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.
Principal Issues: Is the cost of modifying a recovery boiler and the cost of a new turbo generator included in the cost of property described in Class 43.1?
Position: General comments
Reasons: Actual situation considered.
2003-003469
XXXXXXXXXX Luisa A. Majerus
(613) 946-3558
March 10, 2004
Dear XXXXXXXXXX:
Re: Power Project Class 43.1 - Wood Waste System
We are writing in reply to your letter dated July 11, 2003 to the Canmet Energy Technology Centre of Natural Resources Canada ("NRCan") in which you asked whether the cost of the modifications to equipment used in a cogeneration project and the cost of a turbo generator would meet the requirements of Class 43.1 in Schedule II of the Income Tax Regulations ("Regulations"). We acknowledge receipt of your letter to NRCan and the diagrams of the existing and proposed systems. We also acknowledge the additional information provided during telephone conversations and the advice provided by NRCan.
Background
The taxpayer currently operates a steam generating system that consumes both wood waste and black liquor. The steam generated by the system is used in the taxpayer's pulp and paper mill. The taxpayer is proposing to modify two existing recovery boilers and to install a turbo generator. The modifications to the system will result in an increase to the amount of wood waste that can be burned. These modifications can be summarized as follows:
? Expanding the capacity of one of the existing recovery boilers ("black liquor boiler") to process XXXXXXXXXX pounds of black liquor solids per day; and
? Converting another of the existing recovery boilers ("wood waste boiler") into a wood fired boiler that will burn up to XXXXXXXXXX tonnes of wood residue per year.
The taxpayer will also incur the cost of acquiring and installing a new turbo generator that will generate electricity and reroute steam into the mill for use in the taxpayer's operations. The modified system will produce XXXXXXXXXX steam, XXXXXXXXXX steam and XXXXXXXXXX megawatts of electricity per hour.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Paragraph (a) of Class 43.1 includes property, other than reconditioned or remanufactured equipment, that would otherwise be included in Class 1, 2 or 8 and that is:
? electrical generating equipment, including any heat generating equipment used primarily for the purpose of producing heat energy to operate the electrical generating equipment;
? equipment that generates both electrical and heat energy; and
? other equipment that is ancillary to property described above.
In addition, the property described in paragraph (a) must meet conditions described in paragraphs (b) and (c) of Class 43.1. Generally, equipment would be considered to be reconditioned or remanufactured if it has been repaired, overhauled or reconstructed. In our view, the express exclusion for reconditioned or remanufactured equipment indicates that only the cost of new equipment or the cost of modifications or improvements that increase the capacity or performance of property described in paragraph (a) are intended to qualify for Class 43.1 treatment.
Even if the black liquor and wood waste boilers have not been reconditioned or remanufactured and the modification and conversion costs relate to the acquisition of property described in paragraph (a), the requirement in paragraph (c) does not appear to be met. Paragraph (c) requires that the equipment be, "part of a system (other than an enhanced combined cycle system) that:
is used by the taxpayer, ...., to generate electrical energy, or both electrical and heat energy, using only fuel that is fossil fuel, wood waste, municipal waste, landfill gas or digester gas, or any combination of those fuels...."
(Emphasis added)
Subsection 1104(13) of the Regulations defines "wood waste" for the purpose of Class 43.1 to exclude residuals known as black liquor and any waste that no longer has the physical or chemical properties of wood. Consequently, neither the cost of expanding the black liquor boiler nor converting the wood waste boiler will qualify for inclusion in paragraph (a) of Class 43.1. In addition, the cost associated with the acquisition and installation of the turbo generator would not qualify under paragraph (a) of Class 43.1 because of paragraph (c).
However, property other than property described in paragraph (a), may be included in Class 43.1 if it is described in paragraph (d) and meets the requirements set out in paragraph (e). More specifically, subparagraph (d)(ix) of Class 43.1 includes property, that is:
(ix) equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating heat energy from the consumption of wood waste, municipal waste, landfill gas or digester gas, if the heat energy is used directly in an industrial process carried on by the taxpayer or lessee... but not including buildings or other structures, property otherwise included in Class 10 or 17, heat rejection equipment (such as condensers and cooling water systems), fuel storage facilities, fuel handling equipment and electrical generating equipment,
(Emphasis added)
In our view, neither the costs relating to the black liquor boiler nor the turbo generator are described in subparagraph (d)(ix). However, in the particular circumstances described in your letter, we would consider the cost of converting the wood waste boiler to result in the acquisition of a property described in paragraph (d) if
? the wood waste boiler is used primarily for the purpose set out in subparagraph (d)(ix);
? the boiler would otherwise be included in another Class in Schedule II of the Regulations except Class 10 or Class 17;
? the waste fuel qualifies as "wood waste" as defined in subsection 1104(13) of the Regulations;
? the heat energy is used directly in an industrial process; and
? the requirements of paragraph (e) of Class 43.1 are met.
We trust these comments will be of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
cc. Mr. Mark Byron
CANMET Energy Technology Centre
Natural Resources Canada
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