Maximize microFIT profitability

Disclaimer: I am not an accountant and I did not receive a validation of this information from Canada Revenue Agency (CRA). I contacted CRA via an open letter, published here a few months ago, trying to get their guidance on this matter. As of May 7 2010, I received no response from the agency. Use at your own risk :)

Here are a few (obvious) thoughts on how to position your microFIT project for profitability. Yes, despite all the advertising that is coming out, 15% return on your investment is far from being a foregone conclusion. If at least two of the three strategies below are not applied, it is easy to lose money with microFIT.

First – buy solar panels in the USA; don’t buy turn-key solar systems in Ontario

As of May 2010, microFIT consulting companies are still quoting around $10/watt for simple installations. They are charging approximately 300% markups* on solar panels and will tell you that you are breaking even around year 10. This guidance is also coming out from OPA, potentially as a result of market price studies. This is wrong. (* I am not suggesting that ALL consultants have lofty markups, but I have not seen any sensible proposals yet. If you are in this business and can correct me, your feedback would be very helpful).

Get your panels in the States or China, and find a contractor who is willing to do the rest of the project, without selling you their own panels. Get inverters too, if you can. Mounting is cheap(er) and heavy, and to control transportation costs it would be better sourced in Ontario (also don’t forget about domestic content requirement of 40% in 2010).

The biggest portion of the project cost, about 30-40%, is in solar panels, so by controlling your cost in just that one area you will make the biggest impact on your bottom line. After a few months of research I am convinced that this is the only way to do microFIT in Ontario, until solar consulting companies come back to their senses. Getting panels in China should be slightly cheaper but don’t count on being able to buy retail – they want to deal in container quantities. Our neighbors South of the border is the obvious destination for retail quantities (in person or over the internet).

Second – avoid financing at all costs; unless you have access to lots of (very) cheap money

Avoid financing at all costs, or figure out where to get cheap cash and pay it back as quickly as you can. Time = money, for the bank. Money for the bank comes out of your microFIT revenue. No brainer. 8-9% rate is absurdly high for microFIT to be a successfull project, 3-6% is obviously better but may be very hard to come by.

MBNA credit cards are known to offer 0.99% cash loans for 8-9 month periods or so, with a 3% transfer fee. If you happen to have one of those, with a steep credit line, this may be a great way to boost solar capacity, but be prepared to pay it down or transfer elsewhere before the rate goes back out into stratosphere.

Third – use your business; claim CCA deductions and HST credits to minimize income tax

Use your business to register with OPA, electricity company, pay for the installation, and collect microFIT payments (with HST). If you don’t have a business, register it. Doing this under your business potentially brings several advantages:

