On January 4, 2012, the Province of Ontario added greater clarity to the property tax treatment of renewable energy generation facilities by amending Ontario Regulation 282/98 under Ontario's Primary Property tax statute, the Assessment Act.
The objective of the amendments made to Regulation 282/98, which take effect retroactively as of January 1, 2011, were to clarify the property tax treatment of renewable energy installations for property owners, project developers, municipalities and the Municipal Property Assessment Corporation in addition to ensuring that property tax does not act as a disincentive to renewable energy generation, particularly in situations where small-scale generation facilities are owned by persons who are not normally in the business of generation.
For a number of years, the property tax treatment of renewable energy installations has been a matter of some uncertainty in Ontario. Unlike wind energy, where $40,000 of value is attributed to a property for each installed mega-watt of capacity, solar energy developments and biogas developments previously lacked clear assessment rules.
In understanding the changes it is useful to remember that property taxes are based on at least two separate elements: the assessment value and the tax classification (which determine the tax rate).
Rooftop renewable energy installations will not result in a change in the assessment if they are ancillary to the original building and its use – this is very good news for property owners and for project developers who have agreed to bear the burden of property tax increases attributed to rooftop solar installations.
As will always be the case, the issue of whether the installation is ancillary will depend on the factual situation but we expect that the scale or size of the installation in relationship to the existing building and its operations and possibly the amount of revenue it generates compared to the revenue the underlying facility will be of importance. In situations where the economic value or productivity of the existing facility is marginal, particular care should be taken with the legal structure of the arrangement (lease, joint-venture, etc.) to ensure the installation is not unexpectedly assessed with additional value or causes a change in the tax classification.
We would suggest that the regulation's different treatment of ancillary rooftop installations compared to ground-mounted installations should result in only exceptional situations being considered for tax class change or increases in value.
Overall, most rooftop installations will be fairly clear-cut and the regulation's changes represents a significant clarification.
The value for assessment purposes for ground installations will depend on the size and location of the facility. It will also depend on the entity involved in the electricity generation, as described below:
a. The Ancillary Activity/Non-Commercial Carve-out: In instances where the landowner's primary business is not electricity generation or transmission or it meets certain farming business requirements, there are now three rules outlined by the regulations:
- Small-size ground installations, up to 10kW, will not see an increase in assessed value or a change in the tax classification/rate.
- Medium-size ground installations, over 10 kW and up to 500 kW, the tax class/rate will not be changed but will be based on the original surrounding land use, whether that be residential, commercial or farm, etc. The value of the land can be increased however.
- Large-size ground installations with a generation capacity over 500 kW will be reclassified in part to the industrial tax class/rate. The lands will remain in the original tax class to the percentage that 500 kW bears to the total generation capacity. Similarly to medium-size installations, the assessed value of the land can be increased. Depending on the original classification, the change in taxes levied can be very large.
b. Business Scale Solar Facilities: Consistent with current treatment, ground-mounted solar generation facilities that are operated by entities whose primary business is the generation, transmission or distribution of electricity, will be taxed at the industrial rate.
c. Anaerobic Digestion: Farmers that operate anaerobic digestion facilities of any size on a farm will be taxed at the farm rate.
d. Wind Turbine Towers: Consistent with current treatment, wind turbine towers will be assessed at a rate of $40,000 per MW of installed capacity with the exception of rooftop and ground-based installations of up to 10 kW where the property tax assessment is unaffected.
We anticipate further clarification of the taxation rates for renewable energy installations as all uncertainty regarding the property tax impacts of a renewable energy installation is not removed by the regulatory amendments.
For instance, there will continue to be some situations where it is unclear how the test as to whether power generation is "ancilliary" to the main activity on the property will be implemented or applied. Further, if there is a change in the classification of the property, the impact of this change will need to be considered. Finally, the manner in which the value will be increased and whether that is based upon the costs of the installation, the value to the landowner in terms of income from rent or a sharing of income from the electricity generated will almost certainly be an important consideration and possible conflict with the Municipal Property Assessment Corporation.
With more complex arrangements and larger installations, project-specific attention still needs to be given to what the property tax implications of the amendments will be and careful structuring of the arrangement between the parties may be useful to minimize property tax consequences. It is also important to recognize that a landowner or an electricity generator's right to appeal a change in the assessment is time-limited and should be secured by contract and made on time as failure to meet the short appeal deadlines is usually permanently fatal.
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