2016-0670661E5 Capital Cost of De-icing Equipment

Principal Issues: Is de-icing equipment eligible for inclusion in Class 43.2 as equipment related to fixed location photovoltaic equipment?

Position: Possibly yes but question of mixed fact and law.

Reasons: Wording of the Act and Regulations.

Author: Christov, Boriana
Section: Class 43.2; s. 1100(24) to (26)

XXXXXXXXXX                                                                                                                                       2016-067066
                                                                                                                                                               Boriana Christov
May 16, 2017

Dear XXXXXXXXXX:

Re:   De-icing Equipment Installed in Relation to Solar Panels

This is in response to your electronic inquiry of October 7, 2016 concerning possible additions to your photovoltaic system installed on the roof of your principal residence. The information provided during the telephone conversation (XXXXXXXXXX/Christov) is also acknowledged. We apologize for the delay in our response.

In your email, you asked whether the cost of aluminum shingles with an electric cable (the “Equipment”) to be installed on part of the roof of your home will be eligible for inclusion in Class 43.2 of Schedule II of the Income Tax Regulations. The Equipment will be installed only in the area of the roof immediately beneath the exiting solar panels and it will be attached over the existing asphalt shingles. The purpose of the Equipment is to melt snow and ice accumulation over the solar panels which hinders their proper functioning. The Equipment will be new and not used before the installation. We understand that the solar panels currently installed on your roof meet all of the conditions of subparagraph (d)(vi) of Class 43.1.

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 70-6R7 dated April 22, 2016 issued by the Canada Revenue Agency (“CRA”). A fee is charged for this service. Although we are unable to provide any comments with respect to a particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.

Unless otherwise indicated, all references herein are to the Income Tax Act (footnote 1) (the “Act”) or to the Income Tax Regulations (footnote 2) (the “Regulations”).

Eligible equipment described in subparagraph (d)(vi) of Class 43.1 includes the following:

Fixed location photovoltaic equipment that is used by the taxpayer […] primarily for the purpose of generating electrical energy from solar energy if the equipment consists of solar cells or modules and related equipment including inverters, control, conditioning and battery storage equipment, support structures and transmission equipment, but not including

(A)   a building or a part of the building (other than a solar cell or a module that is integrated into a building), [...] [Emphasis added]

The Equipment may be eligible equipment if it is described in subparagraph (d)(vi) of Class 43.1. In particular, the Equipment must be: (i) part of the fixed location photovoltaic equipment, or (ii) related equipment, and it must not be “a building or part of the building.”

Whether any particular piece of equipment qualifies for inclusion in one of the classes described in Schedule II of the Regulations is a question of mixed fact and law, which requires a review of all the facts of the situation. While we cannot confirm that your Equipment will be eligible for inclusion in Class 43.2 of Schedule II to the Regulations we can provide some general comments, which we hope will be of assistance.

Typically, property that is described in paragraph (d)(vi) of Class 43.1 and that is acquired after February 22, 2005 and before 2020 will qualify for inclusion in Class 43.2 which has a 50% CCA rate on a declining balance basis. Generally, the capital cost of the property that is included to Class 43.2 will include the capital cost of eligible equipment, such as the purchase price of fixed location photovoltaic equipment (including related equipment), costs related to the design, engineering and legal and accounting expenses related to the acquisition of the property.

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 will normally be deferred until such time as the property is available for use. A property that becomes available for use in the year is subject to the 50% rule found in subsection 1100(2) of the Regulations. In other words, the CCA rate for property of Class 43.2 in that initial taxation year will be limited to 25%.  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.

Furthermore, in order for the Equipment to be eligible for inclusion in Class 43.2, it must generally:

a.    be situated in Canada;

b.    be acquired by a taxpayer for use by the taxpayer for the purpose of earning income from a business carried on in Canada or from property situated in Canada, or the property must be acquired by a taxpayer in order to be leased to a lessee who will use the property for the same income earning purpose; and

c.    subject to certain exceptions, not have been used for any purpose before the taxpayer acquired the property.

The testing and commissioning of otherwise new equipment prior to the purchaser taking possession will not normally result in a finding that the property was used prior to its acquisition. However, a property will be considered to have been used where the vendor has used it regularly for demonstration purposes.

The capital cost of fixed photovoltaic equipment and related equipment will be eligible for an inclusion in Class 43.2 except if it is part of a building (other than a solar cell or module that is integrated into a building). Whether a piece of equipment is related to the photovoltaic equipment, or is part of a building can only be answered after a review of all of the facts and circumstances of the particular situation.