  1. Most importantly, cost of the project becomes your business expense, which is claimed against income. More specifically, cost of equipment can be depreciated, presumably as Class 8 equipment, at 20% annual rate. Example: you pay $20,000 for microFIT installation, this becomes your capital, which loses value over time (panels age, become obsolete, lose efficiency, need replacement). In recognition of this fact, businesses are allowed to claim reduction in capital value as a business expense. This would amount to:
    1. $2,000 in the first year (10% of 20,000 in the first year), balance $18,000
    2. $3,600 in the second year (20% of 18,000), balance $14,400
    3. $2,880 in the third year (20% of 14,400), balance $11,520
    4. $2,304 in the forth year (20% of 11,520), balance $9,216
    5. $1,843.2 in the fifth year, etc, until capital cost becomes negligible
    6. $20,000 installation done with a solar contractor (and overpriced panels) should be able to bring in around $1,700 per year in microFIT payments. Your “business” will continue to be cash flow negative in this example, until year 6, in which capital cost allowance (expense) becomes less than microFIT revenue (income). When this happens, you start being profitable, and income taxes will become due, BUT ONLY FROM THE PROFIT PORTION… so in year 6, your income tax will be close to $0, and will start climbing gradually as capital cost allowance continues to decrease… BUT! business losses from previous years can be carried forward and offset future profits, which kicks the income tax can that much further down the road. Get a good accountant to advise you on this setup, because when done right, it can make your day very bright. $100,000 dollar question here is, will CRA allow this setup in principle – I will repeat, that I have not received a reply from the government on this, yet.
  2. When income tax on your microFIT payments eventually does kick in, hopefully many years down the road, your income tax in incorporated scenario is only 18% as of 2010; not freakin’ 40%. This setup effectively ensures that you get your money back from your investment, BEFORE government starts to collect taxes on what is becoming an investment gain after the break-even point. That’s pretty fair.
  3. True, being incorporated attracts maintenance fees that you will be likely paying to your accountant, say $600-$1200 a year. But if the company just does microFIT and nothing else, the effort of yearly filings will be minimal and that potentially can be taken into consideration by your accountant.
  4. Also true, that retained earnings in the company are company’s money, until you either pay yourself a salary (and get hosed with that 40% personal income tax), or if happening after the current year, dividends. Dividends are currently taxed at 8%, I think… and unlike salary, dividends paid is NOT an expense to the company, it is an after-tax distribution of assets. So choose: pay 30-40% personal income tax, or 26% corporate tax + dividend tax. But either way, only company would allow you to shelter revenue from income tax until capital costs are written off.
  5. Since your business project is located on the roof of your personal property, in theory it should be possible to prorate home and mortgage costs relative to the area of the house, and write off this prorated portion against microFIT business expense. It remains to be seen, if such method gets permitted. If it gets a nod, micrFIT income will become practically tax-free. But once again, it is based on having a company.
  6. If HST works the same way like GST does today, which the government already announced that will be the case, buying the project under your business becomes even sweeter. Assume that this business makes only microFIT income. That translates, in our $20,000 example, to $1,700/year. In terms of HST, you will be required to collect from OPA $221, on top of $1,700. Instead of remitting full $221 amount back to the government, as a business you would claim your HST expenses against that amount, before remitting it. If you come up with more HST payouts, then HST receipts, guess what… The government owes you some HST back. In the first year, you are going to drop $2,600 in HST on the $20,000 project. As you continue to write off your capital cost allowance as shown in #1 above, you will claim progressively less HST against receipts from OPA. HST on capital goods is claimed on the allowance you deduct that year; you can’t claim full $2,600 HST hit in year one. So in the first year we are claiming $2,000 CCA, so HST on that amount is $260. Bingo, instead of remitting $221 HST we collected to the government, we instead collect $39 back from them. Second year, $221 – $468 = ($247), so we collect even more HST back. What this essentially means, is that our solar project will be sales-tax free. We are going to claim HST paid on labor in the first year, and HST paid on capital goods (durable portion of the project) over the next 5-10 years. This would not be possible without a business.
  7. Needless to say, any other maintenance or repair expenses related directly to the microFIT installation will be written off against microFIT income and HST.

Now, if CRA only responded to this letter to confirm that this will be allowed…

I will follow up in the next few days with comparative analysis of using these strategies vs. not using these strategies, with numbers and charts from RETScreen.

May 7, 2010Solar Energy - -
CommentsRSS33
  1. Hi! I gotta say you’ve got a great blog for those looking into microFIT. I’m trying to put together a system in NW Ontario. I’ve come to the same conclusion you have about buying panels – the only reasonable source is through one of the big US online resellers from one of the sunny states (FL, CA, AZ, NM) that have prices for decent name-brand panels in the $2.00/watt to $2.50/watt range.
    I’m not sure why you’d need to incorporate to claim CCA as a business expense. From what I understand as a “sole proprietor” of a non-incorporated solar business on your roof, you can earn business income and claim all the business’s legitimate expenses against that income. Those expenses include CCA, interest charges for any loan you take out to finance the project, and (if you register your sole proprietorship with a CRA GST/HST account) yes, even GST or HST.

  2. Thanks for the comment!
    The reason I went off on a tangent regarding an incorporated business is because I am used to thinking in terms of separation. Sole props are not really separating much, but you are right, if this method works for an incorporated business it will also work for a sole proprietorship. The only thing is, you still need to file taxes and do bookkeeping, so you are looking at the same yearly maintenance costs (maintenance at the paperwork and compliance level). Incorporating costs what, $300 these days? Not a big difference and you get a better tax treatment, IMHO. Sole proprietor will pay his/her personal income tax rate on the business income. Also, I am under impression that OPA all but requires microFIT owners to collect GST/HST, so as a sole proprietor you are looking at registering for GST/HST, if you haven’t already.
    Good luck!

  3. Just a note, I agree to buy US pannels but be sure they are UL approved to be used in Canada, I talked to a couple of guys who looked at a few that were cheap but were not approved for use in Canada

  4. Hi guys,
    I’ve been thinking about doing the microfit program, but the quote I got seems very high. $44000 for a 7.4kwh system. I would like to do this but don’t want to spend the next ten years paying it off. How do you get panels from the U.S.A. or China? What are some good name brands? Thanks for all the useful info you guys posted. Very helpful.

  5. Hi, your quote is less than $6/watt… that is a damn good deal. Can you share who quoted you this price (and are you sure it does not have any hidden costs)? I am seeing an average $7-$8 per watt quotes here in Toronto, and I don’t like them either.

    I wrote a couple of posts here about importing panels from the States – one site that looks good is dmsolar.com. That being said… you would need to install the system yourself or get another set of certified contractors to do it for you. I tried to approach this idea of getting one of the solar contractors to install my imported panels on their mounting gear etc, and I have to say it’s more difficult than I had thought. Everyone (who has reasonable prices) seems to be pretty busy installing systems with the panels they resell, so you will be at the end of the lineup. Makes sense, since they make more money from markups in addition to labor.

    If you have access to reasonable quality, reasonable price ESA contractors and roofers, you can call your own shots… just keep in mind warranty and insurance issues.

  6. Hi!

    Do you have by chance any reference about you assertion that “you can’t claim full $2,600 HST hit in year one”? I’m looking into HST, but having a hard time finding anything clear about this issue.

    Regards,
    Vasile

  7. I am no accountant (my usual disclaimer…) but this one seems pretty straight forward to me: http://www.cra-arc.gc.ca/E/pub/gp/rc4022/rc4022-09-10e.pdf, pages 19-20. “Claiming ITCs for capital property” has the answer you are looking for.
    Dennis

  8. In general though, and regardless of my previous response with the link to CCA/HST rules, you can’t write off more than amount of income you receive. What I think is most likely to happen here, is you will make your yearly CCA equal to the amount of income you receive from panels. Since your CCA and income are one and the same amount, HST you collect on this amount from OPA will equal the HST you can claim in ITC (because ITC will equal HST off CCA…). So in practical terms, you will be collecting and retaining HST up until the moment your panels break even. At that moment, you will have no more CCA left to write off, and you will have collected exact same amount of HST as you paid when the system was installed. After the break-even point on your profit curve, you will start passing HST on to the government, but OPA payments may still be written off against your house maintenance and depreciation (since the house is being used, partially, to generate income). This is where it is becoming a bit too complex for my taste, and my accountant will do the rest. Point is, after break-even, HST is passed through to the government and you will have cancelled out your initial HST hit.

  9. Hi, Dennis!

    Thanks for the link, I found that HST Guide, too. But page 20 seems to be related to “Capital personal property”, so for mixed business/personal use.

    I also found a different opinion from Rob at http://www.greenpowertalk.org/showthread.php?p=16586&posted=1#post16586 (see post #73). While he is not an accountant either, he usually knows what he’s talking about. So it may worth it to ask your accountant for details, you may have a pleasant 13% surprise :-) .

    I understand your reasoning in the comment IX. I agree that “you can’t write off more than amount of income you receive” in relation to CCA. But for HST it’s possible at least theoretically to get a refund (see page 32 of the HST Guide). My only concern, based on my European experience, is if there’s a special rule regarding the HST refund on capital spending.

    Regards,
    Vasile

  10. Can interest to finance a microFIT also be a deduction?

  11. @Mike: I’m not an accountant, so my advice is worth as much as you paid for it :-) , but I think the interest can be deducted. The Switch Kingston spreadsheet certainly does so.

    Vasile

  12. Solar is passive income in a corporation, you’ll be taxed higher than your personal rate. Incorporating solely for Microfit is bad idea.

  13. Corporate income tax rate (small business case) is going down to 16%. Personal rates vary but if you can afford solar panels, you make enough to pull it into 30%-40% range. If microFIT income is retained by the corporation, 16% is all you pay. If you take out dividends, there will be another 8% on top? Something like that. In either case, I appreciate your comment but last time I looked I did not see a rate distinction between passive or “active” income. If I am way off, please provide a reference, preferably to CRA website… Thanks!

  14. And in any case… OPA stopped accepting corporate applications for microFIT installations back in August 2010.

  15. forwardbackwards says:

    February 5, 2011 at 2:01 am

    Would any of you happen to know of any panel sellers meeting the domestic content rules that sell panels for $3-$4 dollars a KW. $6-$8 dollars a KW seems ridiculous. Cheers…

  16. forwardbackwards says:

    February 5, 2011 at 2:02 am

    correction … what I meant to say was per watt not kilo watt… cheers

  17. 6-8 dollars per watt DC *is* ridiculous for panels. But it isn’t unreasonable for the turn key solution, which in addition to solar panels, includes many other tangible and intangible things. Panels alone don’t cost $6-8 per watt, and they don’t even cost $3-4. Check out DMsolar.com to get an idea of what it may cost you to get cheap US-made panels with inverters and other components, but yes that solution does not qualify for microFIT domestic content requirements anymore. I personally can’t recommend any Ontario made panels (or panels that are made of Ontario sourced silicon) that meets the new requirements, my system was commissioned last year and I have not kept up to date on solar panel production in Ontario. I guess the main point of my response is that solar panels cost much less than $6-8 per watt DC, but solar panels alone won’t get you anywhere. Hopefully one of the installers will spot your question and will help you out with sourcing Ontario made stuff.
    Cheers

  18. dmsolar has a ontario microfit solution.
    $2.63 / W
    http://dmsolar.com/on10grwomope2.html

    hope that helps.

  19. Hi Joseph,
    Thanks for the note. Your actual “installed and commissioned” price with this system will be (very) far from $2.63. Also, this page hasn’t changed since 2010, but OPA domestic content requirements have. My guess is that if this system was still qualifying for microFIT under tightened requirements, DMsolar would be more than capable of updating the page to reflect that. So… let us know if you have any first hand experience with DMsolar. They certainly looked very compelling back in the summer of 2010 when I was contemplating this project.
    Cheers,
    Dennis

  20. I am reading youre blog would you say 6 to 7 dollars a watt is a good price for a turn key company . problem 1 buying panels alone you better know the installer because if you roof starts to leak whose gonna fix it. I guess maybe Ive watched holmes on holmes to much. American panels when they and if they crap out now you have to go through that with the warrantee. Okay our little company out of Campbellville ontario is offering will say a 10 k system installed on the house by an engineering firm with 10 years workmanship warrantee and as well as having a financial institution inline for 62,500.00 I not only work for the company Im also a client install first of June. and yes shop around guys the first company wanted 49,680.00 for a 4.5 k system I ve had my OPA approval for 4 months but I knew this price was not right 10 years to pay off seemed a little long. second thing make sure you get options we give you all the options and varying prices insurance policy exteded warrantees micro inverter or string inverter there are alot of choices and you the customer should get to choose Cioa Andrew

  21. Hi Andrew
    yes i would say 6-7 bucks a watt is a good price, but it is a very wide band. 6 bucks a watt is very different from 7 bucks a watt. makes a difference between a steal and the average going rate.
    if you want my feedback:
    1. my system was engineered and installed professionally with warranty. 7.30/watt all in (including bs meter charges and municipal permits etc )
    2. fact that you provide a 10 year warranty means nothing, unless you have been in business for at least that long. it does not sound like that is the case, since as per your note, you were your own first client last summer
    3. i don’t follow your argument regarding the hassle of returning american made panels via the warranty program. installers don’t provide panel warranty – manufacturers do. whatever panel you install, if it breaks, or if its performance dips below guaranteed levels, the panel goes back to the RMA/factory. here is the tricky bit: read the terms of RMA for panels you install and tell us how easy and realistic it is that someone might actually be able to prove that a panel is not performing to spec. solar panel performance guarantees is really a marketing scam. it does not matter who made that panel.
    4. financial companies “lined up” take money out of your pocket, stretching already unreasonable break-even runs by a number of years. if you can’t afford it, don’t do microFIT at all. that’s my IMHO.
    5. 6 bucks a watt? Using panels that qualify for the new microfit domestic content requirements? with everything else built in? okay maybe plain simple installation with 10KW flush mounted systems, maybe i see that – but then again that is the going rate at the moment. i would like to see a detailed quote for downtown toronto 3-4 KW system, if possible.

    good luck and thanks for the feedback
    Dennis

  22. would anyone be able to break down the current approximate costs of each piece of a microfit installation? im trying to figure out how panels that cost 3 dollars a watt on a 10kw installation could end up costing 60k once done. that seems to be about twice the cost of the panels. where does that money go?

  23. hi Mark
    cost of panels (should) represent approximately 30-40 percent of your installation base. other stuff you have to pay for:
    - engineering calculations showing that the system is designed to code
    - municipal building permit
    - mounting hardware
    - inverters
    - wiring
    - second meter
    - wide meter base
    - disconnect switch
    - lightning breakers if applicable
    - grounding into the house wiring
    - labour to install everything
    - ESA inspection

    that’s all i can think of at the moment. some of these items cost nothing. others are in thousands of dollars. inverters are expensive. second meter plus connection in toronto will cost you about 1500-1600 bucks. Labour is expensive since there is a markup on tradespeople that do work for solar installers. It adds up quickly.

    dennis

  24. Yes youre right on the American panels and warrentees are all the same efficiantcie rating over the 25 years are intsall warranty comes from the engineering firm that has been around 25 years specializing in high voltage projects ie chairlifts at ski resorts and wind generation etc etc. the manufactor of the panels has been around in the electrical business for 30 years and have atleast 20 outlets in ontario but are canda/worldwide. Yes are system is designed by are on staff engineered for each home and all permits everthing is in the price as it is a turn key company check out the web site it might explain alittle more as for the finace my self I have no problem line of credit secured or not I will let you know the amount and all the breakdowns on the financing end when I get all the paper work done my install is in june of this year. now when you say 3-4 watt is to you is that some wherebetwwen 12 panels and 17 panels. on the web sites in the us a ten k system same as us is 44 panels but in fact that only produces 8.36 watts as the micro inverder pushes ot 190 and 199 watts at peak for maybe an hour so tell me is the meter right on the side of the house and will say 4 k 235 watt panels is 17 panels that (3995 watts) is that right let me know. now maybe you could explain the panel warrantee as I am still learning and I am new to this field and am still get up to speed on everything my understanding is 90 % for 12 years and 80 % for 13 years and you can moniter this from the internet and it will tell that way if there is a certain panel has a problem except going with a sting inverter it will tell you which string has an issue. now me I will be able to see the panels from the ground for say snow dead bird what have you. what would the pitch on the roof be thanks Andrew

  25. excuse my reply awake to long to much coffe gettin alittle punchy

  26. A detailed Quote is difficult when you cant see the property and all the possible issues but for everything on a string inverter thats permits meter etc etc etc 27000.00 for a 4 k on a average pitched roof of asphalt shingles . Are finacing option came in around 3.25 % for a HELOCK and 6% for a stand alone loan. Have a nice weekend and Dennis love the blog great reading Andrew

  27. So what is your recommendation on purchasing equipment (solar panels and inverters) now that the domestic content requirement is at 60% for Ontario?

  28. Hi Richard – I’m afraid that you are stuck with Ontario product, for now, at least until WTO rules against this illegal protectionist policy. You should check around with your local installers to see what brands they are pushing now. I heard that LDCs are setting up roadblocks for new installations – and let’s not forget today’s election. So being stuck with untested Ontario product of questionable quality may not be the biggest hurdle one would have to overcome to get their microFIT going now.

  29. If you are planning to be part of the Ontario microFIT program, make sure that you meet the domestic content requirements as outlined on the OPA microFIT website. In 2011, the program requires that 60% of your materials and installation be considered Ontario-based. Read the guidelines on the OPA website.
    Say bye bye to the China or US Pannels…. :P

  30. Dac, this subject isn’t new… and it may not last, because EU and Japan have taken Ontario/Canada to WTO arbitration over these apparently illegal protectionist subsidies. Talk about double standards – Ontario does not like “buy American” stuff in US but “buy Ontario” somehow is OK. My money is on Canada forcing Ontario to change or remove this domestic content requirement – Canada is in free trade talks with EU and places like Germany won’t tolerate this kind of nonsense.

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