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 excess solar power purchased by Ontario Hydro under their Standard Offer Program be treated as a reduction of utility expense or must it be included in income? 2 .Can CCA be claimed on the cost of solar power equipment incurred for primarily for personal use but where excess power will be purchased by Ontario Hydro?
Position: 1. Although income is realized by reduction of individuals utility bill--it is a taxable income inclusion.
2. Whether CCA can be claimed is a question of fact, -depends on if property was acquired for the purpose of earning income.
Reasons: 1. 12(1)(x) 2. Reg 1102(1)(c) & 1100(25)
XXXXXXXXXX 2008-028767
Lena Holloway, CA
August 11, 2008
Dear XXXXXXXXXX :
Re: Renewable Energy Standard Offer Program for the Province of Ontario (the "Program")
This is in response to your e-mail correspondence of July 21, 2008 requesting our views as to the income tax consequences of payments received by an individual under the Program. Specifically you asked if such payments would be treated as an income inclusion or if they would be treated as a reduction of the individuals' personal utility expense. If these amounts are to be treated as income, you also inquired whether capital cost allowance ("CCA") could be claimed on the cost of the equipment against such income. Your correspondence stated that your client was considering a substantial investment in solar panels for a summer retreat which was for "personal use only." In a telephone conversation (Holloway/XXXXXXXXXX ) you provided further clarification that this installation is in fact operative and that your client actually sells all of the energy produced from this system to the Ontario government and gets billed separately for his personal consumption.
Except as otherwise noted, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. All references to a "Regulation" are references to a regulation promulgated under the Act.
Background Information
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 would 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. This Program is to be distinguished from "net metering". Where an Ontario customer generates electricity primarily for their own use from a renewable source (such as solar power) using equipment of maximum cumulative output up to 500 kilowatts in size, they are eligible for net metering. With net metering all of the regulated charges apply only to net consumption and where the customer supplies more than they consume, they will receive a credit that can be carried forward for 12 months. If you require further information on the Program see www.powerauthority.on.ca.
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, 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. We are not providing any comments as to whether an individual who participates 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, for example, an individual who participates in the Ontario net metering program in respect of electricity generated for a personal residence, the property would not be eligible for inclusion in any CCA class.
Where the income earning 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. Generally the requirements to be met for both classes are the same, except that property included in Class 43.2 must be acquired after February 22, 2005 and before 2012 and cannot have been included in any other class by any taxpayer before it was acquired. 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. However, by virtue of the "available for use rules" found in subsections 13(26) to (31) of the Act, CCA for a Class 43.1 or 43.2 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 is subject to a limitation of 50% 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.
Subsections 1100(24) to (29) of the Regulations restrict the accelerated capital cost allowance claim on Class 43.1 or 43.2 assets purchased by passive investors. This property is called "specified energy property" and where Class 43.1 or 43.2 property meets the definition of "specified energy property" in subsection 1100(25) of the Regulations, the amount of CCA that may be claimed on that property is generally limited to the income earned from such property (as per subsection 1100(24) of the Regulations). However, where Class 43.1 or 43.2 property is acquired to be used by the owner primarily for the purpose of gaining or producing income from a business carried on in Canada (other than the business of selling energy produced by the property) or from another property situated in Canada (e.g., rental property), this restriction does not apply. In other words, where the purchaser of a property that qualifies for inclusion in Class 43.1 or 43.2 uses the property in its own business, the property will not normally be affected by the rules restricting the amount of CCA that can be claimed unless the business is that of selling the energy produced by the property. In the situation you have described it appears that CCA would be restricted by the specified energy property rules as your client is an individual that is in the business of selling energy (electricity) produced by the property in question to the OPA under the Program.
We trust that this information will be of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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