2 December 2013 External T.I. 2013-0509801E5 - Class 43.2

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 particular equipment qualifies for inclusion in Class 43.2 such that a purchaser of the equipment would be eligible to claim CCA.

Position: Maybe.

Reasons: If the equipment is described in paragraph (b) of Class 43.2 then it will qualify for inclusion in that class. Whether CCA can be claimed with respect to the equipment will depend on the purchaser's fact situation.

XXXXXXXXXX
2013-050980
L. Zannese
(613) 410-9134

December 2, 2013

Dear XXXXXXXXXX:

Re: Class 43.2 of Schedule II to the Income Tax Regulations

We are writing in response to your email to XXXXXXXXXX which inquired whether the equipment you are manufacturing would qualify for inclusion in Class 43.2 of Schedule II of the Income Tax Regulations ("Regulations"). XXXXXXXXXX forwarded your email to us for response.

We understand, based on our conversations with you, (Zannese/XXXXXXXXXX) that you have developed equipment that uses solar energy to power light fixtures. You advised that the equipment includes solar photovoltaic panels and/or modules as well as inverters, batteries and capacitors. Depending on where the system is installed, there may also be support structures.

Whether any particular piece of equipment qualifies for inclusion in one of the classes described in Schedule II of the Regulations is a mixed question of fact and law that can only be determined once all the facts of the situation have been reviewed. While we cannot confirm that a purchaser of your equipment will be eligible to include this equipment in Class 43.2 and claim CCA we can provide some general comments which we hope will be of assistance.

By virtue of paragraph 1102(1)(c) of the Regulations, a taxpayer may claim CCA only on the classes of property described in Schedule II to the Regulations that were acquired for the purpose of earning income. This means that taxpayers purchasing your equipment for the purpose of reducing their personal consumption of electricity will not be eligible to claim CCA with respect to the equipment. Where the income earning requirement is met, fixed location photovoltaic equipment that is used by a taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy may qualify for inclusion in Class 43.2 under paragraph (b) of that Class.

Components of a solar photovoltaic system that qualify for inclusion in this CCA class are described in subparagraph (d)(vi) of Class 43.1 and would generally include solar cells or modules and related equipment, including:

(a) inverters,
(b) control, conditioning and battery storage equipment (designed to store electrical energy),
(c) support structures, and
(d) transmission equipment up to the interface with either the distribution system or the local utility.

Assets that may be part of a solar photovoltaic system that are not eligible to be included in Class 43.2 are a building or a part of a building (other than a solar cell or module that is integrated into a building), electrical distribution equipment and auxiliary electrical generating equipment. In particular, the light fixture and its components would not be eligible for inclusion in Class 43.2. Therefore, where a taxpayer purchases the solar photovoltaic system as well as the light fixture and its components, the taxpayer would have to allocate the purchase price between the solar photovoltaic equipment, which may qualify for Class 43.2 and the lighting fixtures which will not be eligible in this Class.

Property included in Class 43.2 is eligible for a CCA rate of 50 per cent, on the declining balance basis. However, pursuant to the "available for use rules" contained in subsections 13(26) to (31) of the Income Tax Act, CCA for a Class 43.2 property that was acquired and not considered available for use at the end of a taxation year may be restricted until such time as the property is available for use. A property that becomes available for use in the year is subject to a limitation of 50% of the CCA otherwise deductible in that first year pursuant to subsection 1100(2) of the Regulations.

Limitation on CCA

Subsections 1100(24) to (29) of the Regulations limit the amount of CCA that may be claimed on property that is "specified energy property". Generally, "specified energy property" includes property that is described in Class 43.2 such as a solar photovoltaic system.

Under subsection 1100(24) of the Regulations, the amount of CCA that may be claimed by a taxpayer in a taxation year for a specified energy property is limited to the lesser of:

• the amount of CCA otherwise determined for such property, or
• the taxpayer's net income (after deducting all expenses, other than CCA, related to earning such income) from all specified energy property of the taxpayer.

The CCA deduction limitation would not apply where it is expected that more than 50% of the energy produced by the solar photovoltaic system is to be used or consumed in earning income from either

(a) another business of the owner carried on in Canada (not including the business of selling the energy generated by the particular property); or

(b) another property operated in Canada by the owner of the property.

The determination of whether a particular property is a specified energy property can only be made following a review of the facts of a particular situation.

We trust that these comments will be of assistance.

Yours truly,

Fiona Harrison, CPA, CA
Manager
Resources Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch