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Vol. 139, No. 25 — December 28, 2005
Registration
SOR/2005-415 December 6, 2005
INCOME TAX ACT
Regulations Amending the Income Tax Regulations (Capital Cost Allowance — Energy Conservation Equipment and Alternative Energy Sources)
P.C. 2005-2287 December 6, 2005
Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), hereby makes the annexed Regulations Amending the Income Tax Regulations (Capital Cost Allowance - Energy Conservation Equipment and Alternative Energy Sources).
REGULATIONS AMENDING THE INCOME TAX REGULATIONS (CAPITAL COST ALLOWANCE — ENERGY CONSERVATION EQUIPMENT AND ALTERNATIVE ENERGY SOURCES)
AMENDMENTS
1. (1) The definition "fossil fuel" in subsection 1104(13) of the Income Tax Regulations (see footnote 1) is replaced by the following:
"fossil fuel" means a fuel that is petroleum, natural gas or related hydrocarbons, basic oxygen furnace gas, blast furnace gas, coal, coal gas, coke, coke oven gas, lignite or peat. (combustible fossile)
(2) Subsection 1104(13) of the Regulations is amended by adding the following in alphabetical order:
"basic oxygen furnace gas" means the gas that is produced intermittently in a basic oxygen furnace of a steel mill by the chemical reaction of carbon in molten steel and pure oxygen. (gaz de convertisseur basique à oxygène)
"bio-oil" means liquid fuel that is created from wood waste or plant residues using a thermo-chemical conversion process that takes place in the absence of oxygen. (bio-huile)
"blast furnace gas" means the gas produced in a blast furnace of a steel mill, by the chemical reaction of carbon (in the form of coke, coal or natural gas), the oxygen in air and iron ore. (gaz de haut fourneau)
"plant residue" means the residue of plants that would, but for its use in a system to convert biomass into bio-oil, be waste material, but does not include wood waste or waste that no longer has the chemical properties of the plants of which it is a residue. (résidus végétaux)
2. (1) Subparagraph (a)(ii) of Class 43.1 in Schedule II to the Regulations is replaced by the following:
(ii) equipment that generates both electrical and heat energy other than, for greater certainty, fuel cell equipment,
(ii.1) fixed location fuel cell equipment that has a peak capacity of not less than 3 kilowatts of electrical output and uses hydrogen generated only from internal, or ancillary, fuel reformation equipment,
(2) Subparagraph (a)(iv) of Class 43.1 in Schedule II to the Regulations is replaced by the following:
(iv) control, feedwater and condensate systems and other equipment, if that property is ancillary to equipment described in any of subparagraphs (i) to (iii), or
(3) Clause (c)(i)(A) of Class 43.1 in Schedule II to the Regulations is replaced by the following:
(A) is used by the taxpayer, or by a lessee of the taxpayer, to generate electrical energy, or both electrical and heat energy, using only fuel that is fossil fuel, wood waste, municipal waste, landfill gas, digester gas or bio-oil, or any combination of those fuels, and
(4) Subparagraph (d)(i) of Class 43.1 in Schedule II to the Regulations is replaced by the following:
(i) active solar heating equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of heating a liquid or gas used directly in an industrial process or in a greenhouse, including such equipment that consists of solar collectors, solar energy conversion equipment, solar water heaters, energy storage equipment, control equipment and equipment designed to interface solar heating equipment with other heating equipment, but not including buildings,
(5) Clause (d)(ii)(A) of Class 43.1 in Schedule II to the Regulations is replaced by the following:
(A) has, if acquired after February 21, 1994 and before December 11, 2001, an annual average generating capacity not exceeding 15 megawatts upon completion of the site development, or, if acquired after December 10, 2001, a rated capacity at the hydro-electric installation site that does not exceed 50 megawatts, and
(6) Subparagraph (d)(iii) of Class 43.1 in Schedule II to the Regulations is replaced by the following:
(iii) an addition or alteration, which is acquired after February 21, 1994 and before December 11, 2001, to a hydro-electric installation that is described in subparagraph (ii) or that would be so described if that installation were acquired by the taxpayer after February 21, 1994, and which results in an increase in generating capacity, if the resulting annual average generating capacity of the hydro-electric installation does not exceed 15 megawatts,
(iii.1) an addition or alteration, which is acquired after December 10, 2001, to a hydro-electric installation that is described in subparagraph (ii) or that would be so described if that installation were acquired by the taxpayer after February 21, 1994, and which results in an increase in generating capacity, if the resulting rated capacity at the hydro-electric installation site does not exceed 50 megawatts,
(7) Subparagraph (d)(ix) of Class 43.1 in Schedule II to the Regulations is replaced by the following:
