3 October 2006 External T.I. 2006-0207801E5 - Capital cost allowance - Class 43.1

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: additional queries relating to our comments in 2006-019584 relating to Class 43.1 and/or Class 43.2

Position: general comments provided

Reasons: legislation

								2006-020780
XXXXXXXXXX 							T. Harris
(613) 957-2114
October 3, 2006

Dear XXXXXXXXXX:

Re: Capital Cost Allowance - Class 43.2

We are writing further to your letter of September 19, 2006 wherein you requested clarification of certain comments contained in our letter of September 8, 2006 (our file 2006-019584).

While you agree with our understanding of Ontario's net metering program, you believe that since the terms of the program are identical for both business and residential participants, the tax consequences should be the same for both types of participants. In addition, you have asked for clarification concerning the "available for use" rules, the computation of capital cost allowance ("CCA") and the deductibility of financing costs.

Our Comments

As noted in our previous letter, participation in Ontario's net metering program is available to any Ontario electrical customer who generates electricity primarily for the participant's own use from a renewable source using equipment having a maximum cumulative output not exceeding 500 kilowatts. All electrical energy produced by a participant is sent to the provincial electrical grid for a credit toward the participant's energy costs relating to the electrical energy consumed by the participant. If the power supplied by a participant to the grid is more than what is taken from the grid, the participant will receive a credit that can be carried forward for up to one year to offset future energy costs. A participant will not receive any payment other than the credits reflected on its energy invoices.

Given the terms of the program, we do not believe that a person can be considered to have participated in the program for the purpose of earning income from the sale of electrical energy. Rather, the motivation for participating in the program appears to be to reduce the participant's overall electricity costs (for example, where it is expected that there will be material variances in the participant's electrical consumption throughout the year, participation in the program will eliminate the need to incur costs to acquire battery storage or other similar equipment). In this context, we believe that a taxpayer that acquires a renewable energy property to reduce the costs of electrical energy consumed in a business will generally satisfy the requirements of paragraph 1102(1)(c) of the Income Tax Regulations (the "Regulations"), which provides that CCA may only be claimed in respect of depreciable property that was acquired by the taxpayer for the purpose of earning income. However, an individual or family that participates in the program to reduce the electricity costs for a personal residence will not generally satisfy this requirement as such costs would normally represent personal living costs, such that there would not be any income earning purpose.

CCA Deduction

You have also requested clarification on when a depreciable property will be considered to become "available for use" for the purposes of subsections 13(26) to (31) of the Income Tax Act (the "Act") and at what point in time any remaining balance of undepreciated capital cost ("UCC"), as defined in subsection 13(21) of the Act, for property of Class 43.2 may be deducted.

Chapter 4 of the publication T4002 Business and Professional Income includes a detailed description of the CCA provisions and indicates that property, other than a building, usually becomes available for use on the earlier of the following dates:

• the date the property is first used to earn income;
• the second tax year after the year the property is acquired;
• the time just before the disposition of the property; or
• the time the property is delivered or made available to the purchaser and is capable of producing a saleable product or service.

Generally, the amount of CCA that may be claimed in a taxation year for a property included in Class 43.2 may be determined by applying the specified rate for Class 43.2 (50%) by the UCC of the class at the end of the taxpayer's taxation year. In general, the UCC of the class will be the capital cost of all depreciable property included in the class less the aggregate of

(i) the amount of CCA claimed in any previous taxation year;

(ii) the amount of any assistance received in respect of the acquisition of property included in the class ; and

(iii) where property of the class has been disposed of, the lesser of

• the taxpayer`s proceeds of disposition for the property, minus any related selling expenses; or
• the capital cost of the particular property.

As noted in our previous letter, the amount of CCA that may be claimed in the year that a property included in Class 43.2 becomes available for use will be limited to 15% of the net additions to the UCC of the class (generally, the capital cost of that property) for the year.

Under the declining balance basis, the UCC balance remaining in a class may only be deducted when the taxpayer no longer owns any property that was included in the class at the end of the taxation year. This amount is referred to as a terminal loss.

Financing Costs

A taxpayer that borrows money to acquire property that will be used to earn income will generally be entitled to deduct interest relating to the borrowed money under paragraph 20(1)(c) of the Act provided that the amount is reasonable and is paid pursuant to a legal obligation to pay interest. Alternatively, the taxpayer may elect under subsection 21(1) of the Act to capitalize any interest relating to money borrowed to buy depreciable property, in which case the interest relating to the year will be added to the capital cost of the property for CCA purposes. In addition, certain fees incurred to arrange financing related to the acquisition of property that will be used to earn income may be deductible over a period of five years under paragraph 20(1)(e) of the Act.

These fees include:

• application, appraisal, processing, and insurance fees;
• loan guarantee fees;
• loan brokerage and finder's fees; and
• legal fees related to the financing.

For greater certainty, the comments relating to the CCA deduction and financing costs described above will not generally apply to an individual or family that participates in the program to reduce the electricity costs for a personal residence.

We trust that our comments, which are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5, are of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch