2001 Ruling 2001-0094763 - Class 43.1 - XXXXXXXXXX

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: (a) Whether the proposed cogeneration facility will comprise a system (other than an enhanced combined cycle system) used to generate both electrical and heat energy using only fuel that is fossil fuel for the purposes of subparagraph (c)(i) of Class 43.1. (b) Whether the heat rate requirement under clause (c)(i)(B) of Class 43.1 in Schedule II of the Regulations would be met.

Position: (a) Yes.(b) Yes, however the heat rate requirement must also be met every year the facility is in operation unless subsection 1104(14) of the Regulations apply.

Reasons: (a) From the information provided, and provided the conditions of class 43.1(c)(i) are met, the facility (b) Based upon the opinion of Natural Resources Canada dated XXXXXXXXXX , the heat rate of the facility would be less than 6,000 BTU/kWh and therefore, the heat rate requirement under clause (c)(i)(B) of Class 43.1 in Schedule II of the Regulations would be considered as being met.

XXXXXXXXXX 						2001-009476

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance income tax ruling request, XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named partnership.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier tax return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:

a) "Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date of this letter;

b) "Class 43.1" means Class 43.1 of Schedule II of the Regulations;

c) "Aco" means XXXXXXXXXX;

d) "Bco" means XXXXXXXXXX;

e) "Partnership" means XXXXXXXXXX;

f) "public corporation" has the meaning assigned by paragraph 89(1)(g) of the Act;

g) "Regulations" means the Income Tax Regulations of the Act as amended to the date of this letter;

h) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act; and

i) "taxable Canadian corporation" has the meaning assigned by paragraph 89(1)(i) of the Act.

Facts

1) The Partnership is XXXXXXXXXX general partnership which is carried on by its two partners, Aco and Bco. Aco is a general and managing partner with a XXXXXXXXXX% interest in the partnership and in the partnership assets. Bco is a general partner and holds the remaining XXXXXXXXXX % interest in the partnership and in the partnership assets. The Partnership carries on the business of the XXXXXXXXXX.

2) Aco, a public corporation, is a taxable Canadian corporation. Bco, a subsidiary wholly-owned corporation of Aco, is also a taxable Canadian corporation.

3) XXXXXXXXXX.

Proposed transaction

4) The partnership proposes to construct and operate a cogeneration facility (the "facility") XXXXXXXXXX to improve its energy performance through the cogeneration of steam and electric power. The new facility will consist of a gas turbine generator (GTG) with an associated Heat Recovery Steam Generator (HRSG) equipped with supplementary firing capability. Fuel to the GTG and HRSG will be primarily natural gas complemented by XXXXXXXXXX fuel gas (HRSG only). Electricity will be generated at XXXXXXXXXX using one step-up transformer, and will be routed for use in XXXXXXXXXX operations. Excess steam production will be injected into the GTG for additional power generation. There is no excess power available for export.

Purpose of the proposed transaction

5) The overall objective of the cogeneration project is to increase XXXXXXXXXX profitability by reducing electric power and steam costs. Electricity and utility plant steam costs at the XXXXXXXXXX site were $XXXXXXXXXX in XXXXXXXXXX. These are expected to rise significantly to $XXXXXXXXXX by XXXXXXXXXX without the benefits of the cogeneration project.

Ruling given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our ruling is as follows:

We confirm that:

A) Provided that all the other requirements (including those in Class 43.1) have been satisfied in order for the facility to be included in Class 43.1 of Schedule II to the Regulations, we confirm that the facility will comprise a system (other than an enhanced combined cycle system) used by the Partnership to generate both electrical and heat energy using only fuel that is fossil fuel for the purposes of subparagraph (c)(i) of Class 43.1 of Schedule II to the Regulations.

The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act and Regulations which, if enacted into law, could have an effect on the ruling provided herein. Nothing in this advance income tax ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 as amended and is binding on the Canada Customs and Revenue Agency provided that the construction of the cogeneration facility be commenced by XXXXXXXXXX.

Our comments

The provisions of clause (c)(i)(B) of Class 43.1 in Schedule II to the Regulations provide requirements that have to be met each and every year. This will depend upon factors which may vary from year to year. Consequently, we are unable to rule that the requirements of clause (c)(i)(B) of Class 43.1 in Schedule II to the Regulations would be satisfied each and every year.

However, based upon the opinion obtained from the Class 43.1 Secretariat of Natural Resources Canada, it is our opinion that the heat rate for the cogeneration facility, calculated as required under clause (c)(i)(B) of Class 43.1 in Schedule II to the Regulations, would not exceed 6,000 BTU per kilowatt-hour of electricity energy.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch