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: Does certain zero-emission compact heavy equipment used in construction qualify for the enhanced first-year CCA rate afforded by Class 56 of Schedule II of the Regulations?
Position: Likely yes, provided that all the conditions are met. General Comments provided.
XXXXXXXXXX 2022-094858
Nicki Verlinden
October 11, 2022
Dear XXXXXXXXXX,
Subject: CCA Class 56- Zero-emission heavy equipment
We are writing in response to your email dated September 7, 2022. In your email, you requested our views on whether certain types of fully-electric compact heavy equipment are eligible for the temporary enhanced first-year capital cost allowance (“CCA”) rules applicable to zero-emission automotive equipment. Specifically, you enquired about a fully-electric skid steer loader such as XXXXXXXXXX (footnote 1) , and a zero-emission excavator such as XXXXXXXXXX(footnote 2) , which would be acquired by the taxpayer from dealers of such equipment (new) and used in the operation of the taxpayer’s construction business.
This document provides general comments on the application of the Income Tax Act (footnote 3) (“Act”). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70- 6R12, Advance Income Tax Rulings and Technical Interpretations.
Unless otherwise indicated, all references herein are to the Act or to the Income Tax Regulations (footnote 4) (the “Regulations”).
A. Legislative history
As part of the 2019 Federal Budget, the Government introduced a temporary enhanced first-year CCA rate of 100% in respect of eligible zero-emission vehicles. Two new CCA classes were created: Class 54 and 55.
Eligibility for Classes 54 and 55 is limited to equipment that qualifies as a “motor vehicle”, as that term is defined in the Act. As a result of this definition, eligibility for Classes 54 and 55 is restricted to automotive vehicles designed or adapted to be used on highways and streets. Consequently, off-road automotive vehicles and equipment are excluded from Classes 54 and 55.
Then, in the 2021 Federal Budget, the Government introduced measures to extend the temporary first-year enhanced CCA rate of 100% in respect of zero-emission automotive equipment and vehicles that did not benefit from the accelerated rate provided by Classes 54 and 55. These vehicles and equipment would be included in new Class 56. (footnote 5)
This legislative measure is expected to encourage taxpayers to adopt technologies that would reduce emissions of greenhouse gases and air pollutants. (footnote 6)
B. The Conditions of Class 56 - Zero-emission automotive equipment
To be eligible for inclusion in Class 56, the property must be acquired and become available for use after March 1, 2020 and before 2028, and must meet the following conditions:
1. the property must be automotive equipment, other than a motor vehicle (footnote 7) ;
2. the property must be fully-electric, fully powered by hydrogen or fully powered by a combination of electricity and hydrogen (footnote 8) ; and
3. the property must qualify as accelerated investment incentive property (“AIIP”), as defined in subsection 1104(4) of the Regulations (if read without its exclusion for Class 56) (footnote 9) .
While not relevant to the specific question asked, for completeness, Class 56 also includes an addition or alteration made by the taxpayer to automotive equipment (other than a motor vehicle) to the extent it causes the automotive equipment to become fully electric or powered by hydrogen.
The Department of Finance Explanatory Notes to Class 56 state that:
the exclusion of motor vehicles is generally intended to result in Class 56 capturing all such automotive equipment that is not designed for use on highways or streets. Those that are designed for use on highways or streets should generally be eligible for inclusion in Class 54 or 55. (Emphasis added).
The Explanatory Notes further state that “Class 56 is intended to include any type of zero-emission automotive (i.e., self-propelled) equipment that is not a motor vehicle.”(Emphasis added).
C. Meaning of “automotive equipment”
The phrase “automotive equipment” is not defined in the Act, however the CRA has broadly interpreted it to include all sorts of properties.
In paragraph 1.118 of Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance (dated February 27, 2019), under the sub-heading “Certain words may have wider meanings”, we stated:
Certain words in the Regulations used to describe properties may have wider meanings than those ordinarily attributed to them. For example, automotive equipment in Class 10 may include outboard motors, motorhomes, self-propelled sprayers, all-terrain vehicles, and air cushion vehicles popularly known as hovercraft.
Additionally, in document 2011-0402501E5, we interpreted the meaning of the word “automotive” in the context of the phrase “automotive equipment” and stated the following, which is consistent with the Department of Finance Explanatory Notes referred to above:
The word “automotive” should be given its ordinary meaning since this term is not defined in the Income Tax Act. In this regard, the Merriam Webster dictionary defines “automotive” as “moving by itself; self-propelling or self-propelled”.
D. Application of the Enhanced First-Year CCA Rate
The enhanced first-year CCA deduction for Class 56 applies only for the tax year in which the zero-emission automotive equipment first becomes available for use. The deduction is subject to the following phase-out period:
- 100% if it becomes available for use after March 1, 2020 and before 2024;
- 75% if it becomes available for use after 2023 and before 2026; and
- 55% if it becomes available for use after 2025 and before 2028.
The CCA is deductible on any remaining balance in the new class on a declining balance basis, at the CCA rate of 30%.
For zero-emission automotive equipment included in Class 56, there is no limit in terms of the capital cost that may be included in that class and eligible for a CCA deduction.
We hope these comments will be of assistance.
Yours truly,
Kimberley Wharram
Manager
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 XXXXXXXXXX
2 XXXXXXXXXX
3 R.S.C. 1985, c. 1 (5th suppl.) as amended.
4 C.R.C c. 945 as amended.
5 Legislation to implement these measures was included in Bill C-30 which received Royal Assent on June 29, 2021.
6 Business Investment in Zero-Emission Automotive Vehicles and Equipment - Canada.ca
7 A “motor vehicle” is defined in subsection 248(1) of the Act to mean an automotive vehicle designed or adapted to be used on highways and streets but does not include (a) a trolley bus, or (b) a vehicle designed or adapted for use exclusively on rails.
8 Vehicles or equipment that are powered partially by electricity or hydrogen (which includes hybrid vehicles and vehicles that require human or animal power for propulsion) are not eligible.
9 In general, this means that either the automotive equipment is “new”, and was therefore was never the subject of a CCA deduction or a terminal loss; or, if it is “used”, such equipment was not acquired by the taxpayer on a tax-deferred “rollover”, nor previously owned or acquired by the taxpayer or a person or partnership that was not dealing at arm’s-length with the taxpayer. Furthermore, the anti-avoidance rule for AIIP in subsection 1102(20.1) of the Regulations must also be taken into consideration.
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