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 on the residence of an individual. Several issues discussed including income recognition, expense deduction, CCA deductibility, and principal residence status.
Position: 1) Income under the contract considered income from a source that must be reported for income tax purposes; 2) Certain expenses deductible as noted herein; 3) CCA on the solar photovoltaic system is available, subject to the CCA deduction restrictions described in subsection 1100(24) of the Regulations; and 4) Principal residence status of home should be preserved.
Reasons: Reasons described herein.
2010-035342
XXXXXXXXXX Bob Naufal
(613) 957-2097
April 16, 2010
Dear XXXXXXXXXX :
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 a homeowner's participation in the Feed-In Tariff ("FIT") and microFIT Progams offered by the Ontario Power Authority. In particular, you have asked the following questions:
1. Will a homeowner who acquires and installs a solar photovoltaic ("solar pv") system on the roof of his or her home and signs a contract under the microFIT Program be required to report income for tax purposes?
2. Can the homeowner deduct expenses (e.g. loan interest to purchase and install the solar pv system, additional insurance costs, repairs and maintenance) against the income under the microFIT contract?
3. Can the homeowner deduct capital cost allowance ("CCA") with respect of the costs of the solar pv system?
4. Will the homeowner's participation in the microFIT Program affect the home's status as a principal residence?
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 (the "Agency") to comment on such situations when the identity of the taxpayers is unknown.
However, as discussed with you on April 13, 2010 (Naufal / XXXXXXXXXX ), 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, which was introduced pursuant to Ontario's Green Energy Act, 2009, 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 the each of the FIT or 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 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 is a separate transaction from the participant's consumption of electricity.
Income tax consequences
It is our view that, under the terms and conditions of the microFIT Program, a homeowner has acquired a property that generates electrical energy for sale to the provincial power grid. Accordingly, income from such an arrangement would generally be income from a source that is a business or property, subject to section 3 of 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 that can only be made on a case by case basis.
Since a homeowner is considered to be earning income from a source that is business or property, the homeowner may deduct any reasonable current expenses incurred to earn such business or property 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 homeowner's personal consumption of electricity is considered a personal expense that 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. In our view, a homeowner who enters into a microFIT contract generally meets the income earning requirement of paragraph 1102(1)(c) of the Regulations, and, therefore, is eligible for 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.
Assets that may be part of a solar pv system that are not eligible to be included in Class 43.2 / Class 43.1 are a building or a part of a building (other than a solar cell or module that is integrated into a building), electrical distribution equipment, 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 limits 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.
The CCA deduction limitation would not apply where it is expected that more than 50% of the energy produced by the solar pv 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.
It is our view that homeowners who acquire rooftop solar pv systems to participate under the microFIT Program acquire such property primarily to generate energy for sale from the solar pv systems. Accordingly, CCA on the solar pv system is limited to the net income (before any deduction for CCA) earned under the microFIT contract, as discussed above.
Principal Residence
Generally, if a taxpayer has partially converted a home that would otherwise qualify as a principal residence to an income-producing use, paragraph 45(1)(c) of the Act provides for a deemed disposition of the portion of the home so converted (such portion is usually calculated on the basis of the area involved) for proceeds equal to its proportionate share of the property's FMV.
However, it is generally our practice not to apply the deemed disposition rule on a home, but rather to consider that the home retains its nature as a principal residence, where all of the following conditions are met:
a) the income-producing use is ancillary to the main use of the home as a residence,
b) there is no structural change to the home, and
c) no CCA is claimed on the home.
Where a homeowner acquires and installs a solar pv system on the roof of his or her home and enters into a contract under the microFIT Program, it is our view that the home will maintain its status as a principal residence, provided that the above-noted conditions are met.
Where the homeowner sells his or her residential home, which includes a solar pv system, a reasonable portion of the sale price must be allocated as proceeds of disposition of the system. This may result in a recapture into income of any CCA claimed on the solar pv system and such recaptured income must be reported for income tax purposes. For further information on reporting dispositions of depreciable property, please refer to Chapter 4 of Guide T4002, Business and Professional Income.
The balance of the sale price is generally allocated to the residential home. If the residential home was designated as a principal residence for every year that it was owned, there will be no income tax consequences on the disposition of the residential home. For further information on "principal residence", see Chapter 6 of Guide T4037, Capital Gains.
We trust that our comments will be of assistance to you.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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