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Archived - Explanatory Notes
Proposed Regulations Amending the Income Tax Regulations
(Capital Cost Allowance - Clean Energy Generation)

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The following explanatory notes primarily concern amendments proposed in the February 26, 2008 Budget to the treatment of Clean Energy Generation Assets under Classes 43.1 and 43.2 in Schedule II to the Income Tax Regulations (the “Regulations”).  The explanatory notes also concern a consequential change to paragraph 4600(2)(k) of the Regulations that relates to the inclusion of certain computer assets in Class 50 (see P.C. 2009-660, SOR/2009-126 dated April 30,2009) and Class 52 (see P.C. 2009-660, SOR/2009-126 dated April 30, 2009 and P.C. 2009-847, SOR/2009-155 dated May 28, 2009).

Section 1

Classes 43.1 and 43.2 – Clean Energy Assets

ITR
1104(13)

Subsection 1104(13) of the Regulations sets out various definitions that apply for the purpose of determining whether property is depreciable property to which Class 43.1 or 43.2 applies.

Subsection 1104(13) is amended in four respects consequential to amendments made to Class 43.1 and 43.2.  First, the definition “food waste” is repealed.  Second, the definition “food and animal waste” is added. Third, the definition “biogas” is amended to replace the reference to “food waste” and to add a reference to “sludge from an eligible sewage treatment facility”.  Fourth, the definition “eligible waste fuel” is amended to add a reference to “biogas”.

These amendments apply to property acquired after February 25, 2008.

Section 2

Canadian Renewable and Conservation Expenses (CRCE)

ITR
1219(1)(f)

Section 1219 of the Regulations defines “Canadian renewable and conservation expenses [CRCE]” for the purposes of subsection 66.1(6) of the Income Tax Act.  CRCE is included in calculating a taxpayer’s “Canadian exploration expense” pool, as defined by subsection 66.1(6) of the Income Tax Act, and is eligible to be renounced under a flow-through share agreement.   In general terms, subsection 1219(1) provides that CRCE is an expense incurred (for certain listed purposes) by a taxpayer in respect of a project for which it is reasonable to expect that at least 50% of the capital cost would be included in Class 43.1 or 43.2 but for subsection 1219(1).   Subsection 1219(2) excludes certain listed amounts from being CRCE under subsection 1219(1).

Paragraph 1219(1)(f) of the Regulations provides that CRCE may include an expense incurred for the drilling or completion of a well for a CRCE project.   Paragraph 1219(1)(f) is amended to provide that it does not apply to an expense in respect of a well that is, or can reasonably be expected to be, used for the installation of underground piping that is included in paragraph (d) of Class 43.1.  This change is consequential to changes to paragraph (d) of Class 43.1 which are discussed below in the related explanatory note.

These amendments apply to expenses incurred on or after Announcement Date.

Section 3

Investment Tax Credit

ITR
4600(2)(k)

Subsection 4600(2) of the Regulations prescribes machinery and equipment for the purposes of the definition “qualified property” in subsection 127(9) of the Income Tax Act.  Expenditures on such property give rise to an investment tax credit under subsection 127(5) of the Income Tax Act, where a number of conditions are met.

Paragraph 4600(2)(k) of the Regulations is amended to apply to computer assets included in Class 50 and Class 52 in Schedule II to the Regulations.  This change is consequential to the 2007 Budget proposal under which certain computer assets are included in Class 50 (55% CCA rate), and the 2009 Budget proposal under which certain computer assets are included in Class 52 (100% CCA rate).

Generally, these amendments apply to property acquired after March 18, 2007.

Section 4

Schedule II to the Regulations – Classes of Property

ITR
Classes 43.1 (30% CCA rate) and 43.2 (50% CCA rate)

Schedule II to the Regulations provides a list of classes of depreciable properties for the purposes of deducting capital cost allowance (CCA), and the description of properties that are to be included in each Class.

