29 November 2002 External T.I. 2002-0173355 - Test Wind Turbine - 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 several wind turbines to be acquired and installed in a wind farm project would qualify as "test wind turbines" for the purposes of section 1219 of the Regulations?

Position: Yes, provided that the draft amendments to section 1219 of the Regulations would be enacted as proposed by Finance on July 26, 2002.

Reasons: By virtue of the existing paragraph 1219(3)(a) of the Regulations, only the first wind turbine in each wind farm project would qualify as "test wind turbine". However, pursuant to the proposed amendments to this paragraph dated July 26, 2002, more than one wind turbine in a wind farm project could qualify as "test wind turbines" provided other requirements are met.

XXXXXXXXXX 2002-017335

November 29, 2002

Dear Sirs:

Re: XXXXXXXXXX ("C Co.")
XXXXXXXXXX ("A Co.")
Test Wind Turbines for the XXXXXXXXXX

This is in reply to your facsimile of November 20, 2002 wherein you have requested our view on whether certain wind turbines to be acquired and installed by A Co. in its proposed XXXXXXXXXX (the "Project") as described herein would qualify as "test wind turbines" for the purposes of section 1219 of the Income Tax Regulations (the "Regulations").

Proposed Project

XXXXXXXXXX

Draft Regulations

9. Pursuant to the Technical Notes issued by Finance on July 26, 2002 in respect of the draft amendments to section 1219 of the Regulations of the same date (the "Draft Regulations"), among other changes,

... paragraph 1219(3)(a) is to be amended to remove the requirement that a fixed location device that is a wind energy conversion system be the "first" such device installed at a taxpayer's site. Instead, new paragraph 1219(3)(a) will provide that the device be installed as part of the taxpayer's wind farm project and satisfy one of two separate conditions. In particular, the electrical energy produced from wind by the device, and all other test wind turbines that are part of the taxpayer's project, cannot exceed

one third of the project's planned nameplate capacity, if

- in the opinion of the Minister of Natural Resources, the project's planned nameplate production capacity is limited from an engineering or scientific perspective, and
- the project's planned nameplate capacity does not exceed 6 megawatts, or

20% of the project's planned nameplate capacity, in any other case.

10. The Draft Regulations would be effective for expenditure incurred after July 26, 2002, upon its enactment and subject to certain transitional provisions.

Our Comments

11. Based upon the above-noted facts, proposed transactions and the opinions of Natural Resources Canada dated November 6, 2002, it is our view that upon the installation of A Co.'s Turbines as described in 4 to 7 above, the Turbines would be considered as "test wind turbines" for the purposes of section 1219 of the Regulations, provided that:

(a) the Draft Regulations will be enacted as proposed by Finance on July 26, 2002;

(b) each of the Turbines will be affixed to a concrete foundation at the location as described in 7 above as part of the Project for the primary purpose of testing the level of electrical energy produced by the wind turbine from wind at such location;

(c) the Project Substation and the cable interconnecting it to the XXXXXXXXXX as described in 5 above will not be used by any project(s) other than the Project, and such connection will be the sole connection from the Project to XXXXXXXXXX;

(d) no other test wind turbines will be installed within 1,500 metres of each of the Turbines; and

(e) no other wind turbines will be installed within 1,500 metres of each of the Turbines until the electrical energy production level of each of the Turbines has been tested for at least 120 calendar days.

It is also our view that an expense in respect of the development of the Project incurred by A Co. and payable to C Co. with whom A Co. is not dealing at arm's length, would not qualify as "Canadian renewable and conservation expense" within the meaning of the expression in subsection 66.1(6) of the Income Tax Act and section 1219 of the Regulations.

We do not express any opinion on the tax implications in respect of the Project except those as expressed in the above. We also do not express any opinion on the tax implications in respect of the Second Project.

Yours truly,

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

c.c. Mr. Tom Jewett

Class 43.1 Secretariat
CANMET Energy Technology Centre
Natural Resources Canada