18 July 2000 External T.I. 2000-0027605 - deficiency, failing or shut down of system

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.

2000-002760
XXXXXXXXXX Peter Lee
(613) 957-8977

Attention: XXXXXXXXXX

July 18, 2000

Dear Sirs:

Re: Technical Interpretation Regarding Regulation 1104(14) and Class 43.1

Further to our meeting on July 7, 2000 at the Department of Finance which you attended, this is in reply to your facsimiles of May 23 and 31, 2000, wherein you have requested a technical interpretation of subsection 1104(14) of the Income Tax Regulations (the "Regulations") for the purpose of paragraph (c) of Class 43.1 in Schedule II of the Regulations. In particular, you have requested our views on whether the requirements in subsection 1104(14) of the Regulations would be met in respect of a situation wherein a steam host would reduce its demand for steam or would not demand any steam from the steam/electricity producer for several years or longer, which is beyond the control of the steam/electricity producer. In this case, steam would be wasted by the steam/electricity producer.

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Legislation

1. A property may qualify as a Class 43.1 property if the property meets the following among many requirements:

... Property... that would otherwise be included in Class 1, 2 or 8...

(c) that is (i) part of a system... that (A) is used by the taxpayer, or by a lessee of the taxpayer, to generate electrical energy, or both electrical and heat energy, using only fuel that is fossil fuel..., or any combination of those fuels, and (B) has a heat rate attributable to fossil fuel not exceeding 6000 BTU per kilowatt-hour of electricity energy generated by the system, which heat rate is calculated as the fossil fuel (expressed as the high heat value of the fossil fuel) used by the system that is chargeable to gross electrical energy output on an annual basis...

2. It is stated in subsection 1104(14) of the Regulations as follows:

Where property of a taxpayer is not operating in the manner required by paragraph (c) of Class 43.1 in Schedule II solely because of a deficiency, failing or shutdown - that is beyond the control of the taxpayer - of the system of which it is part and that previously operated in the manner required by that paragraph, that property is deemed, for the purpose of that paragraph, to be operating in the manner required under that paragraph during the period of the deficiency, failing or shutdown, if the taxpayer makes all reasonable efforts to rectify the circumstances within a reasonable time.

Our Comments

3. The Concise Oxford Dictionary (7th ed.) defines the word "annual" as "reckoned by the year, recurring yearly". We understand that it is the intent of Finance and Natural Resources Canada to require that the heat-rate test be met each and every year in order for a property to continue to be included in Class 43.1. Given this definition and the intent of the provisions under Class 43.1, it is our view that the expression "heat rate is calculated... on an annual basis" used in subparagraph (c)(i) of Class 43.1 should be interpreted as a reference to the requirement that the heat-rate test must be met each and every year in order for a property to continue to be included in Class 43.1, unless subsection 1104(14) of the Regulations applies.

4. The reference to the word "system" in paragraph (c) of Class 43.1 and in subsection 1104(14) of the Regulations is a reference to a system that is used by the taxpayer or a lessee of the taxpayer (the "producer") to generate electrical energy or both electrical and heat energy. Whether or not a steam host is a part of the relevant system would depend upon the circumstances. In a situation wherein a steam host is not considered as a part of such a producer's system referred to in paragraph (c) of Class 43.1, it is our view that for the purpose of subsection 1104(14) of the Regulations, any reduction of demand for steam by (or permanent shut-down of) the steam host would not be considered as a deficiency, failing or shut-down of the producer's system that was previously operated in the manner required under paragraph (c) of Class 43.1.

5. Whether a steam/electricity producer makes all reasonable efforts to rectify a deficiency, failing or shutdown of its system within a reasonable time, is always a question of fact to be determined in the circumstances in each case.

We hope that our comments are helpful to you. These are only our general views on the matter and do not constitute an advance income tax ruling and accordingly they are not binding on the Canada Customs and Revenue Agency in accordance with paragraph 22 of Information Circular 70-6R3 as amended.

Yours truly,

John Chan, CA
Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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