(ix) equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating heat energy from the consumption of wood waste, municipal waste, landfill gas, digester gas or bio-oil, if the heat energy is used directly in an industrial process, or in a greenhouse, of the taxpayer or lessee, including such equipment that consists of fuel handling equipment used to upgrade the combustible portion of the fuel and control, feedwater and condensate systems, and other ancillary equipment, but not including buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), fuel storage facilities, other fuel handling equipment and electrical generating equipment, and property otherwise included in Class 10 or 17,
(8) Paragraph (d) of Class 43.1 in Schedule II to the Regulations is amended by striking out the word "and" at the end of subparagraph (x) and by adding the following after that subparagraph:
(xi) equipment used in a system of the taxpayer that converts wood waste or plant residue into bio-oil, if that bio-oil is used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating electricity, or electricity and heat, other than equipment used for the collection, storage or transportation of wood waste or plant residue, buildings or other structures and property otherwise included in Class 10 or 17, or
(xii) fixed location fuel cell equipment used by the taxpayer, or by a lessee of the taxpayer, that has a peak capacity of not less than 3 kilowatts of electrical output and uses hydrogen generated only from ancillary electrolysis equipment (or, if the fuel cell is reversible, the fuel cell itself) using electricity generated by photovoltaic, wind energy conversion or hydro-electric equipment, of the taxpayer or the lessee, and equipment ancillary to the fuel cell equipment other than buildings or other structures, transmission equipment, distribution equipment, auxiliary electrical generating equipment and property otherwise included in Class 10 or 17, and
APPLICATION
3. (1) Subsection 1(1) and the definitions "basic oxygen furnace gas" and "blast furnace gas" in subsection 1104(13) of the Regulations, as enacted by subsection 1(2), apply in respect of property that is acquired after 2000.
(2) The definitions "bio-oil" and "plant residue" in subsection 1104(13) of the Regulations, as enacted by subsection 1(2), apply in respect of property that is acquired after February 18, 2003.
4. (1) Subsections 2(1) to (4), (7) and (8) apply to property that is acquired after February 18, 2003.
(2) Subsections 2(5) and (6) apply after December 10, 2001.
REGULATORY IMPACT
ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
Description
These amendments implement measures proposed in the 2001 and 2003 Budgets to broaden the application of Class 43.1 in Schedule II to the Income Tax Regulations (the "Regulations"). Class 43.1 provides taxpayers with an accelerated capital cost allowance to encourage more efficient use of fossil fuels and the use of renewable or alternative energy sources. By virtue of Class 43.1, qualifying assets of a taxpayer are eligible for a capital cost allowance rate of 30%, computed on a declining balance basis. Included in the class are wind energy equipment, small hydro equipment, geothermal electricity equipment, certain types of efficient cogeneration equipment, photovoltaic equipment and other types of renewable or alternative energy production equipment.
These amendments
• Add "basic oxygen furnace gas" and "blast furnace gas" to the definition of "fossil fuel" in subsection 1104(13) of the Regulations. Only certain types of fuel (including fossil fuel) may be used by certain properties described in Class 43.1. These changes apply to property acquired after 2000 that uses such fuel.
• Increase the upper limit on the size of a small hydroelectric project that qualifies for Class 43.1 treatment to a maximum rated capacity of 50 megawatts (MW), from the current limit of an annual average generating capacity of 15 MW. This change applies to property acquired after December 10, 2001.
• Add "bio-oil" to the list of fuels one or more of which must be the only type of fuel used by certain property described in Class 43.1 and, subject to certain conditions, provide that the equipment used to generate electricity using bio-oil is eligible for Class 43.1 treatment. This change applies to property acquired after February 18, 2003 that uses such fuel.
• Extend Class 43.1 treatment to certain fixed location fuel cells that use hydrogen generated from either fuel reformation equipment or ancillary electrolysis equipment, or fixed location fuel cells that use internally generated hydrogen. These changes apply to fuel cells acquired after February 18, 2003.
• Extend Class 43.1 treatment to certain active solar heating equipment that is used for the purpose of heating a liquid or a gas used directly in a greenhouse. In addition Class 43.1 treatment is extended to certain equipment that generates heat energy from the consumption of certain waste fuels, if the heat energy is used directly in a greenhouse. These changes apply to equipment acquired after February 18, 2003.
The measures concerning "blast furnace gas" and small hydroelectric projects are discussed in detail at page 223 of Annex 7 to The Budget Plan of 2001. As well, these amendments were first released in draft form by the Department of Finance on February 5, 2002 (Finance News Release 2002-013). Subsequent to that release, the Department of Finance agreed to recommend to the Minister of Finance that "basic oxygen furnace gas" be treated in the same manner as blast furnace gas. The measures concerning bio-oil, fixed location fuel cells and certain equipment used in greenhouses are discussed in detail at pages 338 and 339 of Annex 9 to The Budget Plan of 2003.
Alternatives
These amendments are necessary to implement measures related to energy conservation equipment and alternative energy sources that were proposed in the 2001 and 2003 Budgets. No alternatives were considered.
Benefits and Costs
The benefits of Class 43.1 treatment are difficult to quantify. To the extent these measures encourage the development of a successful domestic renewable energy and energy conservation sector, significant environmental benefits will accrue in the form of reduced greenhouse gas emissions and reduced reliance on fossil fuels. These measures will also help Canada diversify its energy supply. However, tangible economic benefits of renewable energy are difficult to measure, given that much of the industry is still in the early stages of development.
The 2001 and 2003 Budgets estimated that the annual cost of broadening the Class 43.1 in the manner proposed in the Budgets would be $5 million.
Strategic Environmental Assessment
These amendments to Class 43.1 provide tax incentives to encourage a more efficient use of fossil fuel and the use of renewable and alternative energy sources. In that sense, these amendments are intended and expected to have a positive impact on the environment.
In particular, small hydroelectric projects are generally considered to be a "clean" way in which to produce electrical energy and encouraging such production is intended to have a positive impact. In the case of basic oxygen furnace gas and blast furnace gas, which are considered greenhouse gases, such gases would otherwise escape into the atmosphere. The change with respect to the eligibility of fuel cell equipment is expected to help make fuel cells more cost-competitive with both conventional power sources and other new technologies that are already in Class 43.1. Also, bio-oil is considered to be a neutral energy source with respect to greenhouse gases, because unlike fossil fuels, the carbon released into the atmosphere as a by-product of combustion was already part of the natural carbon cycle. Finally, the measure with respect to greenhouses is intended to help promote the use of certain renewable and alternative energy assets in the Canadian greenhouse industry.
Consultation
The criteria established for assets under Class 43.1 were developed through consultations held by the Department of Finance and various parties, including Natural Resources Canada and industry stakeholders.
The December 2001 Budget announced formal consultations on Class 43.1. Numerous submissions were received and reviewed. A draft of the amendments related to the 2001 Budget was released for consultation on February 5, 2002 (Finance news release 2002-013). As a result of these consultations, the 2003 Budget included proposals to further broaden Class 43.1.
These 2001 and 2003 Budget changes were pre-published in the Canada Gazette, Part I, on December 18, 2004. Following that pre-publication comments were received from certain stakeholders. As a result, four changes have been made to the proposed Regulations. First, a reference to "coal gas" which was inadvertently omitted in the definition of fossil fuel in subsection 1104(13) of the English version of the proposed Regulations is re-introduced. Second, the reference to "coke gas" in the English version of the definition of fossil fuel is clarified to "coke oven gas". Third, "coke oven gas" is added to the definition of fossil fuel in the French version of the proposed Regulations. Fourth, subparagraphs (a)(ii.1) and (d)(xii) of Class 43.1 to the proposed Regulations are amended to ensure that fuel cells that use internally generated hydrogen qualify for Class 43.1 treatment.
Compliance and Enforcement
The Income Tax Act provides the necessary compliance mechanisms. These mechanisms allow the Minister of National Revenue to assess and reassess tax payable, conduct audits and seize relevant records and documents. The "Class 43.1 Technical Guide and Technical Guide to Canadian Renewable and Conservation Expenses (CRCE)," published by Natural Resources Canada sets out engineering and scientific criteria applicable in determining if property is included in Class 43.1.
Contact
Gurinder Grewal
Tax Legislation Division
Department of Finance
L'Esplanade Laurier
140 O'Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: (613) 992-1862
S.C. 2000, c. 12, s. 142 (Sch. 2, par. 1(z.34))
R.S., c. 1 (5th Supp.)
C.R.C., c. 945
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