The government of Ontario has announced new rules that are expected to offer greater clarity for the property tax treatment of solar and other renewable energy projects. The rules amend Ontario Regulation 282/98 under Ontario's Primary Property tax statute, the Assessment Act, and take effect retroactively as of Jan. 1, 2011.
The government's goal was to clarify the property tax treatment of renewable energy installations for property owners, project developers, municipalities and the Municipal Property Assessment Corp., in addition to ensuring that property tax does not act as a disincentive to renewable energy generation, particularly in situations where small-scale generation facilities are owned by persons who are not normally in the business of generation.
For a number of years, the property tax treatment of solar energy and some other types of renewable energy installations has been a matter of uncertainty in Ontario. Unlike wind energy, where $40,000 of value is attributed to a property for each installed megawatt of capacity, solar energy developments previously lacked clear assessment rules.
To understand the changes, it is useful to remember that property taxes are based on at least two separate elements: the assessment value and the tax classification (which determine the tax rate).
Rooftop rules
Rooftop renewable energy installations will not result in a change in the assessment if they are ancillary to the original building and its use. This is good news for property owners and for project developers who have agreed to bear the burden of property tax increases attributed to rooftop solar installations.
As will always be the case, the issue of whether the installation is ancillary will depend on the factual situation. But we expect that the scale or size of the installation in relationship to the existing building and its operations – and possibly the amount of revenue it generates compared to the revenue of the underlying facility – will be of importance.
In situations where the economic value or productivity of the existing facility is marginal, particular care should be taken with the legal structure of the arrangement (lease, joint venture, etc.) in order to ensure the installation is not unexpectedly assessed with additional value and does not cause a change in the tax classification.
We would suggest that the regulation's different treatment of ancillary rooftop
installations compared to ground-mounted installations should result in only exceptional situations being considered for tax class change or increases in value.
Overall, most rooftop installations will be fairly clear-cut, and the regulation's changes represent a significant clarification.
The value for assessment purposes for ground installations will depend on the size and location of the facility. It will also depend on the entity involved in the electricity generation, as described below:
Ground-mounted projects
In instances where the landowner's primary business is not electricity generation or transmission or it meets certain farming business requirements, there are now three rules outlined by the regulations. The ancillary activity/non-commercial carve-out applies for the following installation types, according to these size-based rules.
1. Small ground installations, up to 10 kW, will not see an increase in
assessed value or a change in the tax classification/rate.
2. For medium ground installations, over 10 kW and up to 500 kW, the tax class/rate will not be changed, but it will be based on the original surrounding land use, whether that be residential, commercial or farm, etc. The value of the land can be increased, however.
3. Large ground installations with a generation capacity over 500 kW will be reclassified in part to the industrial tax class/rate. The lands will remain in the original tax class to the percentage that 500 kW bears to the total generation capacity. As with midsize installations, the assessed value of the land can be increased. Depending on the original classification, the change in taxes levied can be very large.
Conversely, business-scale solar facilities will see a tax rate that is consistent with their current treatment. Ground-mounted solar generation facilities that are operated by entities whose primary business is the generation, transmission or distribution of electricity will be taxed at the industrial rate.
We anticipate further clarification of the taxation rates for renewable energy installations, as all uncertainty regarding the property tax impacts of a renewable energy installation is not removed by the regulatory amendments. For instance, there will continue to be some situations where it is unclear how the test to determine whether power generation is ‘ancillary’ to the main activity on the property will be implemented or applied.
Further, if there is a change in the classification of the property, the impact of this change will need to be considered. Finally, the manner in which the value will be increased and whether that is based upon the costs of the installation, the value to the landowner in terms of income from rent or a sharing of income from the electricity generated will almost certainly be an important consideration and possible conflict with the Municipal Property Assessment Corp.
With more complex arrangements and larger installations becoming common, project-specific attention still needs to be given to what the property tax implications of the amendments will be, and careful structuring of the arrangement between the parties may be useful to minimize property tax consequences.
It is also important to recognize that a landowner or an electricity generator's right to appeal a change in the assessment is time limited and should be secured by contract and made on time, as failure to meet the short appeal deadlines is usually permanently fatal.
Thomas J. Timmins and David Tang are partners at law firm Gowlings, and Neeta Sahadev is a student who contributed to this report.
Photo: Solar trackers in Stella, Ontario. Photo credit: m.gifford via Flickr (CC)