Generally, if something is “related to” a particular subject it concerns that subject. (footnote 3) Moreover, if two or more things are related, there is a connection between them. Thus, if the Equipment is necessary for the proper functioning of the existing photovoltaic equipment, it would likely be considered to be “related equipment” for the purposes of subparagraph (d)(vi) of Class 43.1.

In determining whether the Equipment is “part of the building,” it would be necessary to consider common law principles that apply to establish whether an asset has become a fixture and therefore part of the building to which it is attached. In broad terms, this requires a consideration of the intent of the annexation to the building.

It is accepted that this determination is a matter of intention that is objectively established. (footnote 4) This intention is ascertained by examining the degree and object (sometimes called “purpose” of the annexation). The test asks whether an article is attached to another property to effect a permanent and substantial improvement of that other property or to enable more complete enjoyment and use of the first article. (footnote 5) In a situation where there is a dual or multiple purposes, the courts have considered what the dominant purpose of the annexation is. (footnote 6)

It is important to note that depending on the circumstances, different factors will be relevant when determining the purpose of the annexation.

Here, the intention to install the Equipment is to resolve a problem caused by the deficient operation of the solar panels. Thus, the fact that the Equipment is necessary for the proper operation of the photovoltaic equipment during the winter period and that its main function is to support the solar panels (with any benefits to the building being negligible), may support the inclusion of its capital cost to Class 43.2, provided that all other conditions are otherwise satisfied. This conclusion may also be supported by the fact that the Equipment will not be installed on the entire roof but only to areas immediately contiguous to the existing solar panels.

However, if the Equipment is installed also on parts of the roof not immediately contiguous to the existing solar panels, it is doubtful that it could be considered as necessary for the proper functioning of the solar panels. In such a case, the Equipment would likely not be related to the fixed location photovoltaic equipment and thus, it would be ineligible for inclusion in Class 43.2.

CCA Limitation Rules – Specified Energy Property Rules

Certain taxpayers (footnote 7) who own property described in Class 43.1 and 43.2 that qualifies as “specified energy property” (footnote 8) could be subject to the rules contained in subsection 1100(24) of the Regulations. In general, these rules limit the amount of CCA deductions to the amount of income from such property. This prevents the use of CCA deductions to create or increase a loss that might otherwise shelter other sources of income for tax purposes. Specified energy property generally includes property described in Class 43.1 and 43.2. However, pursuant to paragraphs (a) and (b) of subsection 1100(25) of the Regulations, the definition of specified energy property does not apply to the following situations:

a.    where the 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 the product of the property) or from another property situated in Canada, or

b.    if the property is leased in the year in the ordinary course of carrying on a business of the owner in Canada and where certain conditions are met (not applicable here).

Please note that information concerning taxpayers who acquire solar photovoltaic systems and participate in Ontario’s microFIT program can be obtained on our website at: http://www.cra-arc.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html. In particular, we note that question 9 states as follows:

9. Where a Participant that is a homeowner acquires a solar pv system and enters into a Contract, will the homeowner be subject to the CCA deduction limitation?

Yes. Since the homeowner is not consuming the energy produced in a business or to earn income from another property, the homeowner will be subject to the CCA deduction limitation described in Question 7 [Specified Energy Property Rules].

For more information concerning the income tax incentives for clean energy equipment, please refer to the Income Tax Folio S3-F8-C2, Tax Incentives for Clean Energy Equipment which can be found at our website: http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s3/f8/s3-f8-c2-eng.html.

We hope that these comments will be of assistance.

Yours truly,

Nicolas Bilodeau
Acting Manager
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1     R.S.C. 1985, c. 1 (5th suppl.) as amended; hereinafter (the “Act”).
2     C.R.C c. 945 as amended; hereinafter (the “Regulations”).
3     See Collins Cobuild English Dictionary (3rd ed) (2001) Harper Collins Publishers, the definition of “relate.” See also the Supreme Court of Canada decision in Slattery (Trustee of) v. Slattery, [1993] 3 S.C.R. 430.
4     Generally, see Bruce Ziff, Principles of Property Law, 3rd ed. (Scarborough, On: Carswell, 2000), pp. 105 et seq.
5     See, Alberta v. Hansen, 1998 ABQB 1103, at para. 18 and 21.
6     Ibid. at para. 21.
7     Other than taxpayers described in subsection 1100(26) of the Regulations.
8     Defined under subsection 1100(25) of the Regulations.

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