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: Is the anaerobic digester of the taxpayer eligible for ITCs and Class 43.1/43.2 CCA?
Position: Maybe
Reasons: Mixed question of facts and law
XXXXXXXXXX
2013-048644
Lata Agarwal, CMA, MBA
August 21, 2013
Dear XXXXXXXXXX:
Re: Investment tax credit ("ITC") for anaerobic digester
This is in response to your email of April 23, 2013, wherein you have requested our views as to whether your client's anaerobic digester would be "qualified property" ("QP"), as that term is defined in subsection 127(9) of the Income Tax Act ("Act"), for the purposes of claiming an ITC under subsection 127(5) of the Act.
In particular, the anaerobic digester has been built by your client in XXXXXXXXXX to produce and sell methane gas that will be extracted from XXXXXXXXXX manure, as well as the fertilizer which is a residual byproduct of this process. You also wish to confirm that the anaerobic digester would qualify under subparagraph (d)(xiii) of Class 43.1 of Schedule II of the Income Tax Regulations ("Regulations") for the purposes of the capital cost allowance ("CCA") deduction.
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 Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.
Very broadly speaking, the definition of QP of a taxpayer includes new equipment that is to be used by the taxpayer in Canada primarily for certain purposes, including manufacturing or processing goods for sale or lease. Further, paragraph (b.1) of the definition includes a prescribed energy generation and conservation property ("PEGCP") acquired by the taxpayer after March 28, 2012. Under subsection 4600(3) of the Regulations, a PEGCP includes depreciable property that is included in Class 43.2. (In this regard, it is to be noted that, in general, Class 43.2 includes a property that is described in paragraph (d) of Class 43.1, is acquired after February 22, 2005 and before 2020, and was not included, before it was acquired, in another class, by any taxpayer.)
Property of a taxpayer, including an anaerobic digester, that is used by the taxpayer primarily to produce and store "biogas", as that term is defined under subsection 1104(13) of the Regulations, will qualify for inclusion under subparagraph (d)(xiii) of Class 43.1 and paragraph (b) of Class 43.2. Generally, the word "primarily" means more than 50%. Accordingly, where your client's anaerobic digester meets the requirements of Class 43.2, it would qualify as a PEGCP and would meet the definition of QP for purposes of the ITC.
We trust that these comments will be of assistance.
Yours truly,
Fiona Harrison, C.P.A., C.A.
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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