2023-1000861E5 Clean technology property and phase out of AIIP

Principal Issues: A multi-year example to illustrate the phase-out period for an accelerated investment incentive property that also qualifies for the clean technology investment tax credit.

Author: Verlinden, Nicole
Section: Section 127.45, CCA regime incl 20(1)(a), Class 43.1, Class 43.2, Reg. 1104(4), Reg. 1100(2)

XXXXXXXXXX                                                                Nicki Verlinden
                                                                                         2023-100086

June 24, 2024

Dear XXXXXXXXXX,

Re: Acquisition of photovoltaic equipment during the phase-out period of the “Full Expensing for Clean Energy Equipment” incentive

I am writing in response to your email inquiry sent to the general mailbox for the Income Tax Rulings Directorate on November 20, 2023. I also acknowledge your subsequent conversation with Boriana Christov.

You asked us to provide you with some information on the availability of the Clean Technology Investment Tax Credit (“Clean Tech ITC”) and a simplified explanation of the capital cost allowance (“CCA”) rules related to an acquisition of solar panels to be used in a taxpayer’s business. You specifically inquired about the availability of CCA Classes 43.1 and 43.2 as well as the accelerated investment incentive (also referred to as the “full expensing for clean energy equipment” incentive), considering that the particular property will be acquired by the taxpayer during the phase-out period of one or more of these investment incentives. (footnote 1)

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended (the “Regulations”).

I: Hypothetical scenario

The following outlines the hypothetical facts that will form the basis for our analysis and conclusions in this letter.

* Taxpayer is a “taxable Canadian corporation”, as defined in subsection 89(1).

* Taxpayer operates a business in Alberta, Canada and earns income from that business.

* Taxpayer’s taxation year is from January 1 to December 31.

* For the purpose of this letter, we have assumed that Taxpayer does not have any properties in its undepreciated capital cost (“UCC”) Classes 43.1 and 43.2, nor will it acquire or dispose of any properties in those classes, unless otherwise specified in this hypothetical scenario.

* Taxpayer acquired new depreciable capital property with a cost of $20 million on November 30, 2024 (herein referred to as the “Property”) and then acquired new depreciable capital property with a cost of $10 million on June 30, 2027 (herein referred to as the “Additional Property”).

* The Property and the Additional Property constitutes equipment used to generate electricity from solar energy that is described in subparagraph (d)(vi) of Class 43.1(i.e., fixed location photovoltaic equipment that is situated in Canada and used by the Taxpayer primarily for the purpose of generating electrical energy from solar energy).

* The Property becomes “available for use” on January 5, 2025.

* The Additional Property becomes “available for use” on July 2, 2027.

* The Property and the Additional Property are intended for use exclusively in Canada, in the Taxpayer’s business.

* Taxpayer has not received any form of government or non-government assistance (footnote 2) in respect of the acquisition of the Property and the Additional Property.

* Taxpayer will file its income tax returns on or before its filing due-date for the respective taxation years.

* Taxpayer will not elect to meet the labour requirements in section 127.46 in respect of the acquisition of the Property and the Additional Property.

* The specified energy property rules, (footnote 3) which limit a taxpayer’s CCA deduction, will not apply because the Taxpayer meets one of the exceptions in subsections 1100(25) or (26) of the Regulations.

II. Relevant Income Tax Implications for Taxpayer in its December 31, 2024 taxation year

A. Deduction from income – CCA

A Taxpayer’s ability to claim CCA on depreciable property that it acquires will depend on when the property becomes “available for use”. (footnote 4) Consequently, although the Taxpayer acquired the Property in 2024, it is not available for use until 2025, so the Taxpayer is not permitted to take a CCA deduction in respect of the Property in computing its income for its December 31, 2024 taxation year-end.

Although the Taxpayer cannot claim CCA in 2024 in respect of the Property because it is not available for use until 2025, the acquisition date (here, November 30, 2024) is relevant for determining the appropriate CCA class that it will be included in, and therefore the CCA rate used to compute the annual CCA deduction once the Property is available for use. Note that Class 43.1 has a 30% CCA rate and Class 43.2 has a 50% CCA rate.

