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 two wind turbines to be used for a wind farm in generating electricity would be qualified as "test wind turbines" for the purposes of subsections 1219(1) and (3) of the Regulations and subsection 66.1(6) of the Act?

Position: Only one of the two wind turbines would qualify as "test wind turbine".

Reasons: Whether a wind turbine would qualify as a test wind turbine would always be a question of fact to be determined based on the circumstances. It is intended by Finance and NR Can that the term "project" used in section 1219 of the Regulations relates to a wind farm project. However, it has never been intended by Finance and NR Can to ring-fenced a wind farm to an area of slightly greater than 1.5 kilometers in diameter as a project, even though there is a reference that the minimum distance between two wind turbines must be greater than 1.5 kilometers in the Class 43.1 Technical Guide issued by NR Can. In the case at hand, the representative of the taxpayer has argued that there are two sites and two wind farm projects at XXXXXXXXXX with a "test" wind turbine on each site. The two wind turbines would be approximately 1.514 kilometres apart. One wind turbine would be made by XXXXXXXXXX and the other one would be made by XXXXXXXXXX . Given that the proposed business plan of the taxpayer would be to have XXXXXXXXXX wind turbines XXXXXXXXXX as a wind farm, given that according to Raj Rangi of NR Can (the wind energy specialist) the variation of the wind power XXXXXXXXXX would be minimal, and given that using two different wind turbines for testing would indicate the primary purpose of the testing may not be determining the quality, quantity and extent of the wind power, but to determine the efficiency and economy of a particular wind turbine equipment, it is our view that only one of the two wind turbines would be qualified as test wind turbine provided that other requirements are met. The representative of the taxpayer has also argued that this wind farm project would be economical only if two wind turbines would be considered as test wind turbines. It is our view that whether the project is economical or not is really not relevant in determining whether a wind turbine would qualify as a test wind turbine.

Memo to File

Re: XXXXXXXXXX
Test Wind Turbines
Canadian Renewable & Conservation Expense

Prepared by Peter Lee
September 12, 2001
#2001-009629

Background

Even though Natural Resources Canada ("NR Can") have reviewed and provided opinions on several wind farm projects in respect of the "test-wind-turbine" issue for the purposes of subsection 1219(3) of the Income Tax Regulations (the "Regulations") and subsection 66.1(6) of the Income Tax Act (the "Act"), CCRA have not been consulted with and no advance income tax rulings have been requested and given on these projects. In their opinion letters, NR Can have reminded the representatives of these projects that, notwithstanding their technical opinions, CCRA would have to make the final determination on whether a particular wind turbine would qualify as a "test wind turbine" within the meaning of the expression in subsection 1219(3) of the Regulations and whether the expenses thereof would qualify as "Canadian renewable and conservation expenses" ("CRCE") under paragraph 1219(1)(g) of the Regulations. This XXXXXXXXXX project is the first wind farm project in respect of the "test-wind-turbine" issue to be reviewed by CCRA. XXXXXXXXXX.

Facts

XXXXXXXXXX have planned to purchase and erect two "test" wind turbines in their proposed business plan of a wind farm (i.e., it would eventually have XXXXXXXXXX wind turbines in the farm) to be set up on XXXXXXXXXX has planned to obtain a grant of easement XXXXXXXXXX for this wind farm project. XXXXXXXXXX have also planned to locate the two "test" wind turbines on the far ends XXXXXXXXXX, one on the east side and the other one on the west side, and they would be approximately 1.514 kilometres apart. XXXXXXXXXX has argued that XXXXXXXXXX could be divided into two sites and there would be a "test" wind turbine on each site. Two different turbines would be used for these two sites for testing purposes. It is also argued that there would be need to gain experience with both sites XXXXXXXXXX.

Legislation

Pursuant to subsection 1219(1) of the Regulations,

... "Canadian renewable and conservation expense" means an expense incurred by a taxpayer... in respect of the development of a project... and includes such an expense incurred by the taxpayer... (g) for the taxpayer's test wind turbine for the project...

Pursuant to subsection 1219(3) of the Regulations,

For the purpose of paragraph (1)(g), "test wind turbine" means a fixed location device that is a wind energy conversion system that would, but for this section, be property included in Class 43.1 of the Schedule II because of subparagraph (d)(v) thereof, and in respect of which the Minister, in consultation with the Minister of Natural Resources, determine that

(a) the device will be the first such device installed at the taxpayer's site for a proposed wind energy conversion system; and

(b) the primary purpose of the device is to test the level of energy production at the site.

Pursuant to subsection 66.1(6) of the Act,

the expression "Canadian renewable and conservation expense" has the meaning assigned by regulations, and for the purpose of determining whether an outlay or expense meets the criteria set out in the Regulations in respect of Canadian renewable and conservation expenses, the Technical Guide to Canadian Renewable and Conservation Expenses, as amended from time to time and published by the Department of Natural Resources, shall apply conclusively with respect to engineering and scientific matters.

