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: 1. Whether Class 43.2 of Schedule II of the Income Tax Regulations, which provides for an accelerated capital cost allowance rate of 50%, is still available for new renewable energy projects?
2. Whether new solar photovoltaic (pv) system projects for businesses will qualify for inclusion under Class 43.2?
Position: 1. & 2. Possible, depends on the facts.
Reasons: Mixed fact and law.
XXXXXXXXXX
Sean Evans
2014-054304
(613) 957-2095
October 21, 2014
Dear Sir:
Re: Class 43.2 of Schedule II of the Income Tax Regulations
This is in response to your email dated August 13, 2014, which enquired about whether your property would qualify for inclusion in Class 43.2 of Schedule II of the Income Tax Regulations (ITR) and the appropriate rate of capital cost allowance (CCA) that should be claimed. In particular, you enquire about the CCA classification of solar photovoltaic (pv) systems.
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 70-6R6 dated August 29, 2014, issued by the Canada Revenue Agency (CRA). A fee is charged for this service. Although we are unable to provide any comments with respect to the specific situations that you have described, otherwise than in the form of an advance income tax ruling, we will provide the following general comments.
We note that you did not provide any facts or further information. Whether any particular piece of equipment qualifies for inclusion in one of the classes described in Schedule II to the ITR is a question of mixed 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 of Schedule II of the ITR and claim CCA we can provide some general comments, which we hope will be of assistance.
To claim CCA on a particular property a taxpayer must meet certain conditions prescribed by the ITR.
Income earning property
A taxpayer may claim CCA only on property described in Schedule II of the ITR that was acquired for the purpose of earning income pursuant to paragraph 1102(1)(c) of the ITR.
Class determination
The Income Tax Act (footnote 1) has incentives to encourage investment in clean energy generation and energy conservation projects. Specific classes of property provide a higher rate of CCA than would otherwise be available as an incentive to encourage investment in equipment designed to produce energy in a more efficient way or from alternative renewable sources.
Where the income earning condition is met, fixed location photovoltaic equipment ( i.e. solar pv system) that is used by the taxpayer, or a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy may qualify for inclusion under subparagraph (d)(vi) of Class 43.1, if the equipment consists of solar cells or modules and related equipment including inverters, control, conditioning and battery storage equipment, support structures and transmission equipment. Property that would not be included in Class 43.1 of Schedule II of the ITR are: a building or a part of a building (other than a solar cell or module that is integrated into a building); auxiliary electrical generating equipment property otherwise included in Class 10 and property that would be included in Class 17 if that Class were read without reference to its subparagraph (a.1)(i); and distribution equipment. Property included in Class 43.1 is eligible for CCA at a rate of 30 percent.
Generally, property that is described in paragraph (d) of Class 43.1 and is acquired after February 22, 2005 and prior to 2020 will qualify for inclusion in Class 43.2. Class 43.2 provides an accelerated CCA rate of 50% using the declining balance method. To be eligible for Class 43.2 the property must not have been included in any other class by any taxpayer before it was acquired. In addition, for property described in paragraphs (a) to (c) of Class 43.1 the heat rate of the cogeneration equipment described in clause (c)(i)(B) must be 4,750 BTU to be eligible for Class 43.2 instead of 6,000 BTU for Class 43.1. Consequently, a new solar pv system that meets the description in subparagraph (d)(vi) of Class 43.1 will currently qualify for inclusion in Class 43.2.
Available for use rules
A Class 43.1 or Class 43.2 property, which is not considered available for use at the end of a taxation year may be restricted by the available for use rules until such time that the property is available for use in accordance with subsections 13(26) to (31) of the Act. A property that becomes available for use in the year of acquisition is subject to a limitation of 50 percent of the CCA otherwise deductible in that first year as required by subsection 1100(2) of the ITR. Where a depreciable property is used for both personal and business use, CCA can only be claimed on the portion or percentage of capital cost that is used for business purposes.
Chapter 4 of the T4002 Business and Professional Income guide includes a detailed description of the CCA provisions and indicates that a property, other than a building, usually becomes available for use on the earliest of the following times:
- The date you first use it to earn income;
- The beginning of the second tax year after the year you acquire the property;
- The time just before you dispose of the property; or
- The time the property is delivered or made available to you and is capable of producing a saleable product or service.
Limitation on CCA
Where a taxpayer is not a "principal business corporation" and acquires clean energy generation and energy conservation equipment property, generally the property will be considered a "specified energy property" as defined under subsection 1100(25) of the ITR. In general, these rules limit the amount of CCA deductions that may be used by passive investors to the amount of income from such property. This prevents CCA deductions from being used by certain passive investors to create or increase a loss that might otherwise shelter other sources of income for tax purposes.
The determination of whether a particular property is a specified energy property is made following a review of the facts of a particular situation. However, specified energy property generally includes property in Class 43.1 and 43.2, such as a solar pv system.
There is a limit for the amount of CCA that may be claimed on property that is specified energy property pursuant to subsections 1100(24) to (29) of the ITR.
More specifically, subsection 1100(24) of the ITR limits the amount of CCA that a taxpayer may deduct under subsection 1100(1) of the ITR in respect of specified energy property, typically to the lesser of:
- The amount of CCA otherwise determined; or
- The taxpayer's income for the year from all specified energy property or from the business of selling the product of that property, computed without the CCA deduction.
Where, for any taxation year, a property of a taxpayer or partnership is a specified energy property, a separate class is prescribed in respect of that property for that and subsequent taxation years pursuant to paragraph 1101(5m) of the ITR.
Certain properties included in Class 43.1 or 43.2 are excluded from the meaning of specified energy property in accordance with paragraphs 1100(25)(a) and (b) of the ITR, as follows:
(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 where certain conditions are met.
Subsection 1100(26) of the ITR provides an exception to the rule in subsection 1100(24) of the ITR that limits the amount of CCA deduction. The exception in subsection 1100(26) of the ITR applies to the following:
(a) a corporation whose principal business throughout the year was (i) manufacturing or processing, (ii) mining operations, or (iii) the sale, distribution or production of electricity, natural gas, oil, steam, heat or any other form of energy or potential energy; or
(b) a partnership each member of which was (i) a corporation described in paragraph (a), or (ii) another partnership described in this paragraph.
Please note that information concerning taxpayers who acquire solar pv systems and participate in Ontario's microFIT program can be obtained on our website at: http://www.cra-arc.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html.
In particular, we note that question 9 states as follows:
9. Where a Participant that is a homeowner acquires a solar pv system and enters into a Contract, will the homeowner be subject to the CCA deduction limitation?
Yes. Since the homeowner is not consuming the energy produced in a business or to earn income from another property, the homeowner will be subject to the CCA deduction limitation described in Question 7.
We trust that our comments, provided in accordance with paragraph 6 of the Information Circular 70-6R6, will be of assistance.
Yours truly,
Fiona Harrison, CPA, CA
Manager,
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
FOOTNOTES
1. R.S.C. 1985, c. 1 (5th suppl.) as amended; hereinafter (Act).
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