B. Clean Tech ITC

Furthermore, the Taxpayer is not entitled to the Clean Tech ITC in its December 31, 2024 taxation year-end because the Property is not available for use in 2024. (footnote 5)

For more details on the meaning of “available for use”, see paragraphs 1.32 and 1.34 of Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance – Canada.ca, but note that the third bullet point in paragraph 1.34 does not apply for purposes of the Clean Tech ITC.

III. Relevant Income Tax Implications for Taxpayer in its December 31, 2025 taxation year

A. Deduction from income – CCA

The capital cost of the Property of $20 million will be included in the UCC of Class 43.2, (footnote 6) pursuant to Element A of that definition in subsection 13(21), based on its date of acquisition.

The Property meets the definition of accelerated investment incentive property (“AIIP”) in Regulation 1104(4) and therefore it will be eligible for the first-year enhanced CCA deduction. (footnote 7) In general, AIIP is depreciable property that is new and acquired by a taxpayer after November 20, 2018 and that becomes available for use before 2028. (footnote 8)

The Taxpayer may deduct $15,000,000 as CCA in respect of the Property (footnote 9) from its income from a business for its 2025 taxation year, which is computed as follows:

Capital Cost of the Property determined under Element A of UCC $20,000,000

Add: adjustment for accelerated investment incentive $10,000,000 (i.e., 1/2 X $20M (footnote 10) )

Subtotal for purposes of computing first-year CCA in 2025 $30,000,000

CCA deduction (Class 43.2 – 50% (footnote 11)) $15,000,000

B. Clean Tech ITC

The Clean Tech ITC is available to the Taxpayer in respect of the capital cost of a clean technology property, which is defined in subsection 127.45(1). The Property will meet the definition of a clean technology property, based on the hypothetical facts. (footnote 12)

In claiming the Clean Tech ITC on its 2025 income tax return, to the Taxpayer will follow the instructions in the attached website: How to claim the credit - Canada.ca

The capital cost of the clean technology property (i.e., the Property) is $20 million, (footnote 13) therefore the Clean Tech ITC for the Taxpayer will be $4 million (i.e., 20% (footnote 14) x $20 million), based on the hypothetical facts.

The Clean Tech ITC is deemed to be a payment on account of the Taxpayer’s tax payable, on its balance due-day for its December 31, 2025 taxation year-end. (footnote 15) Therefore, to the extent that the deemed payment is in excess of the Taxpayer’s taxes payable for the year, it will be refunded to the Taxpayer.

IV. Relevant Income Tax Implications for Taxpayer in its December 31, 2026 taxation year

A. Deduction from income – CCA

The preamble to the definition of UCC in subsection 13(21) states that the UCC to a taxpayer of depreciable property of a prescribed class is computed “at any time”.

The capital cost of the Property (i.e., Element A of the UCC definition) will be adjusted by the amount of the Clean Tech ITC deemed to have been deducted for its December 31, 2025 taxation year, pursuant to paragraph 13(7.1)(e). (footnote 16) Therefore, the CCA deduction for its December 31, 2026 taxation year will be $500,000, computed as follows:

Adjusted capital cost of the Property (Element A of UCC) $16,000,000

(i.e., $20M - $4M)

Less: previously deducted CCA (Element E of UCC) $15,000,000

Subtotal for purposes of computing CCA in 2026 $1,000,000

CCA deduction (Class 43.2 – 50%) $500,000

For practical purposes, the Taxpayer will use the T2 Schedule 8 “Capital Cost Allowance” form (“T2 Schedule 8”) to calculate its annual CCA deduction and UCC balances. In completing this schedule for the Taxpayer’s 2026 taxation year-end, there will be an “opening UCC balance” for Class 43.2 of $5 million (i.e., the “closing UCC balance” from the prior taxation year-end (footnote 17) ). The Element E adjustment for the previously deducted CCA will be reflected in the “opening balance”, and the adjustment to the capital cost for the Clean Tech ITC of $4 million, will be made to the applicable “adjustment” column in the T2 Schedule 8 before the 2026 CCA deduction is calculated on the schedule, resulting in an adjusted UCC balance of $1 million on the Taxpayer’s 2026 T2 Schedule 8.

