Time-limited relief on taxes pertaining to transfers of electricity assets
Learn about relief on taxes pertaining to transfers of electricity assets.
On this page Skip this page navigation
This page explains the 2016 amendments to three regulations made under the Ontario Electricity Act, 1998 (Act):
- O. Reg. 124/99 Transfer Tax on Municipal Electricity Property (Transfer Tax Regulation)
- O. Reg. 162/01 Payments In Lieu of Corporate Taxes – Municipal Electricity Utilities (PILs (MEUs) Regulation)
- O. Reg. 207/99 Payments In Lieu of Corporate Taxes (PILs (Hydro/OPG) Regulation).
This page is for information purposes only and does not replace the law found in the Act or the regulations under the Act.
In 2009, Ontario introduced a permanent transfer tax exemption for transfers of electricity assets among publicly owned utilities in order to encourage municipalities to enter into consolidation transactions. A number of primarily public‑to‑public mergers have occurred in the sector since 2009. However, at present, there are about 60 municipal electricity utilities remaining in Ontario.
The government of Ontario recognizes that consolidation within the electricity sector can improve efficiency and the capacity of MEUs to meet key priorities, including upgrading aging infrastructure, and that private capital can play an important role in facilitating consolidation. Consolidation could lead to reduced electricity rates and improved services for electricity customers through innovation and efficiency gains. Private‑sector expertise can play an important role in achieving these objectives.
To spur consolidation and encourage efficiency within the sector, Ontario has implemented additional time‑limited relief on taxes pertaining to transfers of electricity assets for all PILs payers including transfers to the private sector.
The time‑limited relief on transfer tax began January 1, 2016 and will end December 31, 2022, and includes:
- reducing the transfer tax rate from 33 to 22 per cent
- exempting MEUs with fewer than 30,000 customers from the transfer tax
- exempting capital gains arising under the PILs Deemed Disposition Rules from PILs.
Time‑limited relief was introduced in 2016. To encourage private‑sector involvement in the Ontario electricity distribution sector, time‐limited tax relief measures that had been scheduled to expire on December 31, 2018, were extended until December 31, 2022, as announced in the 2018 Ontario Economic Outlook and Fiscal Review.
Ontario’s recent efforts to encourage consolidation through tax incentives have resulted in a modest number of proposed mergers. For this reason, the government will continue to review sector activity and will consider additional ways to promote efficiency and modernization of the electricity distribution sector in consultation with consumers and other stakeholders.
Adoption of federal anti‑avoidance measures
Amendments were also made to the PILs (MEUs) Regulation and the PILs (Hydro / OPG) Regulation to adopt, effective April 23, 2015, federal anti‑avoidance measures in order to prevent the avoidance of PILs through dispositions of partnership interests made directly, or indirectly as part of a series of transactions, to a person who is not subject to PILs or to a partnership whose members are not all subject to PILs.
The 2012 federal budget amended section 100 of the Income Tax Act (Canada) (ITA) with respect to the taxation of capital gains on the disposition of partnership interests to specified persons. Section 100 is intended to prevent the conversion of recapture and other income gains that would arise on the disposition of the assets of a partnership into capital gains.
Electricity assets held by partnerships
Where electricity assets are held through a general or limited partnership, the rules contained in the ITA with respect to partnerships are adopted for purposes of the Act with any appropriate modifications.
Transfer Tax Regulation
Time‑limited reduction to the prescribed percentage
Amendments have been made to the Transfer Tax Regulation to provide a time‑limited reduction of the prescribed percentage from 33 per cent to 22 per cent on transfers of any interest in real or personal property that has been used in connection with generating, transmitting, distributing or retailing electricity for transfers occurring between January 1, 2016 and December 31, 2018.
All municipal corporations and MEUs will be subject to the reduced transfer tax on the transfer of electricity assets during this period. Additional time‑limited relief is provided for municipal corporations and MEUs that have fewer than 30,000 customers.
Time‑limited relief for MEUs with fewer than 30,000 customers
Amendments have been made to the Transfer Tax Regulation to exempt municipal corporations and MEUs with fewer than 30,000 customers from the transfer tax on transfers of electricity assets occurring between January 1, 2016 and December 31, 2018.
'Interests, options, warrants and rights' and 'total number of consumers' are taken into account in determining whether a municipal corporation or MEU qualifies for the transfer tax exemption.
Interests, options, warrants and rights
The total number of customers of a municipal corporation or MEU is established by reference to the figures published in the Ontario Energy Board 2014 Yearbook of Electricity Distributors. Also considered in calculating the total number of customers are any transactions, or series of transactions, after December 31, 2014 and the date of the transfer whereby the municipal corporation or MEU acquires:
- an interest in, or an option, warrant or a right under a contract in equity or otherwise to acquire an interest in an MEU, partnership or trust that generates, transmits, distributes or retails electricity in Ontario, or
- an interest in electricity assets from an MEU, partnership or trust that includes the right to provide electricity to consumers.
