29 October 2003 External T.I. 2003-0045825 - 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 two wind turbines would each qualify as a "test wind turbine" for purposes of CRCE under proposed amendments to section 1219 of the Regulations.

Position: Provided the amendments are enacted as proposed and the taxpayer proceeds with the development of a wind farm as planned, each of the wind turbines would so qualify.

Reasons: Based upon the wording of the proposed amendments, a written opinion received from Natural Resources Canada and the facts of the situation.

2003-004582
XXXXXXXXXX A. A. Cameron
(613) 347-1361
October 29, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

We are writing further to the request, dated September 15, 2002, of XXXXXXXXXX (the "Corporation") regarding the eligibility of each of two planned wind turbines qualifying as a "test wind turbine" under amendments proposed to subsections 1219(1) and (3) of the Income Tax Regulations (the "Regulations") in News Release 2002-063 issued by the Department of Finance on July 26, 2002 (the "Proposed Amendments").

The Corporation owns all the issued shares of XXXXXXXXXX ("Opco"), the corporation that will proceed with the development of the XXXXXXXXXX (the "Project") and will own the wind turbines in question. The turbines (referred to as XXXXXXXXXX which you have submitted to Natural Resources Canada ("NR Can")) will be located at XXXXXXXXXX on lands leased by Opco from a related company XXXXXXXXXX ("Land Co"). XXXXXXXXXX. The anticipated date that each of the turbines will be commissioned and enter into service is XXXXXXXXXX.

NRCan has reviewed the application for technical opinions on the XXXXXXXXXX wind turbines (the "Application"; NRCan file numbers XXXXXXXXXX ) made by the Corporation on behalf of Opco.

It is our understanding that, based upon representations and information provided in the Application:

(i) it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the Project will be the capital cost of property that is described in Class 43.1 of Schedule II to the Regulations or that would be such property but for subsection 1219(1) of the Regulations;

(ii) each of the XXXXXXXXXX wind turbines (the "Wind Turbines") will be a fixed location device that is part of a wind energy conversion system that would, but for section 1219 of the Regulations, be property of Opco included in Class 43.1 of Schedule II thereto because of subparagraph (d)(v) to that class;

(iii) the Project will be connected through a single point of interconnection to a transmission grid owned by a power company with which Opco deals at arm's length and the Project will not share with any other project a point of interconnection to an electrical energy transmission or distribution system;

(iv) the primary purpose for installing the Wind Turbines will, in each case, be to test the level of electrical energy produced from wind at their respective place of installation;

(v) there will be at least 1,500 meters between the base of Turbine XXXXXXXXXX and the base of Turbine XXXXXXXXXX and no other test wind turbine (as defined in subsection 1219(3) of the Regulations as amended by the Proposed Amendments) will be installed within 1,500 meters of either of the Wind Turbines;

(vi) no other wind energy conversion system will be installed within 1,500 meters of Turbine XXXXXXXXXX or Turbine XXXXXXXXXX , as the case may be, until the level of electrical energy produced from wind by the Wind Turbines has been tested for at least 120 calendar days; and

(vii) the electrical energy produced from wind by the Wind Turbines, in aggregate, will not exceed 20% of the Project's planned nameplate capacity.

Opinion

Provided that:

(a) the Project will be undertaken as described in the Application with the Wind Turbines being installed and used for the testing program described therein;

(b) the facts and representations relating to this situation, including those referred to above, remain as stated in the Application; and

(c) subsections 1219(1) and (3) of the Regulations are amended substantially in the form contained in the Proposed Amendments;

in our opinion, each of the Wind Turbines will constitute a test wind turbine for purposes of subsection 1219(1) and (3) of the Regulations as amended by the Proposed Amendments at the time the respective wind energy conversion system they form part of would, but for section 1219 of the Regulations, be property included in Class 43.1 to Schedule II of the Regulations because of subparagraph (d)(v) thereof.

Other Comments

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 "Canadian renewable and conservation expense" (" CRCE", as defined in the above subsection of the Act) will also be included in the taxpayer's CEE. A taxpayer that qualifies as a "principal-business corporation" ["PBC", 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.

A PBC will be subject to tax under Part X11.6 of the Act, as determined under subsection 211.91(1) thereof, in respect of the total of all amounts which it purports to renounce, in respect of a flow-through share it issues, pursuant to subsection 66(12.6) of the Act having reliance on subsection 66(12.66) thereof. Pursuant to the latter subsection, qualifying expenses incurred by a PBC in a particular calendar year may be deemed, in certain circumstances, to have been incurred by the PBC on the last day of the immediately preceding calendar year.

Where an amount that the PBC so purports to renounce effective on the last day of a calendar year exceeds the amount that it can renounce due to the inability of the PBC to incur sufficient CEE in the next calendar year, the PBC must file with the Minister of National Revenue, within a specified time limit, the statement contemplated in subsection 66(12.73) of the Act and will in that statement apply the excess fully to reduce one or more of the purported renunciations. Except for the purpose of Part XII.6 of the Act, any amount that is purported to have been so renounced to any person will be deemed under paragraph 66(12.73)(d) of the Act, after the above statement is filed, to have always been reduced by the portion of the excess identified in the statement in respect of that purported renunciation.

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