B. Clean Tech ITC

The Taxpayer has not acquired any clean technology property in its December 31, 2026 taxation year, based on the hypothetical facts.

V. Relevant Income Tax Implications for Taxpayer in its December 31, 2027 taxation year

A. Deduction from income – CCA

The capital cost of the Additional Property of $10 million will be included in the UCC of Class 43.1, pursuant to Element A of that definition in subsection 13(21), based on its date of acquisition.

The Additional Property meets the definition of AIIP, and therefore it will be eligible for the first-year enhanced CCA deduction. (footnote 18)

The Taxpayer may deduct $5.5 million as CCA in respect of the Additional Property from its income from a business for its 2027 taxation year, which is computed as follows:

Capital Cost of the Additional Property determined under Element A of UCC $10,000,000

Add: adjustment for accelerated investment incentive $8,333,333 (i.e., 5/6 X $10M (footnote 19) )

Subtotal for purposes of computing first-year CCA in 2027 $18,333,333

CCA (Class 43.1 – 30% (footnote 20)) $5,500,000

Assuming the Property remains the only property included in Class 43.2, the CCA deduction for the Taxpayer’s December 31, 2027 taxation year will be $250,000, computed as follows:

Adjusted capital cost of the Property (Element A of UCC) $16,000,000 (i.e., $20M - $4M)

Less: previously deducted CCA (Element E of UCC) $15,500,000

Subtotal for purposes of computing CCA in 2027 $500,000 (footnote 21)

CCA (Class 43.2 – 50%) $250,000

B. Clean Tech ITC

The Clean Tech ITC is available to the Taxpayer in respect of the capital cost of a clean technology property. The Additional Property will meet the definition of a clean technology property, based on the hypothetical facts.

In order to claim the Clean Tech ITC on its 2027 income tax return, Taxpayer will follow the instructions in the attached website: How to claim the credit - Canada.ca. The capital cost of the clean technology property (i.e., the Additional Property) is $10 million, (footnote 22) therefore the Clean Tech ITC for the Taxpayer will be $2 million (i.e., 20% x $10 million), based on the hypothetical facts.

As was the case in the Taxpayer’s 2025 taxation year, the Clean Tech ITC is deemed to be a payment on account of the Taxpayer’s tax payable, on its balance due-day for its December 31, 2027 taxation year-end.

VI. Relevant Income Tax Implications for Taxpayer in its December 31, 2028 taxation year

A. Deduction from income – CCA

The capital cost of the Additional Property (i.e., Element A of the UCC definition) will be adjusted by the amount of the Clean Tech ITC deemed to have been deducted in its December 31, 2027 taxation year, pursuant to paragraph 13(7.1)(e). Therefore, assuming the Additional Property remains the only property included in Class 43.1, the CCA deduction for its December 31, 2028 taxation year will be $750,000, computed as follows:

Adjusted capital cost of the Additional Property (Element A of UCC) $8,000,000 (i.e., $10M - $2M)

Less: previously deducted CCA (Element E of UCC) $5,500,000

Subtotal for purposes of computing CCA in 2028 $2,500,000

CCA (Class 43.1 – 30%) $750,000

Assuming the Property remains the only property included in Class 43.2, the CCA deduction for the Taxpayer’s December 31, 2028 taxation year will be $125,000, computed as follows:

Adjusted capital cost of the Property (Element A of UCC) $16,000,000 (i.e., $20M - $4M)

Less: previously deducted CCA (Element E of UCC) $15,750,000

Subtotal for purposes of computing CCA in 2028 $250,000

CCA (Class 43.2 – 50%) $125,000

B. Clean Tech ITC

The Taxpayer has not acquired any clean technology property in its December 31, 2028 taxation year, based on the hypothetical facts.

We trust these comments will be of assistance. The full phase-out schedule for the Accelerated Investment Incentive is available at Accelerated investment incentive - Canada.ca.

