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: Quel est le traitement fiscal des avances faites pour acheter des panneaux solaires qui auraient servi à produire un revenu s'ils avaient été reçus? What is the tax treatment of advance payments made in order to acquire solar panels which would have been used to produce income if they would have been received?
Position: Il pourrait s'agir d'une PDTPE si toutes les conditions sont remplies; sinon, il s'agirait d'une perte en capital si la dette a été générée pour produire un revenu d'entreprise ou de bien. It could qualify as an ABIL if all conditions are met; otherwise it would be a capital loss if the debt was generated to produce income from a business or property.
Reasons: Les panneaux solaires n'ont jamais été acquis mais les avances semblent avoir été faites dans le but d'acheter une immobilisation qui produirait un revenu. The solar panels were never acquired but the advance payments seem to have been made in order to acquire a capital property that would produce income.
XXXXXXXXXX
2015-057222
Cynthia Lynch, LL.B, M.Fisc
March 26, 2015
Dear XXXXXXXXXX:
Re: Advance payments for the purchase of solar panels
This is in response to your email dated February 23, 2015, in which you asked our opinion regarding the tax treatment of an amount owing to an individual taxpayer who purported to buy solar panels to produce electricity.
Unless otherwise stated, all references to a statute are to the Income Tax Act ("Act").
Facts
You indicated that, in XXXXXXXXXX, you decided to take part in the Government of Ontario's microFIT Program, a program which provides homeowners and other eligible participants with the opportunity to develop a small renewable electricity generation project on their property. Under this program, participants are paid a guaranteed price over a 20-year term for all the electricity produced and delivered to the province's electricity grid.
You explained that you contracted with a corporation ("Seller") in XXXXXXXXXX for the purchase and installation of solar panels so that you could eventually generate and sell electricity to the Ontario Power Authority. You indicated that, in XXXXXXXXXX and XXXXXXXXXX, you made advance payments for the purchase of the solar panels, totaling 90% of the contract value, but that the panels were never delivered nor installed. In early XXXXXXXXXX, you requested and received a GST/HST return. Later in XXXXXXXXXX, you were informed that the Seller declared bankruptcy. You also mentioned that the only deduction you claimed was in respect of the interest charges you incurred in order to make the advance payments.
In a separate email dated March 9, you indicated that the solar panels were included in Class 29 of Schedule II of the Income Tax Regulations ("Regulations") but that no capital cost allowance ("CCA") was ever claimed.
Questions
Since you are of the opinion that you will never get either the solar panels or your money back, you have asked what is the appropriate tax treatment of the advance payments made to the Seller. You have also asked whether Class 29 is the appropriate class to claim CCA for the solar panels.
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 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.
Capital Cost Allowance
In computing income from a business or property, paragraph 18(1)(b) prohibits the deduction of any outlay, loss or replacement of capital, payment on account of capital or any allowance for depreciation, obsolescence or depletion, unless specifically allowed in Part I of the Act. Paragraph 20(1)(a) allows a deduction, in computing the income from a business or property, of any amount allowed by the Regulations in respect of the capital cost of a property. The amount that is allowed by the Regulations is referred to as CCA.
CCA may be claimed only for property owned by the taxpayer or property in which the taxpayer has a leasehold interest. Furthermore, CCA may be restricted until the depreciable property acquired is considered "available for use" under subsections 13(26) to (31).
The question of whether you acquired the property of the solar panels is one of fact which can only be made after an exhaustive review of all the relevant circumstances. According to the copy of the contract that you provided us, it appears that the solar panels remained the Seller's property until final payment. Since 90% of the total contract value was paid, it would appear that you never acquired the property of the solar panels.
In the event you never acquired the property of the solar panels, your question regarding CCA becomes irrelevant since, apart from situations where a taxpayer has a leasehold interest, there must be acquisition of capital property to trigger the depreciable property rules. However, in the event you acquired the property of the solar panels, we believe that no CCA could have been claimed, as the panels were never available for use.
Treatment of amount owing to the taxpayer
In the situation you described, the advance payments made to the Seller could give rise to a capital loss or to a business investment loss ("BIL"). However, for this to be the case, the advance payments made to the Seller must first be established to be a debt owing to you. Since the term "debt" is not defined in the Act, it must be interpreted according to its ordinary meaning. According to jurisprudence, the fundamental criterion for the existence of a debt is the existence of a clear and unequivocal promise from the debtor to repay the principal amount advanced by the creditor at a future fixed time or when lawfully demanded by the creditor. The determination of whether an amount constitutes a debt owing to a taxpayer is both a question of fact and law.
As stated in paragraph 1 of Interpretation bulletin IT-159R3, ARCHIVED - Capital Debts Established to be Bad Debts, where a taxpayer establishes that an amount receivable on capital account has become a bad debt in a taxation year, subsection 50(1) provides for a deemed disposition of the debt at the end of the year and a reacquisition immediately thereafter at a cost of nil. This normally results in a bad debt being a capital loss for the year with any recovery of the debt being a capital gain. The time at which a debt becomes a bad debt is a question of fact which depends upon the circumstances in each case. However, a debt is considered a bad debt for the purpose of subsection 50(1) when the amount becomes uncollectible. In the present situation, considering that the Seller declared bankruptcy in XXXXXXXXXX, the advance payments, if considered a debt owing to you, could qualify as a bad debt in that year.
Pursuant to subparagraph 40(2)(g)(ii), the capital loss stemming from the disposition of the debt is deemed to be nil unless the taxpayer acquired the debt for the purpose of earning income from a business or property. When subparagraph 40(2)(g)(ii) does not apply, the loss stemming from the disposition of the debt is considered to be a capital loss as provided for by paragraph 39(1)(b). However, when certain conditions are met, the loss can be qualified as a BIL. Half of that amount is deductible as an allowable business investment loss ("ABIL").
A BIL is provided for at paragraph 39(1)(c) and is basically a capital loss arising from a disposition to an arm's length person or a disposition to which subsection 50(1) applies, of any property that is a share of a small business corporation ("SBC") or a debt owing to the taxpayer by a Canadian-controlled private corporation ("CCPC") that is a SBC or a bankrupt that is a SBC. Pursuant to subsection 125(7), a CCPC is a private corporation that is a Canadian corporation which is not controlled by a non-resident person or a public corporation, or a combination of them.
Incidentally, subsection 248(1) defines a SBC as a CCPC of which all or substantially all (i.e. at least 90%) of the fair market value of its assets is attributable to assets used principally (i.e. more than 50%) in an active business it carries on primarily in Canada. Whether a particular asset is used principally in an active business is a question of fact. In this regard, the Seller must be a CCPC at the end of the taxation year in which the debt is established to be a bad debt and a SBC at any time during the 12 months period ending before the moment it declared bankruptcy. In your situation, the question of whether the advance payments give rise to a capital loss or a BIL is a question of fact that can only be answered in light of all the relevant circumstances.
Unlike a deductible capital loss that can only be deducted against a taxable capital gain, an ABIL for a given taxation year may be deducted from all sources of income for that year. Generally, an ABIL that cannot be deducted in the year it arises is treated as a non-capital loss which may be carried back 3 years and forward 10 years to be deducted in calculating taxable income of such other years. Any such loss that is not deducted by the end of that period is then treated as a net capital loss so that it can be carried forward indefinitely to be deducted against taxable capital gains. For additional information on BIL, please see Interpretation bulletin IT-484R2, ARCHIVED Business Investment Losses, on the CRA's web site.
We trust that these comments will be of assistance.
Yours truly,
François Bordeleau, LL.B.
Manager
Business and Employment Income Section
Income Tax Rulings Directorate
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