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. Is the income earned by a farmer under a FIT / microFIT contract considered farming income? 2. Is the income earned by a farmer for the rental of farmland to a third party who enters into FIT / microFIT contract considered farming income? 3. Would the income earned by a farmer under items 1 & 2 be considered incidental to farming income?
Position: 1. No. 2. No. 3. Not likely.
Reasons: These activities in of themselves would not meet the definition of farming contained in subsection 248(1) of the Act. In addition, the arrangements appear to be long-term in nature and involve a significant capital investment.
XXXXXXXXXX 2010-037126
Bob Naufal
July 21, 2010
Dear XXXXXXXXXX :
Re: Technical Interpretation Request - Farming income and Feed-In Tariff Program
We are writing in response to your email dated June 16, 2010, wherein you requested our comments on the income tax consequences with respect to your proposed participation in the Province of Ontario's Feed-In Tariff ("FIT") or microFIT Progams implemented by the Ontario Power Authority ("OPA"). In your email, you propose two scenarios as follows:
1. To acquire and install a solar photovoltaic ("pv") system on a barn on your farm and enter into a 20 year contract with the OPA (the "Contract") to sell all of the electricity generated by the solar pv system to the OPA; or
2. To lease a portion of your farmland to an arm's length party, who would install a ground mounted solar pv system and enter into the Contract.
In each scenario you have asked for our views as to whether the income that you will earn under the Contract or the lease of your farmland is considered farming income.
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 specific situations that you have described, otherwise than in the form of an advance income tax ruling, we will provide the following general comments.
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 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 is a separate transaction from the participant's consumption of electricity.
Income from a source
Based on our understanding of the terms and conditions of each of the FIT and microFIT Programs, it is our view that the income earned under the terms of the Contract would generally be income from a source that is a business or property for the participants of the Programs, 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.
Farming
Pursuant to its definition in subsection 248(1) of the Act, "farming" includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising poultry, fur farming, dairy farming, fruit growing and the keeping of bees. However, this list is not exhaustive and the courts have considered that the word "farming" also includes tree farming, the operation of a wild game reserve and a mechanical hatching operation where eggs are acquired, hatched in incubators and the chicks sold within a few days of hatching. Generally, farming involves all aspects of commercial production of crop, including natural growth, but does not include the processing of goods. In this regard, it is our view that neither the sale of electricity under the terms of the Contract nor the lease of farmland, in the scenarios described above, is considered a farming activity.
In addition, the CRA will generally consider income from certain activities that, by themselves would be non-farming activities, to be income from a farming business if the activities are incidental to the taxpayer's farming operations and the income generated by these activities is not material in relation to the taxpayer's farming revenue. The expression "incidental" is not defined in the Act, but implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether a particular activity is incidental to another would include the income generated and the capital or labour invested in each activity. When these factors are considered in the context of the FIT / microFIT Programs, it is our view that income under the scenarios described above would not be considered incidental to a farming business.
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.
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.
In our view, where a taxpayer acquires a Class 43.1 or 43.2 property primarily to generate electrical energy for sale and not to be consumed in the taxpayer's business, the property will be a "specified energy property" for purposes of subsection 1100(24) of the Regulations and CCA on that property can not be deducted to the extent that it would create or increase a loss from all specified energy property owned by the taxpayer. For example, where a taxpayer who operates a farming business acquires a Class 43.2 property to participate in the FIT or microFIT Programs, rather than for use in the taxpayer's farming business, CCA on the property would not be available to be deducted against the taxpayer's income from other sources, including the farming business.
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 farm business in Canada and participates in the FIT or microFIT Programs, 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, which are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5, are of assistance.
Yours truly,
Fiona Harrison
Manager
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2010
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2010