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: The income tax consequences arising from the purchase of a solar photovoltaic system and the participation in the Ontario microFIT Program. In particular, can CCA be claimed on the solar photovoltaic system.
Position: CCA on the solar photovoltaic system is available, subject to the CCA deduction restrictions described in subsection 1100(24) of the Regulations.
Reasons: In the situation described, the solar photovoltaic system is a specified energy property.
2010-036113
XXXXXXXXXX Bob Naufal
(613) 957-2097
May 17, 2010
Dear XXXXXXXXXX :
Re: Ontario microFIT program
We are writing in response to your letter dated January 7, 2010, wherein you requested our comments on the income tax consequences with respect to your participation in the Province of Ontario's microFIT Progam. In your letter, you describe that you have registered a sole proprietorship (the "Proprietorship") that will produce and sell electricity. In this regard, the Proprietorship will acquire and install a solar photovoltaic ("solar pv") system to produce electricity and will enter into a contract to sell all the electricity produced to the Ontario Power Authority, at a fixed rate over a 20 year period.
It is our understanding that the Proprietorship will not carry out any other business activities and that none of the electricity produced by the solar pv system will be consumed by your residence.
You have asked whether the Proprietorship will be entitled to claim capital cost allowance ("CCA") in respect of the cost of the solar pv system.
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 of an advance income tax ruling request, as described in Information Circular 70-6R5, dated May 17, 2002. The review of fact situations involving specific taxpayers and transactions or events that have already taken place is the responsibility of the local tax services office where the taxpayer resides and it is not the practice of the Canada Revenue Agency to comment on such situations when the identity of the taxpayers is unknown.
However, we can provide the following general comments which we hope will be of assistance to you.
The microFIT Program
It is our understanding that the microFIT Program is a stream of the Feed-In Tariff ("FIT") Program that was introduced pursuant to Ontario's Green Energy Act, 2009, which was enacted to encourage the development of renewable energy projects in Ontario. The microFIT Program is intended to encourage the development of "microscale" renewable energy projects which are described as very small renewable power projects that generate 10 kilowatts (kW) or less of electricity.
To qualify under the microFIT Program, applicants must ensure that the project meets certain technical requirements, must be willing to make necessary investments in their facilities, and must bear the costs of connection to the electrical distribution system and metering as well as certain ongoing costs of operation and maintenance.
In addition, based on our understanding of the terms of the Program, all of the energy generated from the renewable energy project is sold to the Provincial power grid, regardless of whether such electricity is consumed by the participant. In this regard, a participant's sale of electricity to the power grid is determined by a separate meter from the participant's consumption of electricity. Accordingly, it is our view that the sale of electricity to the power grid would be a separate transaction from the participant's consumption of electricity.
Income tax consequences
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 for the Proprietorship, subject to section 3 of the Income Tax Act (the "Act"), provided there is a reasonable expectation of profit. The determination of whether a source of income is considered business or property income is generally a question of fact that can only be made on a case by case basis.
Since the Proprietorship would be considered to be earning income from a source that is business or property, reasonable current expenses incurred to earn such business or property income may be deducted in arriving at taxable income. In this regard, expenses may, for example, include any incremental increases to property taxes and insurance resulting from the installation of the solar pv system. However, it should be noted that expenses incurred by a homeowner in respect of the consumption of electricity for personal purposes is not deductible for income tax purposes.
Capital cost allowance ("CCA")
By virtue of paragraph 1102(1)(c) of the Income Tax Regulations (the "Regulations"), only property that was acquired by a taxpayer for an income earning purpose would be eligible for CCA and included in the Classes described in Schedule II to the Regulations ("Schedule II"). Where a taxpayer cannot be considered to have acquired a particular property for the purpose of earning income, the property would not be eligible for inclusion in any CCA class. Based on our understanding of the situation described in your letter, the Proprietorship would likely meet the income earning requirement of paragraph 1102(1)(c) of the Regulations, and, therefore, would be eligible to claim CCA.
Where the income earning requirement is met, fixed location photovoltaic equipment (e.g. a solar pv system) acquired after February 22, 2005 and before 2020, not included in another CCA class and that is used by a taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy may qualify for inclusion under paragraph (b) of Class 43.2. Acquisitions of such property on or before February 22, 2005 would qualify for inclusion in Class 43.1 by virtue of subparagraph (d)(vi) of that Class.
Components of a solar pv system that qualify for inclusion in Class 43.2 / Class 43.1 would generally include solar cells or modules and related equipment, including:
(a) inverters, control, conditioning and battery storage equipment (designed to store electrical energy),
(b) support structures, and
(c) transmission equipment up to the interface with either the distribution system or the local utility.
Examples of assets that may be part of a solar pv system but would not be eligible for inclusion in Class 43.2 / Class 43.1 are buildings or parts of a building (other than a solar cell or module that is integrated into a building), electrical distribution equipment, and auxiliary electrical generating equipment.
In addition, for any property to be eligible for inclusion in Class 43.2 or Class 43.1, the property must:
- be situated in Canada; and
- not have been used for any purpose before the taxpayer acquired the property.
Property included in Class 43.2 is eligible for a CCA deduction rate of 50 percent, while property included in Class 43.1 is eligible for a CCA deduction rate of 30 percent, each 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 or 43.1 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. Where a depreciable property is used for both personal and business use, CCA can only be claimed on the portion or percentage of the capital cost that is used for business purposes.
Limitation on CCA
Subsections 1100(24) to (29) of the Regulations limit the amount of CCA that may be claimed on property that is "specified energy property". Generally, "specified energy property" includes inter alia property that is described in Class 43.2 or 43.1, such as a solar pv system. Under subsection 1100(24) of the Regulations, the amount of CCA that may be claimed by a taxpayer in a taxation year for a specified energy property is limited to the lesser of:
- the amount of CCA otherwise determined for such property, or
- the taxpayer's net income (after deducting all expenses, other than CCA, related to earning such income) from all specified energy property of the taxpayer.
In other words, CCA on a specified energy 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. This CCA deduction limitation would not apply:
a) where it is expected that more than 50% of the energy produced by the solar pv system is to be used or consumed in earning income from either:
- another business of the owner carried on in Canada (not including the business of selling the energy generated by the solar pv system); or
- another property operated in Canada by the owner of the property;
b) to certain leasing situations where certain conditions are met; and
c) 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.
It is our understanding that the Proprietorship described in your letter will acquire a Class 43.2 property (i.e. the solar pv system) primarily to generate energy for sale from that property. Accordingly, CCA on the solar pv system will be limited to the net income (before any deduction for CCA) earned under the microFIT contract, as discussed above.
We trust that our comments will be of assistance to you.
Yours truly,
Fiona Harrison
Manager
Resources Industries Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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