5 November 2003 External T.I. 2003-0042215 - Feasability Studies and CRCE

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 CCRA.

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

Principal Issues: Whether the cost of a pre-feasibility study and a feasibility study related to a proposed wind farm project would constitute CRCE.

Position: Whether or not a particular expenditure will constitute CRCE must be determined from the facts of a particular situation. General comments given respecting aspects of such studies which may constitute CRCE.

Reasons: Nature of the determination.

2003-004221
XXXXXXXXXX T. Harris
(613) 957-2114
November 5, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (the "Corporation")
Proposed Wind Energy Project at XXXXXXXXXX

We are writing in response to your letter of August 11, 2003 (the "Letter") addressed to Mr. T.J. Jewett of Natural Resources Canada ("NRCan") requesting an opinion as to whether certain costs relating to the Corporation's proposed renewable wind energy project at XXXXXXXXXX would qualify as "Canadian renewable and conservation expense" ("CRCE") pursuant to section 1219 of the Income Tax Regulations (the Regulations"). A copy of the Letter was forwarded to our office.

The Corporation is planning to undertake a detailed wind resource and site assessment at XXXXXXXXXX, which requires collection and analysis of detailed onsite measurements of wind speed, duration, density, direction and frequency distribution. The effects of wind shear and turbulence must also be measured and calculated. At this time, the Corporation is not planning to install test wind turbines, but is instead proposing to install towers equipped with calibrated anemometers and other instrumentation to monitor wind speeds at a few locations at the proposed site for a period of at least one year. If the results of the preliminary assessments are favourable, the Corporation may install test wind turbines at the site at a later date. The Corporation is proposing to finance this preliminary feasibility study through the issue of flow-through shares.

The Corporation's proposed wind farm project is to be located at XXXXXXXXXX. This permit grants exclusive rights to the Corporation to enter onto the land for extensive investigative use for wind power monitoring purposes for a period of XXXXXXXXXX years commencing XXXXXXXXXX.

In their letter of September 30, 2003, NRCan has advised us that, from a scientific and engineering perspective, the type of project development expenses that the Corporation proposes to incur for the XXXXXXXXXX project may qualify as CRCE in that it is reasonable to conclude that at least 50% of the capital costs of the depreciable property to be used in a typical wind farm project would qualify for inclusion in Class 43.1 of Schedule II to the Regulations. Consequently, in the opinion of NRCan, wind farm project development expenses may qualify for CRCE treatment from a scientific and engineering perspective if it is reasonable to expect that a wind farm project at the proposed site would be feasible and that wind turbines would ultimately be used to generate electricity at the proposed site. It was also the opinion of NRCan, based on the available information, that it is reasonable to expect that it would be feasible to build and operate a wind farm at XXXXXXXXXX.

Our Comments

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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency.

The determination of whether a particular expense incurred by a taxpayer will qualify for inclusion in CRCE must be made based upon a review of all of the facts relevant to a particular situation. However, in our view, expenses incurred by a taxpayer in respect of the development of a project for which it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the project would be the capital cost of any property that is described in Class 43.1 of Schedule II to the Regulations, including:

a) the cost of a pre-feasibility study or feasibility study for such a project to determine a suitable site and potential markets for the electricity,

b) negotiation and site approval costs,

c) certain site preparation costs that are not directly related to the installation of equipment, and

d) process engineering, such as collection and analysis of site data (i.e. measurements of wind speed, duration, density, direction and frequency), determination of energy and air balances, simulation and analysis of performance and cost of various options and selection of the optimum process design, will generally constitute CRCE to the taxpayer provided they are payable to a person or a partnership with whom the taxpayer is dealing at arm's length and to the extent they are not specifically excluded from CRCE under subsection 1219(2) of the Regulations. This provision provides that the following types of costs, amongst others, do not qualify as CRCE:

i) certain expenses in respect of overhead and management,

ii) expenses relating to financing and interest,

iii) certain expenses for the acquisition, or use of, land, including the grading, levelling or landscaping thereof, other than costs relating to:

A) a temporary access road to the project,
B) a right of access to the project site during the start-up phase, or
C) clearing land as required to complete the project,

iv) amounts paid to a non-resident person or a partnership which is not a Canadian partnership (other than costs relating to a test wind turbine),

v) amounts that would otherwise be included in the capital cost of depreciable property, other than costs incurred:

A) for a temporary access road to the project,
B) for clearing land as required to complete the project,
C) for process engineering for the project, or
D) for a test wind turbine,

vi) amounts that would otherwise be included in the capital cost of intangible property, other than costs incurred:

A) for making a service connection to transmit electricity to a purchaser,
B) for a temporary access road to the project,
C) for a right of access to the project site during the start-up phase,
D) for clearing land as required to complete the project, or
E) for process engineering for the project, or

vii) an amount for the acquisition of inventory or an expenditure for scientific research or experimental development.

Although the costs relating to the installation of the met towers and related instrumentation, as well as the costs of the computer equipment, would normally be included in the capital cost of depreciable property, it appears that such costs will be eligible as CRCE on the basis that they will be incurred for the collection and analysis of site data which is included as process engineering for the project by virtue of subparagraph 1219(1)(e)(i) of the Regulations.

Pursuant to paragraph (g.1) of the definition of "Canadian exploration expense" ("CEE") in subsection 66.1(6) of the Income Tax Act (the "Act"), expenses incurred by a taxpayer that qualify for inclusion in CRCE will also be included in the taxpayer's CEE. A taxpayer that qualifies as a "principal-business corporation" [as defined in subsection 66(15) of the Act] may be able to renounce amounts, in respect of the CEE incurred by it, to an investor that has acquired a "flow-through share" [also as defined in subsection 66(15) of the Act] in its capital stock. However, amounts may only be renounced to a particular investor in respect of CEE incurred by the taxpayer on or after the date the agreement in writing relating to the acquisition of the flow-through share was made. Consequently, any CRCE eligible expenses incurred prior to this time would not be eligible for inclusion in a flow-through share financing.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

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