THE INCOME TAX IMPLICATIONS OF OWNING A RESIDENTIAL SOLAR ELECTRIC SYSTEM IN ONTARIO
Questions keep coming up about income tax implications of owning a solar electric system and selling your
power back to the grid under Ontario's Feed-In Tariffs (FITs) program, so this brief is intended to capture all
of what is known about the topic so far. This page will be updated as more is learned. This information is
based on Tax Act Rules of April 2009.
The Government of Ontario acknowledges the value of generating safe, clean electrical energy and in 2006
took a very progressive step in creating "The Renewable Energy Standard Offer Program" (RESOP). Under
the RESOP, homeowners and business owners were invited to apply for a 20 year RESOP contract, under
which they were paid a premium price ($.42 per kilowatt hour) for every bit of electricity they generated.
The RESOP program has now been replaced by a new program called the "Feed-in Tariffs" ("FITs")
program under Ontario's new "The Green Energy Act". The great news is that homeowners should now be
able to earn a profit on their home system, since the new price paid per kilowatt hour is now 80.2 cents!
Since you are to be paid for your solar electricity sales, in the eyes of the Canada Revenue Agency, your
contract with the Ontario Power Authority (OPA) makes you a business. This means that the income you
earn from selling kilowatts is taxable. That's the bad news.
Now for the good news. There are a number of allowable deductions you can take against this income,
which will reduce the resulting taxes payable to zero for many years of your 20 year contract with the OPA as follows:
1. The largest of these expenses is depreciation and a special provision of the tax act allows the homeowner to write off the cost of their system more quickly that would normally be the case. The result is that that every bit of energy revenue earned, does not result in any taxable income until the point is reached where the amount of income from energy sales equals the cost of the system. The technical info: Solar PV systems are classified as " class 43.2 assets" for which, accelerated depreciation is allowed (1) at a rate of 50% declining balance per year. Unfortunately one can't use this as quickly as it first appears is possible.
2. Loan interest for the purchase of the system (if any)
3. Additional insurance premium paid (which should be minor, being at the same cost per $1,000 of coverage as your existing home policy)
4. Repairs and maintenance (likley all that a homeowner would face would be an inverter repair or replacement every 10-15 years)
5. There will be no affect on your property taxes. See note 2 below.
When completing you tax return, you should therefore claim as per the following example:
Note that in a future year once you have claimed depreciation totalling up to the value of the system, you will likely have to start paying some tax on the income, but rest assured that it won't likely be in the first 10 years, particularly if you have loan interest expense to claim.
Additional information:
· Feel free to use my free spreadsheet for calculating your anual income tax preparation and here are some other forms you may need:
T2125 Statement of Business or Professional Activities
T2125 Calculation or Capital Cost Allowance (CCA) Claim
· Personal Tax software would be better
· A professional Accountant will be the most pain-free except for his/her bill
NEW INFO: September 2010: The Canada Revenue Agency (CRA), now has a web page devoted to this. Click here.
Notes
1) Adding a solar PV system does NOT affect property value assessments for tax purposes. In other words, MPAC is to disregard them for
roof top systems. Solar PV systems are considered "Machinery for producing electric power" and here are the details directly from The Ontario
Assessment Act:
Assessment Act R.S.O. 1990, CHAPTER A.31
Property assessable and taxable, exemptions
3. (1) All real property in Ontario is liable to assessment and taxation, subject to the following exemptions from taxation:
Machinery for producing electric power
18. All machinery and equipment including the foundations on which they rest to the extent and in the proportion used for producing electric power
but not including any buildings, structures, structural facilities or fixtures used in connection therewith.
In the case of adding ground-mounted PV systems, while such will not affect property value assessments for tax purposes, they may cause
a change of land use, which might cause in increase in taxes. For instance, if one is placed on agricultural land, which is typically taxed at a low
rate, the land use designation for that portion of the property will be changed to "industrial", which is taxed at a higher rate. As a result, although
the property assessment doesn't change, the yearly taxes will. Note that the above applies only to solar PV, not other renewable energy
technologies.
For questions or additional information on the above, call the Ontario Ministry of Finance call centre at 1 866 ONT-TAXS (1 866 668-8297).
2) PV systems are Class 43.2 assets, which qualify for accelerated Capital Cost Allowance (CCA) on purchases made Feb 24, 2005 to Dec 31,
2011. But, Business Owners Take Note: Class 43.2 accelerated deprecation often isn't fully usable:
As per Tax Act regulation 1100(26), the accelerated CCA (tax depreciation) allowed under class 43.2 cannot be deducted against general
income of a business except income from energy production or sale, EXCEPT FOR manufacturing and processing companies, mining
operations and energy sale/distribution businesses.
Disclaimer: The information above is intended to make residential homeowners aware of residential solar electric system income tax implications as a guide only, but does not constitute an opinion and should not be relied upon as such. The advisability of any course of action mentioned above depends on your particular financial, tax and legal circumstances. Readers may wish to consult an accountant before implementing the suggestions made above.
Questions keep coming up about income tax implications of owning a solar electric system and selling your
power back to the grid under Ontario's Feed-In Tariffs (FITs) program, so this brief is intended to capture all
of what is known about the topic so far. This page will be updated as more is learned. This information is
based on Tax Act Rules of April 2009.