Class 43.1 Technical Guide

In providing technical opinions to applicants for such opinions, NR Can have developed certain criteria in determining whether a wind turbine of an applicant would be considered as a test wind turbine where the proposed wind energy generating facility ("the wind farm") are to be connected to the main North American electrical grid. These criteria are stated in the Class 43.1 Technical Guide of January 1998 issued by NR Can as follows:

(i) the turbine is the first such device installed at the site for a proposed wind farm, and whose primary purpose is to test the energy production at the site;

(ii) the test turbine will be metered separately, and the applicant has agreed to provide NR Can on a quarterly basis the following information for the first twelve months of operation: monthly electricity production in kWh; monthly downtime; and, where available, hourly averages of wind speed at hub height;

(iii) the distance from the test turbine to the nearest wind turbine will be a minimum of 1,500 meters;

(iv) the applicant has title to, or options on, the land required for the wind farm;

(v) the electricity generated by the test turbine will be sold on a commercial basis to an electricity purchaser, for example an electric utility, a power pool, a power marketer or an end-use customer;

(vi) the test turbine will have a separate point of interconnection to the electrical grid or to the purchaser's electrical system;

(vii) the applicant has developed a business plan for the proposed wind farm, which is available on request to NR Can on a confidential basis; and

(viii) the applicant has access to a market for the full generating capacity of the wind farm, that is:

- the test turbine is located in a jurisdiction where there is open access to the electrical wholesale, retail or export market;

- the applicant has a contract or an expression of interest from an electricity purchaser; or

- if the test turbine and wind farm are to be connected directly to a customer's electrical system that is grid connected (i.e., the turbine would be connected "behind the meter"), the customer has sufficient base load demand to fully use the output of the wind farm.

When the test turbine and the wind farm are to be connected to an electrical grid not connected to the main North American electrical grid, for example the local electrical grid of a remote community, or will not be connected to an electrical grid, for example at a remote mine site, the eligibility of the test turbine is exempt from the general criteria (v), (vi), (vii) and (viii).

Our Comments

The expression "Syncrude Project" was defined in the Syncrude Remission Order dated May 6, 1976 as follows: "the scheme of the participant for the recovery of leased substances from Leases 17 and 22". It appears that the Syncrude Project has been ring-fenced around the Leases 17 and 22. However, unlike the Syncrude Project, the term "project" in respect of wind-farming has not been defined or ring-fenced for the purposes of subsection 1219(1) and (3) of the Regulations and subsection 66.1(6) of the Act. The Concise Oxford Dictionary, 8th Edition, defines "project", in part as: "a plan; a scheme; a planned undertaking".

With the reference to "wind farm" in the above-noted Class 43.1 Technical Guide, it is our understanding that it is intended by Finance and NR Can that the term "project" used in section 1219 of the Regulations relates to a wind farm project. However, it has never been intended to ring-fenced a wind farm to an area of slightly greater than 1.5 kilometers in diameter as a project, even though there is a reference that the minimum distance between two wind turbines must be greater than 1.5 kilometers in (iii) above.

Pursuant to (i) above, a wind turbine could be considered as a "test wind turbine" only if it "is the first such device installed at the site for a proposed wind farm, and whose primary purpose is to test the energy production at the site". It is our understanding that "the first such device" is intended by Finance and NR Can to be analogy to the situation of the oil and gas industry wherein the drilling or completing of the first well resulting in the discovery that a natural underground reservoir contains petroleum or natural gas. Therefore, it is our view that there should not be more than one test wind turbine to be allowed for the site of a wind farm project (i.e., only the first one would be allowed as the test wind turbine if the other requirements are met). It is also our understanding that "the testing of energy production at the site" is intended to be analogy to the situation of the oil and gas industry wherein the purpose of exploration is to determine "the existence, location, extent or quality of an accumulation of petroleum or natural gas". Therefore, it is our view that "the testing of energy production at the site" relates to the determination of the quantity, quality and extent of the wind power at the site of the wind farm, and not relating to the determination of the efficiency and economy of any particular wind turbine equipment.

Whether a wind turbine would qualify as a test wind turbine for the purposes of subsection 66.1(6) of the Act and subsections 1219(1) and (3) of the Regulations, would always be a question of fact to be determined based on the circumstances. In the case at hand, the representatives of XXXXXXXXXX have argued that there are two sites and two wind farm projects at XXXXXXXXXX with a "test" wind turbine on each site. One wind turbine would be made by XXXXXXXXXX and the other one would be made by XXXXXXXXXX. Given that the proposed business plan of XXXXXXXXXX would be to have XXXXXXXXXX wind turbines on XXXXXXXXXX as a wind farm, given that according to Raj Rangi of NR Can (the wind energy specialist) the variation of the wind power on XXXXXXXXXX would be minimal, and given that using two different wind turbines for testing would indicate the primary purpose of the testing may not be determining the quality, quantity and extent of the wind power, but to determine the efficiency and economy of a particular wind turbine equipment, it is our view that only one of the two wind turbines would be qualified as test wind turbine provided that other requirements are met. On the other hand, the representatives of XXXXXXXXXX have also argued that this wind farm project would be economical only if two wind turbines would be considered as test wind turbines. It is our view that whether the project is economical or not is really not relevant in determining whether a wind turbine would qualify as a test wind turbine.

Both Finance and NR Can have agreed with our above-noted views. XXXXXXXXXX.