Canada: Municipalities To Step Into Leading Role

Last Updated: July 9 2013
Article by Stephen J. Fyfe, Shane Freitag and Stephanie Wong

Most Read Contributor in Canada, September 2016

On June 12, 2013, the Ministry of Energy issued a directive to the Ontario Power Authority ("OPA") pursuant to the Electricity Act, 1998 to amend the Feed-in-Tariff ("FIT") Program. The directive follows the May 30, 2013 speech by the Ontario Minister of Energy to an energy industry association announcing major changes to the procurement and planning processes for renewable energy in the Province.

Under the directive, the OPA was tasked with developing a competitive procurement process for renewable energy projects over 500 kW, which will replace the existing large project stream of the FIT Program. Under the new competitive procurement process, the OPA will be required to engage with municipalities to help identify appropriate locations and siting requirements for future large renewable energy projects. The Government has also asked the Independent Electricity System Operator and the OPA to consult on the development of regional energy plans to ensure that it "gets siting decisions right the first time".

The Minister has also directed the OPA to revise the FIT program for projects between 10 and 500 kW ("Small FIT") to give priority to projects partnered or led by municipalities. These incentives include the provision of a "price adder" to the standard FIT pricing, the provision of priority points during the application process and the creation of capacity set-asides.

In addition, municipalities will have access to funding for costs associated with design and development of their Small FIT projects. This funding will be similar to the funding that is already available for community co-op and aboriginal sponsored projects.

The Government has also indicated that it will work with municipalities to determine a property tax rate increase for wind turbine towers, as well as provide funding to help small and medium-sized municipalities develop municipal energy plans focusing on increasing conservation and helping to identify the best energy infrastructure options for their communities.

These announcements and directives clearly signal Ontario's strong commitment to small renewable energy projects by making a total of 900 MW of new capacity available between now and 2018 for the Small FIT and microFIT (10 kW and under) programs. The OPA will open a new procurement window for Small FIT and microFIT starting in the fall of 2013. The fall 2013 procurement target will be 70 MW for Small FIT and 30 MW for microFIT, with annual procurement targets being set thereafter at 150 MW for Small FIT and 50 MW for microFIT. The OPA will also be launching a pilot program for rooftop solar projects on unconstructed buildings during the new procurement window for Small FIT.

Municipalities that want to become more active in renewable energy development and be ready for the new procurement window starting in the fall of 2013 need to understand how they should structure their activities to ensure that as a municipality they can continue to maintain their tax-exempt status while participating in the development of the project in a tax-efficient manner. Some thoughts on these issues are discussed below.


A municipal corporation formed by a municipality qualifies for tax-exempt status if it meets both a qualifying ownership test and a source of income test. The ownership test is satisfied by restricting ownership to one or more municipalities in Canada.1 The source of income test requires the municipal corporation to restrict its income-producing activities to activities carried on within the geographic boundaries of its municipal shareholders, subject to a couple of exceptions.

The first is a de minimis exception allowing up to 10% of the municipal corporation's net income for a taxation year to come from activities carried on outside those municipal boundaries. The second exception applies to income from certain regulated activities, including the production or distribution of electricity, or income that arises from a contract with a Crown entity.2

Determining whether the geographic source of income test is satisfied in a particular situation is a question of fact. The Canada Revenue Agency has in the past confirmed that it is the activities of the corporation itself and not of its subsidiaries that are relevant in determining where its income is earned for the purposes of the geographic source of income test.3 Also, the geographic source of income test is not concerned with the location of the municipal corporation's income, but instead the location of the activities from which the municipal corporation's income is generated.4

Municipalities that participate in the development of a renewable energy project will need to ensure that their participation does not affect their ability to satisfy the geographic source of income test to maintain tax-exempt status. A normal first step in structuring municipal involvement in the development of a renewable energy project would be for the municipality to establish a separate subsidiary municipal corporation for that purpose.


The structure of the investment entity will be affected by an analysis of whether the income from the generation activity will fit within the source of income exceptions described above. If so, it would likely make sense for the municipal corporation to consider where permissable holding the investment through a limited partnership. This would provide some measure of limited liability, while not creating an intervening level of corporate tax.

If there is some ambiguity around the application of the source of income exceptions, another alternative is to organize a blocker entity to hold the partnership interest. If permitted by municipal law regulations, the municipality could capitalize the blocker corporation with a combination of debt and equity, sufficient to defer any corporate level tax for an indefinite period of time.


1 See paragraphs 149(1)(d.5) and (d.6) of the Income Tax Act (Canada) which provide tax exempt status for 90% owned corporations, and wholly owned subsidiaries, respectively. The same tests apply in the determination of whether a municipal corporation is exempt from income tax under Ontario's Corporations Tax Act for a taxation year: see paragraph 57(1)(a) and subsection 57(4) of the Corporations Tax Act (Ontario).

2 Subsection 149(1.2) of the Income Tax Act (Canada).

3 See, for example, CRA document no. 2011-0395521I7.

4 This means that a municipal corporation may, for example, own all of the shares and debt of a taxable subsidiary that carries on business outside the municipality without jeopardizing its tax exempt status, as long as it ensures that any activities relating to its equity and debt investments in the subsidiary take place within the municipality.

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