Principal Issues: Would wind turbines qualify for Investment Tax Credits
Position: No
Reasons: Such property would not be prescribed machinery and equipment per regulation 4600(2) for the purposes of the definition "qualified property" in subsection 127(9).
XXXXXXXXXX 2011-039405 S. D'Angelo (613)952-5803
February 21, 2011
Dear XXXXXXXXXX :
Re: Investment Tax Credits - Wind Turbines
This is in response to your correspondence of January 26, 2011, and further to our telephone conversation of February 7, 2011 (D'Angelo/XXXXXXXXXX ), where you asked under what circumstances, if any, would the purchase and use of a wind turbine by a business owner in Prince Edward Island ("PEI") qualify for an investment tax credit ("ITC") under subsection 127(5) of the Income Tax Act (the "Act").
Our Comments
It is our understanding that a wind turbine is essentially considered to be a fixed location device that is a wind energy conversion system that is used primarily for the purpose of generating electrical energy. 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 capital cost allowance ("CCA") and included in the Classes described in Schedule II of 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 above-noted income earning purpose is met, where a new wind turbine situated in Canada was acquired by a taxpayer on or before February 22, 2005, it would have been included in Class 43.1 of Schedule II pursuant to subparagraph (d)(v) of that Class for CCA purposes. However, where a wind turbine is acquired after February 22, 2005 and before 2020, it would be included in Class 43.2 of Schedule II pursuant to paragraph (b) of that Class for CCA purposes.
In order for a wind turbine to be eligible for the ITC it generally must be "qualified property" as that term is defined in subsection 127(9) of the Act. In the case of a depreciable property such as a wind turbine, such property will only be a "qualified property" where each of the following conditions are met: 1) such property is "prescribed machinery and equipment", 2) such property has not been used for any other purpose before it was acquired by the taxpayer and 3) such property is used in Canada for an accepted purpose described in either paragraph 127(9)(c) or (c.1) of the definition of qualified property.
Assuming conditions 2) and 3) have otherwise been met, in order for a wind turbine to be considered as "prescribed machinery and equipment" it must be property described in subsection 4600(2) of the Regulations. Pursuant to subsection 4600(2) of the Regulations a property is "prescribed machinery and equipment" if, inter alia, it is depreciable property of the taxpayer that is:
".....
(m) a property included in Class 43.1 because of paragraph (c) of that Class; or
...
(n) a property included in Class 43.2 because of paragraph (a) of that Class."
Paragraph 4600(2)(m) of the Regulations would not apply to a wind turbine because such property would only be included in Class 43.1 because of subparagraph (d)(v) of that Class and not because of paragraph (c). Similarly, paragraph 4600(2)(n) of the Regulations would not apply to a wind turbine because such property would be included in Class 43.2 by reason of paragraph (b) of that Class and not because of paragraph (a). As such, a wind turbine would not appear to be "prescribed machinery and equipment".
Based on the above, we are not aware of any present circumstances where a wind turbine could qualify for an ITC as such property would not be "qualified property".
We trust our comments will be of assistance.
Yours truly
S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch