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 income received under the microFIT program should be reported as part of farming income or as separate business income. 2. Whether a farmer's rental of land to another individual for the purpose of installing and operating a solar PV installation would be included in farming income. 3. General comments on CCA requested.
Position: 1. and 2. Question of fact. 3. General comments provided.
Reasons: 1. and 2. Whether or not the income from non-farming activities could be regarded as farming income would generally depend on whether the other activities are incidental to the farming operations or are, in fact, a separate business.
2011-042438 T. Posadovsky, CMA
February 21, 2012
Dear XXXXXXXXXX :
Re: Solar Installations
We are writing in reply to your correspondence of October 17, 2011, wherein you asked several questions in respect of the Province of Ontario's microFIT (Feed-In Tarrif) renewable energy program (the "Program"). We apologize for the delay in our response.
You wish to know whether income received under the Program should be reported as part of a taxpayer's farming income or as separate business income. Similarly, you ask whether the farmer's rental of land to another individual for the purpose of installing and operating a solar photovoltaic ("PV") installation would be included in farming income. You also request some information in respect of the capital cost allowance ("CCA") rules associated with roof and ground-mounted solar PV installations.
Income from a source
The microFIT Program was developed to encourage the development of small renewable power projects that generate 10 kilowatts (kW) or less of electricity. An individual, partnership or corporation (the "Participant") enters into a contract with the Ontario Power Authority ("OPA") to supply electricity generated from the Participant's renewable energy project to the electricity distribution system. The Participant is paid a guaranteed fixed rate for each kilowatt hour (kWh) of electricity produced. All of the energy generated from the renewable energy project is sold to the Provincial power grid and is a separate transaction from the Participant's purchase and consumption of electricity. Based on our understanding of the terms and conditions of the microFIT Program, it is our view that income from such an arrangement would generally be income from a source that is a business or property under section 9 of the Income Tax Act (the "Act").
Whether or not a particular activity is considered to be "farming" for the purposes of the Act is a question of fact. The definition of "farming" in subsection 248(1) of the Act is very broad, but is generally regarded as the tillage of soil, raising or exhibiting of livestock, maintenance of horses for racing, raising of poultry, keeping of bees, fur farming, dairy farming and fruit growing.
Notwithstanding the above, where a taxpayer is actively involved in a farming business and also derives income from other activities that, if considered alone, would not constitute farming, it is our view that whether or not the income from the other activities can be included in farming income would generally depend on whether the other activities are incidental to the farming operations or are, in fact, a separate business. The expression "incidental" implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether particular activities are incidental to the farming operation would include the quantum of income generated, the scale of operations and the relative capital or labour invested in the non-farming activity. Accordingly, whether or not a Participant's income received from the microFIT Program, or from the rental of real property to another Participant, is incidental to the taxpayer's farming activities is a question of fact that can only be determined on a case-by-case basis.
Class 43.2 renewable energy property
By virtue of paragraph 1102(1)(c) of the Income Tax Regulations (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 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)(vi) of Class 43.1 includes fixed location PV equipment that is used by the taxpayer, or a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy 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 is, among other things, 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 and distribution equipment is not eligible for inclusion in Class 43.1.
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 certain components of a solar PV installation, 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).
The CCA deduction limitation does not apply to certain corporations (and partnerships each member of which was an eligible corporation) whose principal business is:
- manufacturing or processing,
- mining, or
- the sale, distribution, or production of energy.
A determination of whether a particular property is a specified energy property can only be made following a review of the facts of a particular situation. It is our view, however, that where a taxpayer who operates a farming business acquires the property and participates in the Program and the amount of electricity consumed in carrying on the farming business exceeds 50 percent of the electricity generated by the property, the property would not be a specified energy property. On the other hand, where the amount of electricity consumed in carrying on the farming business of the taxpayer does not exceed 50 percent of the electricity generated by the property, the property will be a specified energy property and the CCA will be restricted accordingly.
For more information on specified energy property and other taxation issues related to the FIT/microFIT programs, please visit our Website at http://www.cra-arc.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html for more information.
We trust the above comments will be of some assistance.
Fiona Harrison, C.A.
Reorganizations and Resources Division
Income Tax Rulings Directorate
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