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: Tax consequences where a solar pv system is installed on the roof of a principal residence.
Position: The principal residence exemption will not be affected.
Reasons: Administrative position will cover this situation.
XXXXXXXXXX
2013-048095
J. Nichols
June 18, 2013
Dear XXXXXXXXXX:
RE: MicroFIT program
We are writing in reply to your faxes dated March 7, 2013 and April 17, 2013 concerning the various tax consequences associated with the acquisition, use, and disposition of renewable energy property used in Ontario's microFIT program.
It is our understanding that you purchased a solar photovoltaic system (the "Solar Equipment") and installed it on the roof of your principal residence in XXXXXXXXXX. You entered into a microFIT contract to sell the electricity generated from the Solar Equipment to the Ontario Power Authority. Specifically, you are asking for clarification of the capital cost allowance ("CCA") rules associated with the Solar Equipment, and whether claiming CCA on the Solar Equipment will affect your principal residence exemption under the Income Tax Act (the "Act").
Our Comments
Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.
The Canada Revenue Agency provides information to participants in Ontario's microFIT program on its Website at www.cra-arc.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html. Several income tax issues associated with the microFIT program are discussed on this Webpage, including information on the CCA rules and the principal residence exemption.
As indicated in the Frequently Asked Questions ("FAQs"), starting at question number 6, the total costs associated with the purchase and installation of renewable energy property, such as the Solar Equipment you described, are considered to be the capital cost of depreciable property for income tax purposes. Under the Act, you cannot deduct the full capital cost of depreciable property you acquire for use in your business activities as an expense. Instead, you deduct, subject to certain limitations discussed below, a percentage of the property's capital cost from the business income you earn each year. Solar Equipment is generally included in Class 43.2, which has a 50% CCA rate, and is computed on a declining balance basis.
Please take note of the CCA limitations addressed in the answer to question 7 of the FAQs. For instance, a homeowner who acquires renewable energy property and enters into a microFIT contract will generally be subject to the "specified energy property rules". This means that subsection 1100(24) of the Income Tax Regulations (the "Regulations") will limit the CCA available on your Solar Equipment to the net income from selling the electricity generated by the Solar Equipment. Essentially, CCA cannot be used to create or increase a loss from a renewable energy property. Further, in the year that you acquired the Solar Equipment, the CCA rate is one-half of the rate that would otherwise be allowed.
Your second concern has to do with the principal residence exemption. As explained in the response to question 12 of the FAQs, a homeowner who installs renewable energy property on the roof of his or her residential home and enters into a microFIT contract will continue to maintain the home as a principal residence. However, as noted in the response to question 13 of the FAQs, when you sell your residential home, a reasonable portion of the sale price must be allocated as proceeds of disposition of the Solar Equipment. The proceeds of disposition should be reported in Area A on page 4 of your T2125 Statement of Business or Professional Activities. The balance of the sale price is generally allocated to the residential home. If the residential home was designated as a principal residence for every year that it was owned, there will be no income tax consequences on the disposition. You should also note that the disposition of the Solar Equipment may result in a recapture into income of any CCA claimed on the equipment and such recaptured income must be reported for income tax purposes.
For more information on how to claim CCA and how to report the disposition of depreciable property, please refer to Chapter 4 of Guide T4002 - Business and Professional Income available on our Website.
We trust our comments will be of assistance.
Yours truly,
Fiona Harrison, CPA, CA
Manager
Resources Section
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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