3 March 2015 External T.I. 2015-0565761E5 - Classes 43.1 and 43.2 - Additions

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 new property for used cogeneration equipment fuelled by wood waste to generate electricity for the manufacturing process qualifies for inclusion in Class 43.1 or Class 43.2 of Schedule II to the Income Tax Regulations?

Position: Possible

Reasons: Law

XXXXXXXXXX
2015-056576
Sean Evans, CPA, CGA, MBA
(613) 670-9049
March 3rd, 2015

Dear Sir:

Re: Class 43.1 and Class 43.2 of Schedule II to the Income Tax Regulations

This is in response to your letter dated January 14, 2015, which enquired about whether new property (the "New Property") that was acquired by a taxpayer as an addition to used cogeneration equipment (the "Cogeneration Equipment") could be included in Class 43.1 or Class 43.2 of Schedule II to the Income Tax Regulations (footnote 1) (the "Regulations"). In addition, we acknowledge our telephone discussion with respect to these issues.

According to the information that you submitted to us, the taxpayer purchased previously used Cogeneration Equipment and a manufacturing plant in XXXXXXXXXX. The taxpayer has previously claimed the full capital cost allowance ("CCA") available for the Cogeneration Equipment. In particular, the Cogeneration Equipment consists of a power boiler and turbo generator. The power boiler uses wood waste supplemented by fossil fuel to produce steam. The turbo generator uses the steam to produce electricity utilized in the plant for the manufacturing process. The taxpayer has acquired certain New Property as an addition to the Cogeneration Equipment in order to increase the fuel combustion and to enhance the environmental impact.

Our Comments:

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 (the "CRA"). This service requires a fee. Although we are unable to provide any comments with respect to the specific situation that you have described, otherwise than in the form of an advance income tax ruling, we will provide the following general comments

Subparagraph (a)(v) of Class 43.1 of Schedule II to the Regulations includes an addition to a property "described" in subparagraph (a)(ii) of Class 43.1, namely equipment that generates both electrical and heat energy, i.e. cogeneration equipment. Where a taxpayer has acquired New Property as an addition to the Cogeneration Equipment and the New Property otherwise meets the requirements of paragraphs (a) to (c) of Class 43.1, the New Property would be included in Class 43.1, which has a CCA rate of 30% on a declining-balance method. In addition, where a taxpayer acquires New Property prior to 2020 and the New Property would otherwise qualify under the provisions of paragraphs (a) to (c) of Class 43.1, it may be included in Class 43.2 where it is part of a system described in paragraph (a) of Class 43.2. In this regard, we note that cogeneration systems must meet a higher efficiency standard in order to qualify for inclusion in Class 43.2, which has a CCA rate of 50% on a declining-balance basis. Finally, we note that scientific and engineering information on equipment eligible for inclusion in Class 43.1 and Class 43.2 is contained in the Technical Guide to Class 43.1 and 43.2 published by Natural Resources Canada.

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

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 "Regulations" means the Income Tax Regulations, C.R.C., c. 945, promulgated under the Act.