Class 43.1 provides a 30% accelerated capital cost allowance rate for certain renewable energy and conservation equipment.  Class 43.2 in Schedule II provides a 50% accelerated capital cost allowance rate.  In general terms, Class 43.2 applies to property described in Class 43.1 if the property is acquired on or after February 23, 2005 and before 2020.  Unlike Class 43.1, however, Class 43.2 applies to co-generation property described in paragraphs (a) to (c) of Class 43.1 only if the heat rate of an eligible co-generation system attributable to fossil fuel does not exceed a 4,750 BTU requirement instead of the 6,000 BTU requirement.

Class 43.1 (and indirectly Class 43.2) is amended in a number of respects more fully described below.

1. Active Solar Equipment and Ground Source Heat Pump Systems

Subparagraph (d)(i) of Class 43.1 applies to certain active solar heating equipment and ground source heat pump system equipment.

Subclause (d)(i)(A)(II) is amended to remove the requirement that the liquid or gas heated by equipment that is part of a ground source heat pump system be used directly in an industrial process or in a greenhouse.  Under the revised provision, the equipment must be part of a ground source heat pump system that meets the standards set by the Canadian Standards Association for the design and installation of earth energy systems.  Such equipment includes the underground piping (including the cost of drilling a well, or trenching, for the purpose of installing that piping).

Subclause (d)(i)(B) is amended to exclude energy equipment that backs up equipment described in subclause (A)(I) or (II).

2. Geothermal Equipment

Subparagraph (d)(vii) is amended to remove the requirement that eligible geothermal equipment be “above-ground”.  A related change extends eligibility to geothermal “equipment that consists of underground piping (including the cost of drilling a well for the purpose of installing that piping)”.

3. Equipment used Primarily to Collect Landfill Gas and Digester Gas

Subparagraph (d)(viii) is amended to remove the requirement that equipment used to collect landfill gas and digester gas be “above-ground”.  A related change extends eligibility to “equipment that consists of underground piping (including the cost of drilling a well or trenching for the purpose of installing that piping)”.

4. Equipment used Primarily to Generate Heat Energy from an Eligible Waste Fuel

Subparagraph (d)(ix) is amended to remove the requirement that the industrial process or greenhouse that uses the heat energy be “of the taxpayer or lessee”.  Accordingly, a taxpayer’s equipment that generates heat in an eligible manner remains eligible under the provision if the heat is sold to another person who uses it in their industrial process or greenhouse.   In addition, eligibility requires that the heat be generated primarily from eligible waste fuel and, while eligibility is not denied if fossil fuel is also consumed as a minority fuel source, no other fuel may be consumed for the purposes of the provision.  Both “eligible waste fuel” and “fossil fuel” are defined in subsection 1104(13) of the Regulations.

5. Equipment used Primarily to Convert Wood Waste or Plant Residue into Bio-oil

Subparagraph (d)(xi) currently requires that the  bio-oil be used “primarily for the purpose of generating electricity”.  This use requirement is extended to apply where the bio-oil is “used primarily for the purpose of generating heat that is used directly in an industrial process or a greenhouse, electricity or electricity and heat”.  In addition, the provision is amended to remove the requirement that the bio-oil be used by “the taxpayer or lessee”.  Accordingly, a taxpayer’s equipment that generates bio-oil in an eligible manner remains eligible under the provision if the bio-oil is sold to another person who uses it directly in an industrial process or a greenhouse, to generate electricity or to generate electricity and heat.

6. Equipment that is part of a system used Primarily to Produce and Store Biogas

Subparagraph (d)(xiii) currently requires that eligible equipment be used primarily to “produce, store and use” biogas.  Subparagraph (d)(xiii) is amended to apply to eligible equipment that is used primarily to “produce and store” biogas.  Accordingly, a taxpayer’s equipment that produces and stores biogas in an eligible manner remains eligible under the provision if the biogas is sold to another person. 

Generally, these amendments apply to property acquired after February 25, 2008.