The Government of Ontario acknowledges the value of generating safe, clean electrical energy and in 2006
took a very progressive step in creating "The Renewable Energy Standard Offer Program" (RESOP). Under
the RESOP, homeowners and business owners were invited to apply for a 20 year RESOP contract, under
which they were paid a premium price ($.42 per kilowatt hour) for every bit of electricity they generated.
The RESOP program has now been replaced by a new program called the "Feed-in Tariffs" ("FITs")
program under Ontario's new "The Green Energy Act". The great news is that homeowners should now be
able to earn a profit on their home system, since the new price paid per kilowatt hour is now 80.2 cents!
Since you are to be paid for your solar electricity sales, in the eyes of the Canada Revenue Agency, your
contract with the Ontario Power Authority (OPA) makes you a business. This means that the income you
earn from selling kilowatts is taxable. That's the bad news.
Now for the good news. There are a number of allowable deductions you can take against this income,
which will reduce the resulting taxes payable to zero for many years of your 20 year contract with the OPA as follows:
1. The largest of these expenses is depreciation and a special provision of the tax act allows the homeowner to write off the cost of their system more quickly that would normally be the case. The result is that that every bit of energy revenue earned, does not result in any taxable income until the point is reached where the amount of income from energy sales equals the cost of the system. The technical info: Solar PV systems are classified as " class 43.2 assets" for which, accelerated depreciation is allowed (1) at a rate of 50% declining balance per year. Unfortunately one can't use this as quickly as it first appears is possible.
2. Loan interest for the purchase of the system (if any)
3. Additional insurance premium paid (which should be minor, being at the same cost per $1,000 of coverage as your existing home policy)
4. Repairs and maintenance (likley all that a homeowner would face would be an inverter repair or replacement every 10-15 years)
5. There will be no affect on your property taxes. See note 2 below.
When completing you tax return, you should therefore claim as per the following example:
Note that in a future year once you have claimed depreciation totalling up to the value of the system, you will likely have to start paying some tax on the income, but rest assured that it won't likely be in the first 10 years, particularly if you have loan interest expense to claim.
Additional information:
· Feel free to use my free spreadsheet for calculating your anual income tax preparation and here are some other forms you may need:
T2125 Statement of Business or Professional Activities
T2125 Calculation or Capital Cost Allowance (CCA) Claim
· Personal Tax software would be better
· A professional Accountant will be the most pain-free except for his/her bill
NEW INFO: September 2010: The Canada Revenue Agency (CRA), now has a web page devoted to this. Click here.
Notes
1) Adding a solar PV system does NOT affect property value assessments for tax purposes. In other words, MPAC is to disregard them for
roof top systems. Solar PV systems are considered "Machinery for producing electric power" and here are the details directly from The Ontario
Assessment Act:
Assessment Act R.S.O. 1990, CHAPTER A.31
Property assessable and taxable, exemptions
3. (1) All real property in Ontario is liable to assessment and taxation, subject to the following exemptions from taxation:
Machinery for producing electric power
18. All machinery and equipment including the foundations on which they rest to the extent and in the proportion used for producing electric power
but not including any buildings, structures, structural facilities or fixtures used in connection therewith.
In the case of adding ground-mounted PV systems, while such will not affect property value assessments for tax purposes, they may cause
a change of land use, which might cause in increase in taxes. For instance, if one is placed on agricultural land, which is typically taxed at a low
rate, the land use designation for that portion of the property will be changed to "industrial", which is taxed at a higher rate. As a result, although
the property assessment doesn't change, the yearly taxes will. Note that the above applies only to solar PV, not other renewable energy
technologies.
For questions or additional information on the above, call the Ontario Ministry of Finance call centre at 1 866 ONT-TAXS (1 866 668-8297).
2) PV systems are Class 43.2 assets, which qualify for accelerated Capital Cost Allowance (CCA) on purchases made Feb 24, 2005 to Dec 31,
2011. But, Business Owners Take Note: Class 43.2 accelerated deprecation often isn't fully usable:
As per Tax Act regulation 1100(26), the accelerated CCA (tax depreciation) allowed under class 43.2 cannot be deducted against general
income of a business except income from energy production or sale, EXCEPT FOR manufacturing and processing companies, mining
operations and energy sale/distribution businesses.
Disclaimer: The information above is intended to make residential homeowners aware of residential solar electric system income tax implications as a guide only, but does not constitute an opinion and should not be relied upon as such. The advisability of any course of action mentioned above depends on your particular financial, tax and legal circumstances. Readers may wish to consult an accountant before implementing the suggestions made above.
Example: Say you paid $30,000 for a 3 kilowatt system and you earn $3,000 each year. You can bring the taxable portion to zero by deducting up to $3,000 worth of system depreciation each year over 10 years, until the $30,000 cost of the system has been fully depreciated. NOTE: The $3,000 figure above was used for simple math. In fact, a properly installed system of 3 kilowatt size should generate about $2,700 -$2,800 in the first year, but then decline very slightly at about 0.5% to 0.75% per year due to panel degradation. Varying amounts of sun will also affect your revenues up or down. You can use certainly take enough depeciation to get your taxable income to zero whan all your ongoing costs are applied, but you can't claim a loss on the system.
The Tax Man
