March 2002
- Consulting with Canadians -

Consultations

Subject:  Class 43.1 (Income Tax Regulations)

Related document:

• Background information.

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The Department of Finance would like to invite all interested parties to participate in a consultative process regarding Class 43.1 in the Income Tax Regulations.

Class 43.1 was introduced in the 1996 Budget and it currently provides an accelerated capital cost allowance (CCA) rate of 30 per cent for certain types of renewable energy and energy efficiency equipment. Class 43.1 is a special CCA class that focuses on industrial processes. Class 43.1 is designed to encourage taxpayers who either generate and sell electricity or use energy in other industrial sectors to make efficient use of fossil fuels and increase their use of both alternate and renewable energies. Certain types of property that is part of a system within an industrial process that saves energy and/or uses renewable or alternative forms of energy may be eligible for Class 43.1.

Since the introduction of Class 43.1, there have been several additions and modifications to the class. Most recently, the December 10, 2001 Budget Plan expanded eligibility for this class to property that generates electricity using blast furnace gas produced at steel mills. In addition, the capacity restriction was increased so that more small hydro-electric projects now qualify for Class 43.1. The Budget Plan also announced that:

".because of rapid changes in technology in this area, the Government intends to consult with industry to determine whether additional improvements are required for this CCA class. In this context, the Government will also explore whether a more streamlined process could be implemented to determine new types of projects that would be eligible for Class 43.1"

(Page 223, December 10, 2001 Budget Plan).

In this context, we are seeking your input in two broad areas.

The first area concerns the existing administrative framework for Class 43.1. Under the current rules, Natural Resources Canada (NRCan) is designated as the "engineering and scientific authority" for Class 43.1. While the Canada Customs and Revenue Agency (CCRA) is the final authority on all tax matters, NRCan provides advice to corporations on the potential eligibility of capital assets for Class 43.1 that corporations plan to acquire or have acquired. We are interested in seeking your views on how to improve the current administration of Class 43.1 and in particular, on how to improve services to corporations seeking advice on Class 43.1.

We would also appreciate your views on possible ways to accommodate emerging technologies that are not currently part of Class 43.1 but that are in keeping with the broad criteria for this CCA class. Past experience has shown that it may take some time under the existing structure to both thoroughly assess emerging technologies for inclusion in Class 43.1 and then promulgate changes to the Income Tax Regulations. Some stakeholders have suggested "streamlining" the process by developing a certification process within the existing administrative framework. Such a process could apply only to specialized new technologies that are not currently eligible for Class 43.1 but that are within the policy intent of this CCA class. Corporations holding a certificate would benefit as they could continue with their project planning given that they would have more certainty with respect to their tax position. That is, corporations would not have to wait for future amendments to the Income Tax Regulations before making investment decisions. We would like your views on this suggestion as well as providing other ideas that your organisation might have on ways to address issues related to emerging technologies not currently included in Class 43.1.

The second area we wish to consider is potential amendments to the existing Income Tax Regulations governing Class 43.1. We would like to seek your views on which of the existing eligibility criteria could be clarified or simplified within the Income Tax Regulations. The Government also recognises that technologies in this area are rapidly evolving as more attention is paid to broader environmental objectives. In this regard, we would also like to seek your views on suggestions for technologies that are in keeping with the policy intent of Class 43.1 but that are not currently included in the class.

We hope that you will consider participating in this consultative process. We rely on input from all interested parties to ensure that the income tax system is responsive to the needs and concerns of stakeholders. We ask that your organisation submit a written submission before May 15, 2002. You may submit your comments electronically or you may forward your submissions to my attention at the address below:

Business Income Tax Division
Tax Policy Branch
Finance Canada
17^th Floor, East Tower
L'Esplanade Laurier
140 O'Connor Street
Ottawa, Ontario
K1A 0G5

Attached for your use is a brief information package that provides some general background information on Class 43.1. Should you have any questions related to the consultative process or the information package, please do not hesitate to contact either Mr. Bill Toms at (613) 992-0960 or Ms. Sharmila Khare at (613) 992-1280.

We hope that you will agree to participate and look forward to receiving your written submission.

Yours sincerely,

Paul Berg-Dick
Director

Business Income Tax Division
Tax Policy Branch