The microFIT Program, which was introduced by the 2009 Ontario Green Energy Act, is designed to encourage the development of renewable energy projects in Ontario that generate electricity of 10kW or less. This program is part of the Ontario Power Authority's (OPA) Feed-in Tariff (FIT) program for renewable energy in Ontario. The OPA guarantees a price over a 20 year term for the electricity generated. Rates are currently 80.2 cents/kwh for rooftop systems and 64 cents/kwh for ground mounted systems.
Basic Eligibility Requirements
To be eligible for the microFIT Program, a project must:
- be a Renewable Generating Facility, which is an electricity-generating facility that generates electricity exclusively from a renewable fuel (wind, solar, biogas, biomass, biofuel, landfill gas or waterpower);
- be located in Ontario;
- not have an existing OPA contract;
- not have a rated capacity to generate greater than 10kW;
- be connected, directly or indirectly, to the IESO-Controlled Grid via a distribution system; and
- have separate metering suitable for microFIT Program data collection.
The OPA reviews and updates the "microFIT Eligible Participant Schedule" periodically to ensure that the program is primarily focused on non-commercial applicants. As of September 24, 2010, the following constitute an "Eligible Participant" for the purposes of the program:
- An individual who solely owns, or together with other natural persons jointly owns, all the legal and beneficial title to the property on which the facility is located.
- A farmer (a natural person or other entity) who was registered under the Farm Registration and Farm Organizations Funding Act and who has obtained a farm business number registration (or has received a waiver to file the farm business registration form).
- Renewable Energy Cooperative, municipality, LDC Participant, certain specified universities, school or college, hospital or long-term care home, aboriginal community, social and affordable housing, and faith based organization.
In all cases, the eligible participant must own both the legal and beneficial title to the property on which the facility is located. It is no longer permitted that the eligible participant leases the land on which the facility is located.
Tax Considerations
HST:
In order to recover the HST charged on the purchase and construction of the facility, the project owner needs to be an HST registrant. In most cases this will already be the case, but if not already a registrant, the project owner should register as soon as possible. Registrants are able to recover all HST paid on their inputs (can range from $9,000 to $13,000). In addition, registrants must also charge HST on their electricity sales to the OPA. This can be done by informing the OPA that you are an HST registrant and giving them your HST business number. At a minimum, annual HST returns will have to be filed with the Canada Revenue Agency (CRA).
Income Tax Reporting:
Income earned on the sale of electricity to the OPA must be included in taxable income. This income can be reduced by expenses incurred (interest, repairs & maintenance, etc) and by taking capital cost allowance (CCA) on the equipment. For CCA purposes, the project would be considered to be class 43.2 equipment which have a declining balance deduction rate of 50%. After just 5 years, over 95% of the capital cost will have been deducted for tax purposes assuming that maximum CCA has been claimed. However, recent interpretations from the CRA have placed restrictions on the amount of CCA that can be claimed. The CRA considers these projects to be "Specified Energy Property". As a result, CCA can only be deducted to the extent that there is net income from the project. This means that you cannot deduct CCA that would create or increase a loss on the project.
The CRA also considers that, due to the long-term nature and significant capital investment of the project, income from these projects cannot be considered incidental to the farming operations. Since it is not considered to be farming income, it is not eligible for income tax reporting on a cash basis but must be reported on the accrual basis. Where the project is being undertaken by an unincorporated entity, this income and expenses will be reported on a separate business statement (for example, not part of the farming operations). For incorporated entities, a separate calculation of net income for this project will need to be done to ensure that the restrictions on CCA are met. In addition, no cash basis adjustments are permitted for this type of income.
There is currently no mechanism to sell your property but retain the rights to the contract. As such, it may become a valuation issue if you decide to sell. In addition, the long term impact on property tax assessments is unclear and insurance policies have to be reviewed to address the investment in equipment. Each potential participant should consider the above issues prior to signing a contract.
To learn more about the financial considerations of the microFIT program and how it could impact your farm business, contact your Collins Barrow advisor.