Yours truly,

Kimberley Wharram
Manager, Resources Section
for Division Director
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 The accelerated investment incentives were announced as part of the Minster of Finance’s 2018 Fall Economic Statement on November 21, 2018.

2 Government assistance and non-government assistance are defined terms in subsection 127(9) of the Act.

3 The specified energy property rules are in subsections 1100(24) to (29) of the Regulations.

4 The relevant “available for use” rules are in subsections 13(26) and 13(27) of the Act.

5 Subsection 127.45(4) deems a taxpayer not to acquire clean technology property before it is considered to have become available for use by the taxpayer, determined without reference to paragraphs 13(27)(c) and 13(28)(d). Note that this deeming rule is for the purpose of section 127.45 (i.e., the Clean Tech ITC) only.

6 This is because the Taxpayer acquired the property before 2025. If the Property was acquired in 2025, it would be included in Class 43.1, under subparagraph (d)(vi). Note that current Class 43.2 will not be available for properties acquired after December 31, 2024.

7 The first-year enhanced CCA deduction is gradually being phased-out starting in 2024 and will no longer be in effect for properties that become available for use after 2027. Note that the rate of the first-year enhanced CCA deduction depends on the date when the particular property is available for use.

8 The definition of AIIP in subsection 1104(4) of the Regulations refers to property of a taxpayer that meets two conditions described in paragraphs (a) and (b). Paragraph (a) requires that the property is acquired by the taxpayer after November 20, 2018 and becomes available for use before 2028; and paragraph (b) applies in one of two circumstances outlined in subparagraphs (b)(i) and (b)(ii). Because the facts state that the property was new when it was acquired by the taxpayer, and thus no CCA or terminal loss was claimed in respect of the property before it was acquired, the condition in subparagraph (b)(i) is met and therefore the condition in subparagraph (b)(ii) is not relevant.

9 Pursuant to paragraph 20(1)(a) of the Act.

10 Pursuant to Regulation 1100(2), Element A, subparagraph (c)(ii).

11 Pursuant to Regulation 1100(1)(a)(xxix.2).

12 Note: The property is situated in Canada and intended for use exclusively in Canada (para. (a) of definition), is new (para. (b) of definition) and is equipment used to generate electricity from solar energy as described in Class 43.1(d)(vi) (subparagraph (d)(i) of definition). Para. (c) is not applicable based on the hypothetical facts.

13 Subsection 127.45(5) adjusts the amount of the capital cost of property in certain situations. For purposes of this letter, we have assumed that no adjustments are required to be made to the capital cost of the Property under this subsection.

14 The specified percentage is defined in paragraph (b) of subsection 127.45(1) as 30%, however, because the facts indicate that the Taxpayer will not elect to meet the labour requirements in section 127.46 of the Act, it will be reduced by 10% to 20% pursuant to subsection 127.46(2).

15 Subsection 127.45(2).

16 Subsection 127.45(6) states that for purposes of subsection 13(7.1), the amount deemed under subsection 127.45(2) to have been paid by a taxpayer for a taxation year is deemed to have been deducted from the taxpayer’s Part I tax otherwise payable for the year.

17 The $5,000,000 closing UCC balance for Class 43.2 for the Taxpayer’s 2025 taxation year-end, as shown on the 2025 T2 Schedule 8 is the result of the addition of $20,000,000 for the capital cost of the Property minus the $15,000,000 CCA deduction taken for the 2025 taxation year.

18 Supra footnote 8.

19 Pursuant to Regulation 1100(2), Element A, subparagraph (b)(iii).

20 Pursuant to Regulation 1100(1)(a)(xxix.1).

21 See comments above regarding the T2 Schedule 8 computations of UCC and CCA in a particular taxation year. For practical purposes, the $500,000 shown here should reflect the “opening UCC” for class 43.2 property on the Taxpayer’s 2027 T2 Schedule 8.

22 Subsection 127.45(5) adjusts the amount of the capital cost of property in certain situations. For purposes of this letter, we have assumed that no adjustments are required to be made to the capital cost of the Additional Property under this subsection.

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