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: Can a partnership claim CCA on the cost of depreciable property that is a rooftop photovoltaic system acquired by the partnership to generate electricity that is sold to the Ontario Power Authority pursuant to the Feed-In Tariff Program?
Position: Yes, provided that 1) the photovoltaic system is acquired for an income earning purpose, and 2) the CCA is computed within the specified energy property restrictions described in subsection 1100(24) of the Regulations.
Reasons: The legislative wording.
2009-034355
XXXXXXXXXX Bob Naufal
(613) 957-2097
May 17, 2010
Dear XXXXXXXXXX :
We are writing in response to your letter dated September 21, 2009, wherein you request our comments on the income tax implications with respect to the purchase and installation of a solar photovoltaic ("solar pv") system to generate electricity for sale to the power grid in the Province of Ontario pursuant to the Feed-in-Tariff Program (the "FIT Program") offered by the Ontario Power Authority. In your letter, you describe a situation whereby you and your spouse would jointly acquire a solar pv system and enter into a contract with the Ontario Power Authority to sell all of the electricity generated by the system at a fixed price over a 20 year period. You also advise that it is your intention to install the solar pv system on a commercial roof that will be leased. It is our understanding that it is your intention to carry out this arrangement by way of a partnership formed by you and your spouse and that this partnership will not carry out any other activity.
In particular, you have asked whether the partnership would be eligible to claim sufficient capital cost allowance ("CCA") in respect of the cost of the solar pv system to create a loss in the partnership that can be allocated to the partners to offset the partners' income from other sources.
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.
As discussed with you on April 15, 2010 (Naufal / XXXXXXXXXX ), we are unable to issue an advance income tax ruling as requested in your letter. However, we can provide the following general comments which we hope will be of assistance to you.
The FIT Program
It is our understanding that the FIT Program is designed to encourage the development of renewable energy projects in Ontario that generate more than 10 kilowatts of electricity. The microFIT Program is a stream of the FIT Program and 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 each of the FIT or microFIT Programs, 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 each 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 to be a separate transaction from the participant's consumption of electricity.
Capital cost allowance
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 ("Schedule II") only include property that was acquired by a taxpayer for the purpose of earning income. Based on our understanding of the situation described in your letter, the partnership appears to meet the income earning purpose.
Where the income earning requirement is met, fixed location photovoltaic equipment (such as a solar pv system), acquired after February 22, 2005 and before 2020, that is used by the 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 of Schedule II of the Regulations. 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.
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 Income Tax 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.
Where property is held in a partnership, subsection 1102(1a) of the Regulations provides that CCA on depreciable property acquired and owned by a partnership is claimed at the partnership level.
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. However, 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.
While the 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 that where a taxpayer, other than a corporation or partnership described in the previous paragraph, acquires a Class 43.2 or 43.1 property such as a solar pv system, primarily to generate electricity for sale and not for consumption in a business or other property of the taxpayer, the property would be considered a specified energy property for purpose of subsection 1100(24) of the Regulations, and therefore subject to the CCA deduction limitation. Accordingly, in the situation described in your letter, CCA cannot be deducted by the partnership to create or increase a loss that can be used to reduce a partner's income from other sources.
We trust that our comments, provided in accordance with paragraph 22 of Information Circular 70-6R5, will be of assistance.
Yours truly,
Fiona Harrison
Manager
Resources Industries Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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