Principal Issues: The taxpayer requested clarification of the CCA implications relating to the acquisition of solar photovoltaic (PV) equipment under the Ontario microFIT Program. Specifically, the taxpayer requested clarification as to whether the equipment would be subject to any restrictions with respect to CCA.
Position: General comments provided with respect to CCA availability. Where a taxpayer who operates a farming business acquires a Class 43.2 property (such as solar PV equipment) and participates in the microFIT program and the amount of electricity consumed in carrying on the farming business exceeds 50% of the electricity generated by the property, the taxpayer would normally be entitled to deduct CCA on the property against his/her income. On the other hand, if the amount of electricity consumed in carrying on the farming business does not exceed 50% of the electricity generated by the solar PV equipment, the CCA on the property cannot be deducted to the extent that it would create or increase a loss from the property.
Reasons: Consistent with the income tax policy intent to encourage investments in clean energy and energy conservation equipment.
XXXXXXXXXX 2011-039684 Bob Naufal (613) 957-2097
April 21, 2011
Dear XXXXXXXXXX :
Re: Ontario microFIT program
We are writing in response to your correspondence dated January 26, 2011. In your correspondence you requested clarification of the capital cost allowance (CCA) rules for property described as solar photovoltaic (PV) equipment (the "Property"). It is our understanding from your correspondence and our phone discussion March 9, 2011 (Naufal/XXXXXXXXXX ) that you have acquired the Property and propose to participate under the Province of Ontario's microFIT program. Accordingly, you will enter into a contract with the Ontario Power Authority to sell all the electricity generated by the Property to the Ontario Power Authority, at a fixed rate over a 20 year period. You also informed us that you operate a farming business.
Our Comments
Written confirmation of the tax consequences that apply to a particular fact situation is given by this Directorate only in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the CRA Web site at www.cra-arc.gc.ca. However, we are prepared to provide the following general comments, which may be of assistance.
The microFIT Program
It is our understanding that the microFIT Program is a stream of the Feed-In Tariff ("FIT") Program that was introduced pursuant to Ontario's Green Energy Act, 2009, which was enacted to encourage the development of renewable energy projects in Ontario. The microFIT Program 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.
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. 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. Based on our understanding of the microFIT Program, a participant in the Program would meet the income earning requirement of paragraph 1102(1)(c) of the Regulations, and, therefore, would be eligible to claim CCA.
Where the income earning requirement is met, fixed location photovoltaic equipment (e.g. solar PV 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 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.
In addition, for any property to be eligible for inclusion in Class 43.2 / 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 / Class 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.
Restriction on CCA deduction
Subsection 1100(24) of the Regulations restricts the amount of CCA with respect to property that is "specified energy property" as defined in subsection 1100(25) of the
Regulations. 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 restricted to the lesser of:
(a) the amount of CCA otherwise determined for such property, or
(b) 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.
Pursuant to its definition in subsection 1100(25) of the Regulations, "specified energy property" is generally property that is included in Class 43.2 / Class 43.1, such as solar PV equipment. A particular property included in Class 43.2 / Class 43.1 would generally not be a specified energy property in the following circumstances:
(a) where it is expected that more than 50% of the energy produced by the particular property 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 particular property); or
- another property operated in Canada by the owner of the property; or
(b) to certain leasing situations where certain conditions are met.
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. Where a taxpayer who operates a farming business acquires the Property and participates in the microFIT program and the amount of electricity consumed in carrying on the farming business exceeds 50% of the electricity generated by the Property, the Property would not be a specified energy property. On the other hand, where the amount of electricity consumed in carrying on the farming business of the taxpayer does not exceed 50% of the electricity generated by the Property, the Property will be a specified energy property and the CCA will be restricted accordingly.
We trust that our comments will be of assistance.
Yours truly,
Fiona Harrison
Manager
Resources Industries Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch