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: What is the appropriate Capital Cost Allowance Class for biomass electrical facility owned by a First Nation?
Position: Class 43.1 or 43.2
Reasons: Meets the legislative requirements.
May 6, 2014
Re: Biomass Electrical Facility Owned by First Nations
This is in response to your email of February 19, 2014 concerning the capital cost allowance (the "CCA") class for a general biomass-fuelled electricity generating facility. Your additional question was with regard to whether the CCA tax treatment changes if the facility is owned by, or operated on, a First Nation reserve.
Written confirmation of the income 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 as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although, we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
I. GENERAL INFORMATION
Classes 43.1 and 43.2 of the Income Tax Regulations (the "Regulations") provide for an accelerated CCA rate (30% and 50% respectively) in order to encourage investments in technologies that conserve energy or use renewable resources. Generally, properties that meet the conditions for Class 43.1 and that are acquired after February 22, 2005 and before 2020 are included in Class 43.2. In addition, the property under Class 43.2 cannot have been included in any other class by any taxpayer before it was acquired.
Generally, a property that is part of a system that is used by a taxpayer to generate electrical energy using "eligible waste fuel" is included under paragraphs (a) to (c) of Class 43.1. The term "eligible waste fuel" is defined in subsection 1104(13) of the Regulations to mean biogas, bio-oil, digester gas, landfill gas, municipal waste, pulp and paper waste and wood waste. The term "thermal waste", defined in subsection 1104(13) of the Regulations, is also an eligible input for property described under paragraphs (a) to (c) of Class 43.1. Provided that the biomass at issue meets the definitions in subsection 1104(13) and all the other conditions are met, the properties contained in the facility will be described under paragraph (a) of Class 43.1.
II. CLASSES 43.1 AND 43.2
In order for any property to be eligible for inclusion in Class 43.1 or 43.2 of Schedule II of the Regulations, it must:
1. be situated in Canada;
2. be acquired by a taxpayer for use by the taxpayer, or to be leased by the taxpayer to a lessee for use by the lessee, for the purpose of earning income from a business carried on in Canada or from property situated in Canada; and
3. not have been used for any purpose before the taxpayer acquired the property. However, there is an exception where certain used equipment that is depreciable property:
a. was eligible for inclusion in Class 43.1 or 43.2 of the vendor,
b. remains at the same location as used by the vendor, and
c. has been acquired by the taxpayer within five years from the time it became available for use to the vendor.
Eligibility of the property for inclusion in Class 43.1 or 43.2 must generally be determined annually based on the use of the property in the particular taxation year. If, in a particular taxation year, a property included in Class 43.1 or 43.2 no longer satisfies the conditions for inclusion therein, subsection 13(5) of the Income Tax Act (the "Act") requires that the undepreciated capital cost of the property be transferred from Class 43.1 or 43.2, as the case may be, to the class in which the property would otherwise have been included as of the commencement of the particular taxation year. Similarly, if in a subsequent year, the property again satisfies the requirements for inclusion in Class 43.1 or 43.2, subsection 13(5) of the Act would apply to reclassify the property into the particular class as of the commencement of that year.
Subsection 1104(17) of the Regulations prevents the inclusion of property that would otherwise be described in subparagraph (c)(i) of Class 43.1 if the property is not in compliance with environmental laws, by-laws and regulations at the time the property first becomes available for use.
A. Designated Heat Rate
Certain types of systems must meet a designated heat rate to qualify under Class 43.1 or 43.2. Generally, these are systems that burn fuel to produce electricity or electricity and heat and enhanced combined cycle systems. Facilities that use as input only eligible waste fuels do not have to meet the designated heat rate in clause (c)(i)(B) or (c)(ii)(B) of Class 43.1 of the Regulations.
B. Capital Cost Allowance (CCA) Rate
Classes 43.1 and 43.2 provide for a CCA rate of 30% and 50%, respectively, calculated on a declining balance basis. However, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Act, CCA for a Class 43.1 or Class 43.2 property that has been acquired and which is 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 the 50% rule found in subsection 1100(2) of the Regulations.
Restriction on CCA
The specified energy property rules found in subsections 1100(24) to (29) of the Regulations may apply to restrict the amount of CCA that may be claimed for property included in Class 43.1 or 43.2. Where a depreciable property is "specified energy property", CCA cannot be deducted to the extent that it would create or increase a loss from all such property owned by the taxpayer. This limitation on CCA that may be deducted will not apply where any of the following conditions are met:
1. the owner of the property is a principal business corporation (as described below) or a partnership each member of which is a principal business corporation,
2. the property is acquired to be used by the owner primarily for the purpose of gaining or producing income from a business carried out in Canada (other than the business of selling energy produced by the property), for example farming, or from another property situated in Canada (e.g., rental property), or
3. the property is leased by its owner in the ordinary course of carrying on business in Canada and certain conditions relating to the business carried on by the lessor and the lessee are met.
For these purposes, a principal business corporation ("PBC") means a corporation the principal business of which throughout the year was
a. manufacturing or processing,
b. mining, or
c. the sale, distribution, or production of electricity, natural gas, oil, heat, or any other form of energy or potential energy.
Where a taxpayer that is not a PBC acquires a Class 43.1 or 43.2 property primarily to generate electrical energy for sale, the property will be a "specified energy property" for purposes of subsection 1100(24) of the Regulations and CCA on that property cannot be deducted to the extent that it would create or increase a loss from all specified energy property owned by the taxpayer.
III. FACILITY OWNED BY AND/OR OPERATED ON, A FIRST NATION RESERVE
By virtue of paragraph 1102(1)(c) of the Regulations, the classes of property described in Schedule II to the Regulations only include property that was acquired by the taxpayer for the purpose of earning income. Where the First Nation carries on a business and earns taxable income, and provided that all the necessary conditions are met, it would be able to claim the CCA available on property included in Classes 43.1 and 43.2 of the Regulations.
We trust that these comments will be of assistance.
Fiona Harrison, CPA, CA
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs
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