Principal Issues: Whether a wood waste fuelled heat production system and ground source heat pump could qualify for class 43.2 of schedule II of the Income Tax Regulations?
Position: Likely yes.
Reasons: Provided all the requirements of the Act and the Regulations are met.
2008-027676
XXXXXXXXXX Marc LeBlond
(613) 946-3261
May 11, 2009
Dear Madam,
Subject: Capital Cost Allowance Class and Rate
Biomass boiler and geothermal equipment
This is in response to your letter of April 23, 2008 in which you asked for our comments on the above subject. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act.
XXXXXXXXXX
You wish to inform your customers and promote as much as possible those biomass heating systems that you consider to be a very promising form of energy for the years to come.
With respect to biomass heating systems, you wish to know what the class and the maximum rate of capital cost allowance is for this type of equipment (biomass boiler and related equipment). More specifically, you wish to know if it is possible to include this equipment in Class 43.1 (30% depreciation rate) or 43.2 (50% depreciation rate) and if so, which of these two classes would be the most appropriate.
Also in your letter, you stated that the February 2008 Federal Budget proposes to expand the scope of capital cost allowance for Class 43.2 (50%) to include ground source heat pumps used for applications other than industrial processes or greenhouses, such as heating and hot water production (excluding pool heating) in industrial, commercial and residential buildings for the purpose of earning income.
In this regard, you wish to know what specific components of a ground-source heat pump system can be included in that class, such as the cost of drilling, underground piping systems, ground-source heat pumps, energy distribution equipment, etc.
It appears to us that the situation described in your letter could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. However, we are able to offer the following general comments that may be of assistance to you. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Consequently, the comments we make below may not fully apply in a particular given situation.
Our Comments
General
Our comments herein assume that your customer (the "Taxpayer") would purchase a new biomass heating system (using wood pellets as biofuel) or a new ground source heat pump system after February 25, 2008, either for its own use or to provide thermal energy to its customers.
Class 43.1 provides accelerated CCA for property acquired before February 23, 2005. In general terms, Class 43.2 applies to property included in Class 43.1 that is acquired after February 22, 2005 and before 2020.
The eligibility criteria for Categories 43.1 and 43.2 are therefore generally the same, except for cogeneration systems based on fossil fuels.
The guide published by Natural Resources Canada ("NRCan") entitled "Class 43.1 - Technical Guide for Energy-Saving and Renewable Energy Equipment and Technical Guide to Canadian Renewable and Conservation Expenses (CRCE)" (the "NRCan Guide") indicates that, in general, the systems that qualify for Class 43.1 and Class 43.2 are those that save energy by:
- recovering and reusing thermal waste;
- using specific wastes as fuel;
- using cogeneration; or,
- using renewable energy sources including solar, wind and small hydroelectric plants.
Therefore, in general, biomass heating systems and ground source heat pump systems may be eligible for treatment under Categories 43.1 and 43.2.
Biomass heating systems
With respect to your first question, in general, thermal energy systems (including biomass heating systems) whose primary use is to produce thermal energy by consuming only an "eligible waste fuel", "fossil fuel" or a combination of those are eligible for Class 43. 2 (through subparagraph (d)(ix) of Class 43.1), provided that the thermal energy generated is used directly in an industrial process or greenhouse located in Canada that is operated by the Taxpayer or its customers.
For the purposes of Class 43.2, in general, an eligible thermal energy system may include fuel handling equipment used to upgrade the combustible portion of the fuel and control, feedwater and condensate systems, and other ancillary equipment. However, a thermal energy system that otherwise qualifies for Class 43.2 cannot include buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), fuel storage facilities, other fuel handling equipment and electrical generating equipment, and property otherwise included in Class 10 or 17.
Specifically, NRCan's Guide indicates that eligible assets incorporated into a thermal energy system that also qualify for Class 43.2 include the purchase price and installation costs of the following equipment, among others:
- Biomass upgrading equipment (to increase the combustible content of biomass, e.g. through drying, volumetric reduction), ancillary equipment such as controls and instrumentation.
- Biomass storage and handling equipment, e.g. conveyor belts, front-loading trucks.
- Biomass combustion systems and ancillary equipment such as boilers, burners, fuel and combustion air supply systems, piping, ash collection system, controls and instrumentation.
- Boiler water supply systems, including chemical treatment equipment, tanks and deaerators, and ancillary equipment such as controls and instrumentation.
