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 specified energy property provisions would apply to restrict CCA in a situation where a taxpayer acquired a photovoltaic system to generate electricity which is sold to the Ontario Power Authority under the Standard Offer Program.
Position: If the photovoltaic system is acquired principally for the purpose of generating energy for sale, then the specified energy property rules would apply to restrict the CCA on the photovoltaic system.
Reasons: The legislative wording.
2009-034172
XXXXXXXXXX Bob Naufal
(613) 957-2097
May 17, 2010
Dear XXXXXXXXXX :
Re: Specified Energy Property
We are writing in response to your email dated September 21, 2009, wherein you requested our views in respect of "specified energy property" CCA restrictions as described in subsections 1100(24) and (25) of the Income Tax Regulations (the "Regulations").
In your email, you ask whether a taxpayer, in the retail business (the "Retailer"), that acquires and installs solar photovoltaic ("solar pv") systems on the roofs of several buildings where the retail businesses operate, would be subject to the specified energy property CCA restrictions. You also ask whether a taxpayer, that owns commercial and residential rental properties (the "Landlord"), and acquires and installs solar pv systems on the roofs of the rental properties, would be subject to the specified energy property CCA restrictions. In each situation, the Retailer or Landlord has entered into a contract with the Ontario Power Authority ("OPA"), under the Renewable Energy Standard Offer Program ("RESOP"), to sell all of the electrical energy generated by the solar pv systems to the provincial electrical grid at a fixed price over a 20 year period. The anticipated revenue from the sale of the electricity pursuant to the terms of the contract would be incidental in comparison to the retail or rental revenue, as the case may be, and would reduce the respective occupancy costs of the buildings.
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 matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although we are unable to provide any comments with respect to the particular situations described in your email, otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
Background
As discussed with you (Naufal / XXXXXXXXXX ), please be advised that that the RESOP was replaced, in 2009, by the Feed-In Tariff ("FIT") and microFIT Programs that were introduced pursuant to Ontario's Green Energy Act, 2009 and administered by the OPA. Each of the FIT or microFIT Programs is designed to encourage the development of renewable energy projects in Ontario, with the FIT Program available to projects 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.
It is our understanding that the FIT and microFIT Programs, (and previously the RESOP), are designed to encourage and promote greater use of renewable energy sources from smaller generating projects that would be connected to an electricity distribution system in Ontario. Under each of the Programs, an applicant enters into a contract with the OPA, pursuant to which the applicant will deliver electricity to a local electricity distribution system in Ontario for a 20-year period and receive a specified amount per kilowatt hour for the delivered electricity.
To qualify under each of the FIT and microFIT Programs, applicants must ensure that the project meets certain requirements, must be willing to make necessary investments in their facilities and must bear the costs of connection to the local distribution system and metering, as well as certain ongoing costs of operation and maintenance. Based on our understanding of the terms of each of the FIT and microFIT Programs (and previously the RESOP), all of the energy generated from the renewable energy source [e.g. solar pv, wind] is sold to the Provincial power grid. Moreover, the participant's sale of electricity to the power grid is a separate transaction from the participant's consumption of electricity.
Renewable energy property
In general, by virtue of paragraph 1102(1)(c) of the Regulations, property that is 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 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.
Capital cost allowance - Class 43.1 and 43.2
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.
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. In addition, where a property is a specified energy property for a taxation year, pursuant to subsection 1101(5m) of the Regulations, a separate class is prescribed for that property for that year and for subsequent taxation years.
The CCA deduction limitation would not apply where it is expected that more than 50% of the energy produced by the renewable energy property is to be used or consumed in earning income from either
(a) another business of the owner carried on in Canada (not including the business of selling the energy generated by the particular property); or
(b) another property operated in Canada by the owner of the property.
In addition, the CCA deduction limitation does not apply to certain leasing situations where certain conditions are met.
Furthermore, the CCA deduction limitation does not apply to certain corporations (and partnerships each member of which was an eligible corporation) whose principal business is:
(i) manufacturing or processing,
(ii) mining, or
(iii) the sale, distribution, or production of energy.
In our view, where a taxpayer that is not a corporation (or partnership) as 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, under the FIT/microFIT Programs (or previously the RESOP), as the case may be, and not for consumption in the taxpayer's business, the property would be considered a specified energy property for purposes of subsection 1100(24) of the Regulations, and therefore the CCA deduction limitation discussed above would apply to the property. However, where a taxpayer acquires a solar pv system with the intention of using more than 50% of the electrical energy produced by the solar pv system for the purpose of earning income from a business (but not the business of selling the energy produced) or other property in Canada and participates in the FIT/microFIT Program, the solar pv 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 that our comments are of assistance.
Yours truly,
Fiona Harrison
Manager
Resources Industry Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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