On February 11, 2014 Minister of Finance Jim Flaherty delivered his 10th federal budget ("Budget 2014"). In his 2013 budget Minister Flaherty stated that since 2006 he has introduced over 75 "integrity and fairness" measures aimed at closing tax loopholes. This is not a big surprise from the Minister who took the heat for closing down income funds almost a decade ago.
True to form, Minister Flaherty's Budget 2014 continues the pursuit of fiscal integrity. The scale of the integrity and fairness measures introduced by the Government of Canada since 2010 is significant. The total fiscal savings for all of these proposals from the 2010-2011 fiscal year to the 2018-2019 fiscal year is estimated to exceed $23 billion. The Minister of Finance's fiscal savings estimates also provide a good indication of the slower pace of integrity measures in Budget 2014. While savings from integrity measures in Budget 2011 were estimated to be over $8 billion, the estimate for Budget 2014 integrity measures is less than $1.8 billion, with most of that attributed to one proposal aimed at so-called "captive insurers."
Below we describe the proposal in Budget 2014 for the annual expansion of the "green energy" accelerated depreciation provisions in the Income Tax Act (Canada) ("ITA"). For more details on the balance of the tax proposals in Budget 2014 please see our general commentary, "Budget 2014: Fiscal Integrity as a Work in Progress".
Budget 2014 continued the government's policy of providing incentives for green energy by proposing to expand Class 43.2 to include certain water-current energy equipment and equipment used to gasify eligible waste fuel for use in a broader range of applications. The measures are intended to encourage investment in technologies that can contribute to a reduction in emissions of greenhouse gases and air pollutants, in support of Canada's targets set out in the Federal Sustainable Development Strategy and the diversification of Canada's energy supply.
The ITA encourages investment in a broad range of low or no-emission energy generation equipment and energy conservation equipment by providing an accelerated 50% declining-balance capital cost allowance ("CCA") rate for certain assets.
Assets qualifying for accelerated CCA rates are found in Class 43.1 and 43.2. In general, in order for a property to be eligible for inclusion in Class 43.1 or 43.2, it must:
- be situated in Canada;
- be acquired by the taxpayer for use by the taxpayer, or by a lessee of the taxpayer, for the purpose of earning income from a business carried on in Canada or from property situated in Canada; and
- not have been used for any purpose before the taxpayer acquired the property.
Most electricity generating and distributing equipment qualifies as Class 1 property for which only a 4% CCA rate is prescribed (electricity transmission and distribution assets have a higher 8% rate). However, renewable energy and energy conservation systems, including wind, small hydro, solar and cogeneration assets that produce electricity fall within Class 43.1, qualifying for a 50% CCA rate under Class 43.2 (subject to the "half-year rule" which applies in the year of acquisition) for property acquired after February 22, 2005 and before 2020, for the full range of renewable energy equipment included in Class 43.1 and for certain high-efficiency cogeneration equipment. For equipment acquired before or after that time, the rate is 30%.
Eligible water-current energy equipment property will include equipment used primarily for the purpose of generating electricity using the kinetic energy of flowing water without the use of physical barriers (such as a dam), and will include support structures, submerged cables, transmission equipment, and control, conditioning and battery storage equipment. Eligible property will not include buildings, distribution equipment or auxiliary electricity generating equipment. Wave and tidal energy equipment using similar technologies are already generally eligible under Class 43.2.
Gasification equipment is already eligible for inclusion under Class 43.2 as "fuel upgrading equipment" when used in an eligible cogeneration facility to produce electricity and heat or in an eligible waste-fuelled thermal energy facility to produce heat. Class 43.2 will be expanded to include equipment used to gasify eligible waste fuel for other application, such as selling the producer gas for domestic or commercial use. Eligible property will include equipment used primarily to produce producer gas, including related piping, storage equipment, feeding equipment, ash-handling equipment and equipment to remove non-combustibles and contaminants from the producer gas, but will not include buildings or other structures, or heat rejection equipment. The property must also meet the requirements of all Canadian environmental laws, by-laws and regulations.
The Budget 2014 measures will apply to eligible equipment acquired on or after February 11, 2014.
The ability to access accelerated CCA depends on a variety of factors, such as the type of investment, situs (Canadian resident or non-resident) and the type of investor and the entities comprising the investment structure (i.e., corporation, partnership, trust, etc.). Certain investment structures allow investors to maximize their ability to access the tax incentives, while strict limits are imposed on the use of other investment structures. As a result, careful tax law planning is required for energy projects and for investors considering an investment in the energy industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.