- The condensed water return system.
Subsection 1104(13) of the Income Tax Regulations (the "Regulations") defines certain terms that come into play when determining whether a property is depreciable property described in Class 43.1 or Class 43.2. The terms "fossil fuel" and "eligible waste fuel" are defined in subsection 1104(13) of the Regulations as follows:
“fossil fuel” means a fuel that is petroleum, natural gas or related hydrocarbons, basic oxygen furnace gas, blast furnace gas, coal, coal gas, coke, coke oven gas, lignite or peat.
“eligible waste fuel” means bio-oil, digester gas, landfill gas, municipal waste, pulp and paper waste, and wood waste.
According to NRCan, wood pellets are "wood waste" for the purposes of the definition of "eligible waste fuel" in subsection 1104(13) of the Regulation.
The Act does not define the term "industrial process". In general, the Canada Revenue Agency gives the term the meaning of an operation in which products are manufactured or processed.
In summary and taking into account the general comments stated above, we are of the view that, in general, a biomass heating system acquired by a Taxpayer could be included in Class 43.2 of Schedule II if the following conditions are satisfied:
1) The biomass heating system is fuelled only by an "eligible waste fuel" (such as wood pellets), a "fossil fuel" or a combination of those.
2) The heating system is used by the Taxpayer primarily to produce thermal energy through the consumption of an "eligible waste fuel" i.e., for example, wood pellets must be the main fuel producing the thermal energy used for eligible purposes.
3) The thermal energy produced by such biomass heating system must be used directly in an industrial process or a greenhouse, operated either by the Taxpayer or by the Taxpayer's customers.
4) The biomass heating system must be located in Canada.
5) The Taxpayer acquired the biomass heating system for use in the course of earning income from a business carried on in Canada or income from property situated in Canada.
Ground source heat pump systems
Indeed, as you pointed out in your application, Budget 2008 proposed to expand the scope of Class 43.2 (through amendments to subparagraph (d)(i) of Class 43.1) to include ground source heat pumps used for applications other than industrial processes or greenhouses, such as heating and hot water (but not pool heating) in industrial, commercial and residential buildings used for the purpose of earning income.
In general, such ground source heat pumps may qualify for Class 43.2 treatment, provided they meet Canadian Standards Association standards for the design and installation of ground source heat systems.
For the purposes of Class 43.2 (by virtue of subparagraph (d)(i) of Class 43.1), in general, an eligible ground source heat pump system may include underground piping, energy conversion equipment, energy storage equipment, control equipment and equipment designed to interface the system with other heating equipment, as well as related installation costs. However, a ground source heat pump system that qualifies for Class 43.2 cannot include buildings, parts of buildings, equipment used to heat water for use in a swimming pool, energy equipment used in the event of failure or maintenance of an otherwise eligible ground source heat pump system, or equipment used to distribute heated air or water in a building.
Specifically, the NRCan Guide indicates that expenses for eligible property incorporated into a ground source heat pump system that qualifies for Class 43.2 treatment (by virtue of subparagraph (d)(i) of Class 43.1), include:
- The purchase and installation of heat pumps, pumps complete with controls and regulators.
- Pressure test piping and flushing systems.
- Purchase and installation of heat exchangers and thermal storage systems.
- The purchase and installation of a network of horizontal underground collectors.
For vertical well systems with a depth of less than 10 metres
- Purchase and installation of thermal storage systems (including extraction and reinjection wells, complete with wellhead equipment, piping and controls).
For vertical well systems with a depth of more than 10 metres
- The manufacture and installation of support structures: foundations, anchors, fixing brackets, other structures.
- The purchase and installation of thermal storage systems (including extraction and reinjection wells, complete with wellhead equipment, piping and controls).
Other Information
The Class 43.1/43.2 Secretariat (Industrial Programs Division (IPD), Office of Energy Efficiency (OEE) of NRCan is responsible for providing information to the Canada Revenue Agency and others upon request on technical issues related to tax incentives for business investment in energy conservation and renewable energy projects. In this regard, a form for requesting an opinion on the technical eligibility of an asset for Class 43.1 or 43.2 treatment is available in the Guide to NRCan, which is available free of charge from:
Class 43.1/43.2 Secretariat
CANMET Energy Technology Centre - Ottawa
Natural Resources Canada
1 Haanel Drive, 3rd floor, office 204
Nepean, Ontario
K1A 1M1
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.