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 the ground source heating and cooling system described is included in Class 43.2 / 43.1 of Schedule II of the Regulations.
Position: Question of fact, but it appears that parts of the system will qualify for inclusion in Class 43.2 / 43.1.
Reasons: 43.1(d)(i)(A)(II)
XXXXXXXXXX
2011-043043
T. Posadovsky, CMA
February 7, 2012
Dear XXXXXXXXXX :
Re: Renewable Energy Property
We are writing in reply to your correspondence of October 18, 2011 concerning whether certain property would qualify for inclusion in Class 43.2 of Schedule II to the Income Tax Regulations (the "Regulations"). You also asked for more information in respect of the capital cost allowance ("CCA") that can be claimed on such property as well as any limitations that may be applicable.
In the situation you described, a taxpayer that carries on a motel business installs a geothermal ground source heat pump ("GSHP") to assist with heating and cooling of the motel building in order to reduce its energy costs. A GSHP is a central heating and/or cooling system typically used to reduce operational costs of a conventional heating and cooling system by using the earth as a heat source in the winter and a heat "sink" in the summer. A typical GSHP system will include a heat pump, in-ground piping and one or more heat exchangers.
Class 43.2 renewable energy property
By virtue of paragraph 1102(1)(c) of the Regulations, the classes of property described in Schedule II to the Regulations may only include property that was acquired by the taxpayer for the purpose of gaining or producing income. Provided that this requirement is satisfied, certain property situated in Canada that generates or conserves electrical and/or heat energy by using renewable energy sources may qualify for inclusion under paragraph (d) of Class 43.1 if it otherwise meets the requirements of a particular subparagraph thereto. Property that would otherwise be included in Class 43.1 because of paragraph (d) of that class may also be included in Class 43.2 of Schedule II provided that the property was acquired after February 22, 2005 and before 2020 and was not included in any other class by any taxpayer before it was acquired.
Property included in Class 43.2 is eligible for a CCA deduction rate of 50 percent on the declining balance basis. However, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Income Tax Act, CCA for a 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 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 Regulations.
Specific to your query, subparagraph (d)(i) of Class 43.1 includes, among other things, property used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of heating an actively circulated liquid or gas and is equipment that is part of a GSHP system that transfers heat to or from the ground or groundwater (but not to or from surface water such as a river, a lake or an ocean) and that, at the time of installation, meets the standards set by the Canadian Standards Association for the design and installation of earth energy systems. This includes equipment that consists of piping (including above or below ground piping and the cost of drilling a well, or trenching, for the purpose of installing that piping), energy conversion equipment, energy storage equipment, control equipment and equipment designed to enable the system to interface with other heating or cooling equipment. Property that is a building, part of a building (other than a solar collector that is not a window and that is integrated into a building), equipment used to heat water for use in a swimming pool, energy equipment that backs up equipment described in subclause (A)(I) or (II) of subparagraph (d)(i), or equipment that distributes heated or cooled air or water in a building, is not eligible for Class 43.1. This means that any part of the GSHP system that is considered to be an integral part of the motel building or a fixed internal distribution system would not qualify for inclusion in Class 43.2.
Specified energy property
Subsections 1100(24) to (29) of the Regulations limit the amount of CCA that may be claimed on property that is considered to be "specified energy property". Where a property is a "specified energy property", the CCA on the property cannot be deducted to create or increase a loss from the specified energy property that can be used to offset other sources of income. Specified energy property includes, among other things, property that is described in Class 43.2 or 43.1, such as a GSHP system, but does not include property acquired to be used by the owner primarily for the purpose of earning income from a business carried on in Canada (other than the business of selling the energy generated from that property).
Based on your description, it appears that the taxpayer will acquire the property with the intention of using it primarily for the purpose of earning income from a motel business carried on in Canada. Therefore, the system would not generally be considered a specified energy property. However, such a determination is a question of fact that can only be made on a case by case basis.
We trust our comments will be of assistance.
Yours truly,
Fiona Harrison, C.A.
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
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