Principal Issues: Whether taxpayers have the option of classifying certain photovoltaic equipment which meets the requirements of Class 8 and Class 43.1 of Schedule II of the Income Tax Regulations as Class 8 property in order to avoid the "specified energy property" rules in subsection 1100(25) of the Regulations.
Position: No.
Reasons: Because of the specific wording in the mid-amble between paragraphs (c) and (d) in Class 43.1, the property cannot be classified in Class 8, if it meets the requirements of Class 43.1 or 43.2.
XXXXXXXXXX 2008-026501 Fiona Harrison March 6, 2008
Dear XXXXXXXXXX :
Re: Photovoltaic Equipment
This is in reply to your electronic request of December 3, 2007, wherein you requested our comments in respect of the classification of certain photovoltaic equipment acquired by individuals who wished to install this equipment on their personal residences and participate in the Renewable Energy Standard Offer Program.
It is our understanding that the Ontario Power Authority ("OPA") and the Ontario Energy Board have developed a Renewable Energy Standard Offer Program for the Province of Ontario (the "Program") designed to encourage and promote greater use of renewable energy sources, including solar, from smaller generating projects that would be connected to an electricity distribution system in Ontario. Under the Program, an applicant will enter into a contract with the OPA, pursuant to which the applicant will deliver electricity to a local electricity distribution system in Ontario for a 20-year period and receive $ 0.42 per kWh of production.
You enquire as to whether taxpayers who participate in the Program have the option of classifying the photovoltaic equipment in Class 8 of Schedule II to the Income Tax Regulations (the "Regulations") as opposed to Class 43.1 or 43.2. You note that, where these individual taxpayers acquire a property that is described in Class 43.1 or 43.2 primarily to generate electrical energy for sale, the property will be considered "specified energy property" for purposes of subsection 1100(25) of the Regulations and CCA on that property cannot be deducted to the extent that doing so would create or increase a loss from all such property owned by the taxpayer. You further note that the photovoltaic equipment will have a peak capacity of less than 3 kilowatts of electrical output.
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 your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
By virtue of paragraph 1102(1)(c) of the Regulations, the classes of property described in Schedule II to the Regulations ("Schedule II") only include property that was acquired by the taxpayer for the purpose of earning income. We are not providing any comments as to whether these particular individuals who propose to participate in the Program will meet the requirements under paragraph 1102(1)(c) of the Regulations. 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.
Where this requirement is met, fixed location photovoltaic equipment that is used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electrical energy from solar energy may qualify for inclusion in subparagraph (d)((vi) of Class 43.1 of Schedule II, provided that it has a peak capacity of not less than 3 kilowatts of electrical output and it otherwise meets the requirements contained therein. Where the photovoltaic equipment is acquired after February 22, 2005, it may be eligible for inclusion in Class 43.2. However, the Federal Budget dated March 19, 2007, proposes that eligibility for Class 43.1 and Class 43.2 be modified to eliminate the minimum size requirement for photovoltaic systems. This change will apply to eligible assets acquired on or after March 19, 2007.
We note that the mid-amble between paragraphs (c) and (d) in Class 43.1 of Schedule II provides that paragraph (d) applies to "property, other than reconditioned or remanufactured equipment that would otherwise be included in another Class in this Schedule". Therefore, it is our interpretation that depreciable property that qualifies for inclusion in paragraph (d) of Class 43.1 or paragraph (b) of Class 43.2 will not be eligible for inclusion in Class 8 even though the property would otherwise meet the requirements of Class 8 of Schedule II.
We trust that these comments will be of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch