Solar PV as a Tax Saving Investment

How much interest do you get on your savings at the bank? Currently Credit Unions are paying 1.9% on regular savings and the major banks such as Royal Bank 1.1% on their ‘high’ interest account. Neither is what you would call a good moneymaking investment and you must pay income tax on that bank interest. But what would you say if you were told you could get a much better rate by putting your money on the roof of your house? Think solar power. Here’s the math:

At current prices a 3kw DIY solar panel system will cost approx. $10,000 including taxes. That system will on average produce 5400kw/h of electricity per year. If you purchased that amount of electricity from Manitoba Hydro, at present prices it would cost you $440. But that $440 is income you have already paid tax on, so you must earn approx. $616 to get $440 net (depending on your income and tax rate we assume 40%). That $616 is equivalent to about 6.2% as a return on your investment and, by generating your own electricity you also have that $440 more to spend on other things. Not bad but there is more…

In fact, it is just the start. If you consider your solar generation as a home-based business (which you are fully entitled to do) you get a lot of tax advantages. Firstly, your initial investment of $10,000 includes about $1,150 for taxes in Manitoba (5% GST and 8 % PST) and this whole amount can be offset in the first year against your income. Finally, you can write off a percentage of the equipment cost every year too. This is called ‘Capital Cost Allowance’ and for solar equipment is 30% per year, though on the first year one can only claim 15%.

Most likely it is middle income people that would have sufficient spare income to invest in solar, so basing the calculations on a 40% tax rate, in the first year you would pay about $1681 less tax (PST + GST ($1,150 ) + (40%)(15% of capital purchase ($8850)). The second year you are entitled to 30% of the capital purchase less precious depreciation ($8850 – 1327) for a total of $2256 less 40% tax = $902. And if you pay tax at a higher rate than 40% the savings will be even greater.

So, adding all these figures together, in the first year the return on your investment would be about 16.8% and in the second year 9% (because you won’t have such big tax deductions). Also, the percentage is based on the original investment less the amount saved by paying less tax). Now add this to the energy savings ROI of 6.2% and I guarantee you won’t find any other investment making this kind of return! Bear in mind too, Manitoba Hydro is likely to increase the cost of electricity as the years go by, and this means the value of the electricity you generate will also go up, but your equipment is good for 25 years. As an example, a $.10 Kw hour has a ROI of 7.5% before the tax savings.

No guarantees are made for these figures so please check with an accountant before making any purchasing decisions. Remember though, solar power is green.