Following introduction of the microFIT Program by the Ontario Green Energy Act in 2009, many farm operations have invested in solar projects.
Under the microFIT program, participants contract to supply electricity to the Ontario Power Authority (OPA). The participant is paid a guaranteed fixed rate for the electricity produced. All of the energy produced is sold to the OPA and handled as a separate transaction from the participant's purchase and consumption of electricity. The CRA regards income from such an arrangement as coming from a business or property.
The sale of electricity under contract does not meet the definition of farming income under the Income Tax Act. However, when a taxpayer is actively involved in farming and derives income from other activities that are incidental to the farming operations the added income would be considered farming income. Factors that may be relevant in the determination of whether particular activities are incidental to farming operations include the amount of income generated, scale of operations and capital invested. Due to the long-term nature and significant capital investment of these projects, income is not typically considered incidental to farming operations but this should be reviewed on a case-by-case basis.
What does it mean if the income from the sale of electricity does not meet the definition of farming income? Since it is not considered to be a farming activity income must be reported on an accrual basis, cash basis accounting is not allowed. For the unincorporated client, income and expenses should be reported separately from the farm statement on a rental or business statement. The corporate client must determine whether the income is from business or property. Given the nature of the income, it is likely to represent income from property and ownership of a non-business asset. Incorporated clients must identify income from property in Schedule 7 of their corporate tax return and this requires a separate calculation of net income from the project.
If there are significant solar assets owned by the farm corporation, does the corporation meet the definition of a family farm corporation under the Income Tax Act? Favorable tax rules apply to shares of the capital stock of a family farm corporation. These include the availability of tax-deferred transfers to family members during their lifetime or on death, and the eligibility for the lifetime $750,000 capital gains exemption to offset a gain on the sale of shares. If solar assets are greater than 10% of the fair market value of all corporate assets, the shares may not qualify as shares of the capital stock of a family farm corporation. Removal of the solar assets may be required prior to a share sale or transfer of shares to a family member.
Components of solar equipment qualify as class 43.2 property which is deductible at 50% on a declining balance basis and subject to the half-year rule in the year of purchase. However, if the property is considered ‘specified energy property' the deduction is limited to the net income from the project. According to the CRA, the property is ‘specified energy property' if a taxpayer acquires solar equipment primarily to generate electricity for sale and not for consumption by the farm (or other) business,. If more than 50% of the electricity generated by the property is consumed by the farm (or other) business there is no limit to the deduction that can be claimed.
The above discussion is a general overview of tax considerations that are associated with solar investments by a farm. For a full analysis of your current circumstances, please contact your Collins Barrow adviser.
Kathy Byvelds, CA is a Tax Partner in the Winchester office of Collins Barrow.