included in Class 8, other than an individual piece that has a capital cost in excess of $1,000,000;
- general-purpose computer equipment, and ancillary data processing equipment, included in Class 45, 50 or 52, other than an individual piece having a capital cost in excess of $1,000,000;
- furniture, appliances, television and radio receivers, telephones, furnaces, hot-water heaters and other similar properties designed for residential use;
- motor vehicles that are designed or adapted primarily to carry individuals on highways and streets and that have a seating capacity for not more than the driver and eight passengers, or a motor vehicle commonly called a van or pick-up truck, or a similar vehicle;
- trucks or tractors designed for hauling freight on highways and trailers;
- buildings included in Class 1, 3, 6, 20, 31 or 32, unless the building was leased to certain tax exempt entities who owned the building or part thereof at any time before the commencement of the lease (subject to a one year exemption period);
- a vessel mooring space; and
- property included in Class 35 (e.g., railway cars).
Conclusion
The fact scenario described above would suggest that the Solar Photovoltaic Generating Equipment would be non-exempt Specified Leasing Property which would be subject to the CCA restrictions contained in Subsection 1100(1.1) of the Regulations.
We trust that our comments will be of assistance.
Doug Watson
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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