Total number of consumers test
The total number of customers of a municipal corporation or an MEU includes the total number of consumers of any persons, partnerships or trusts in which the municipal corporation or MEU has a direct or indirect interest, and with whom the municipal corporation or MEU does not deal at arm's length or with whom the municipal corporation or MEU is affiliated. The meaning of the terms arm's length and affiliated is defined in the ITA.
The amendments made to the PILs (MEUs) Regulation and the PILs (Hydro/OPG) Regulation, collectively, the PILs Regulations, are identical in nature.
De minimis test
Only taxpayers that are tax exempt under the regular income tax regime can be subject to PILs in Ontario. A PILs payer will remain in the PILs regime and will continue to be liable for PILs in Ontario even if up to ten per cent of the capital of the PILs payer is owned, directly or indirectly, by persons that are not subject to PILs. Once the ten per cent ownership threshold is crossed, the PILs payer becomes subject to the PILs Deemed Disposition Rules (contained in the PILs Regulations), exits the PILs regime, and becomes subject to regular federal and provincial income taxes.
Time‑limited relief for capital gains arising under the PILs Deemed Disposition Rules
Consolidation within the electricity sector can improve the capacity of MEUs to meet key priorities such as the ability to upgrade aging infrastructure. Private capital can play an important role in facilitating this process. To encourage private investment and consolidation within the sector, the government of Ontario has provided additional relief by exempting from tax under the PILs regime all capital gains pertaining to transfers of electricity assets for all MEUs, including transfers to the private sector, for the period beginning January 1, 2016 and ending December 31, 2018.
Under the PILs Deemed Disposition Rules, an MEU will have a disposition of all of its assets at fair market value. As a result of the deemed disposition, the MEU would typically realize:
- capital gains
- income from recapture of previously claimed capital cost allowance and eligible capital property (ECP) expense, and
- income in respect of amounts allocated to ECP (e.g., goodwill) in excess of recapture included in 2.
ECP includes various intangible assets, e.g., customer lists and goodwill. The 2016 federal budget announced that new rules would be implemented to treat gains on the sale of ECP as capital gains effective January 1, 2017. The exemption for capital gains arising under the PILs Deemed Disposition Rules will apply in respect of all capital gains, including ECP such as goodwill, to the extent that such gains are treated as capital gains for federal income tax purposes.
Adoption of federal anti‑avoidance rules for dispositions of partnership interests
In its 2012 budget, the federal government implemented changes with respect to the taxation of capital gains on the disposition of partnership interests to specified persons. A partnership interest is capital property that is subject to capital gains treatment. The federal changes are designed to prevent the conversion of recapture and other income gains (which are fully taxed) that would be realized on the disposition of the assets of a partnership into capital gains (only half of which is subject to tax) that can be achieved through the disposition of partnership interests instead of partnership assets.
Effective April 22, 2015, the PILs Regulations were amended to adopt, with appropriate modifications, the federal anti‑avoidance measures in order to prevent the avoidance of PILs and transfer tax through dispositions of partnership interests made directly or indirectly as part of a series of transactions to a person who is not subject to PILs or a partnership whose members are not all subject to PILs.
Agreements to acquire shares
The PILs rules incorporate a federal anti‑avoidance provision which applies if a private sector taxpayer has a right to acquire shares of a municipal corporation. The effect of this provision is that where a person (other than the Crown, a municipality, or a tax‑exempt municipal corporation) has any type of right to acquire shares of a tax‑exempt municipal corporation, and the exercise of such right would cause the municipal corporation to lose its tax‑exempt status, then the corporation is deemed not to be a tax‑exempt entity. 'Right' is defined broadly to include any type of contingent, immediate or future right related to the acquisition of shares.
To achieve the government's goal of promoting consolidation of the electricity distribution sector, the anti‑avoidance rule will not be applied to the extent that a written agreement to make a bona fide transfer of shares is executed before January 1, 2019 and is not materially changed after that date other than as may be required to obtain the approval for the transfer from the Ontario Energy Board or from any other governmental regulatory body.
If a PILs payer has received a written ruling from the Ministry after December 31, 2007 and before April 23, 2015 that applies to a taxpayer‑specific disposition of an interest in a partnership to any person or partnership that is not an eligible corporation or eligible partnership, the Ministry will generally consider the ruling to continue to apply to the taxpayer‑specific disposition, despite the amendments, provided that all material facts in respect to the disposition were disclosed to the Ministry when the ruling was issued.
Questions regarding the application of time‑limited relief
If a question of interpretation of a term or provision of the Act or the regulations, or a question of the application of the Act or the regulations to a specific fact situation arises, a written request for an interpretation or application may be submitted to the Ministry at the address provided below.
Ministry of Finance
33 King Street West, 3rd Floor
Oshawa ON L1H 8H5
For more information
If this page does not completely address your particular situation, refer to the Act and related regulations, visit ontario.ca/finance or contact the Ministry of Finance at 1‑866‑ONT‑TAXS (1‑866‑668‑8297) or 1‑800‑263‑7776 for teletypewriter (TTY).