26 May 2010 External T.I. 2009-0342121E5 - rooftop solar panels & class 43.2

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.will rooftop solar panels & equip qualify for inclusion in class 43.2 under various scenarios subject to the specified energy rules limiting CCA . 2.will claiming cca jeopardize the principal residence exemption?

Position: 1.provided expenses incurred for the purpose of producing income & other conditions of the class are met; 2. the principal residence claim will not be jeopardized provided no cca claim is made on the building itself & the earning of income is ancillary to the residence use.

Reasons: 1. 1102, 1100(25); 1100; 2.45(2) & IT120-r6

XXXXXXXXXX
							2009-034212
							Lena Holloway

May 26, 2010

Dear XXXXXXXXXX :

Re: Technical Interpretation Request regarding Capital Cost Allowance of Solar Panels

This is in response to your facsimile correspondence of September 24, 2009 requesting our views as to the income tax treatment of the purchase of solar photovoltaic systems under various hypothetical scenarios. Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act").

Your enquiry relates to situations where taxpayers acquire solar photovoltaic systems in order to participate under certain incentive programs offered in the Province of Ontario to promote the greater use of renewable energy.

You have asked us to confirm:

(i) that the cost of the solar photovoltaic system including installation costs would be eligible for inclusion in Class 43.2 of Schedule II to the Income Tax Regulations (the "Regulations");

(ii) that a homeowner that purchases a newly constructed home that includes a solar photovoltaic system integrated into the roof of the home, could allocate a reasonable portion of the total cost of the home to the solar photovoltaic system for inclusion in class 43.2;

(iii) that any capital cost allowance claimed in respect of the solar photovoltaic system would not impact a home's status as a principal residence on a future disposition of the home; and

(iv) that a homeowner who leases the roof of his or her home to certain taxpayers that acquire and install solar photovoltaic systems thereon, would continue to maintain the home as a principal residence.

Background Information

The Ontario Power Authority (the "OPA") has developed a Feed-In Tariff (the "FIT") Program for the Province of Ontario to encourage and promote the greater use of renewable energy sources, including wind, waterpower, renewable biomass, bio-gas, landfill gas and solar photovoltaic, for electricity generating projects in Ontario. The microFIT Program is a stream of the FIT Program and allows for the participation in "micro" renewable energy projects (10 kW or less).

Under each of the FIT or microFIT Programs, a participant with an approved renewable energy project will enter into a contract with the OPA to supply the electricity generated from the renewable energy project to the electricity distribution system. The terms of the contract generally provide that the participant will be paid for each kWh of electricity generated from the renewable energy project, regardless of whether the electricity is consumed by the participant or delivered to the electricity distribution system.

To qualify under each of the FIT or microFIT Programs, participants 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.

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.

Capital cost allowance ("CCA")

By virtue of paragraph 1102(1)(c) of the Regulations, a taxpayer may claim CCA only on the classes of property described in Schedule II to the Regulations that were acquired for the purpose of earning income. Where a person 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 that acquires and installs a solar photovoltaic system and enters into a microFIT contract would generally meet the income earning requirement of paragraph 1102(1)(c) of the Regulations, and is therefore eligible to claim CCA on the solar photovoltaic system.

Where the income earning requirement is met, fixed location photovoltaic equipment 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 in Class 43.2 under paragraph (b) of that Class. 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 photovoltaic system that qualify for inclusion in these CCA classes 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 photovoltaic system that are not eligible to be included in Class 43.2 or 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.

Property included in Class 43.2 is eligible for a CCA rate of 50 per cent, while property included in Class 43.1 is eligible for a CCA rate of 30 per cent, each on the declining balance basis. However, pursuant to the "available for use rules" contained in subsections 13(26) to (31) of the Act, CCA for a Class 43.2 or 43.1 property that was acquired and 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 is subject to a limitation of 50% of the CCA otherwise deductible in that first year pursuant to 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 of the property 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 photovoltaic 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 photovoltaic system 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.

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 individual homeowners, who acquire rooftop solar photovoltaic systems under the microFIT Program, acquire such property primarily to generate energy for sale from the solar photovoltaic systems. Accordingly, the rooftop solar photovoltaic systems would be considered a "specified energy property" for the individual homeowners and pursuant to subsection 1100(24) of the Regulations, CCA would be restricted in the manner described above.

Principal Residence

As outlined in Interpretation Bulletin IT-120R6 "Principal Residence", where a taxpayer has partially converted 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 property 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. Paragraph 45(1)(c) of the Act also provides for a deemed reacquisition immediately thereafter of the same portion of the property at a cost equal to the very same amount. Any gain otherwise determined on the deemed disposition is usually eliminated or reduced by the principal residence exemption.

In addition, paragraph 32 of the bulletin indicates that it is not the CRA's practice to apply the deemed disposition rule, but rather to consider that the entire property 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 property as a residence,

(b) there is no structural change to the property, and

(c) no CCA is claimed on the property.

The determination of whether these conditions are met in respect of a particular property is generally a question of fact that can only be made on a case by case basis.

Where a homeowner acquires a newly constructed home as a principal residence and the home includes a solar photovoltaic system, the solar photovoltaic system will be considered as property of a separate class that may qualify under Class 43.2 provided all the relevant criteria is met. In such a case, the homeowner could allocate a reasonable portion of the purchase price to the cost of the solar photovoltaic system.

Where a homeowner enters into a contract under the microFIT program in respect of the acquisition and installation of a roof-top solar photovoltaic system (including a system integrated as part of the roof of a home), it is our view that the home will maintain its status as a principal residence.

Where a homeowner leases the roof of his or her principal residence to a third party that participates in the microFIT Program, it is our view that a change in use has occurred to a portion of the principal residence. Accordingly, the homeowner would have a deemed disposition under paragraph 45(1)(c) of the Act on the portion of the property so converted, unless the above-described conditions are met.

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 Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch