19 July 2004 External T.I. 2004-0057841E5 - 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.

Principal Issues: Whether each of three wind turbines would qualify as a "test wind turbine" for purposes of CRCE under proposed amendments to section 1219 of the Regulations.

Position: Provided the amendments come into force as proposed and the taxpayer proceeds with the development of a wind farm project 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.

XXXXXXXXXX
2004-005784
A. A. Cameron
(613) 347-1361
July 19, 2004

Dear XXXXXXXXXX:

Re: Wind Farm Projects

We are writing in response to your request, as amended by your letter dated May 8, 2004, regarding the eligibility of each of three planned wind turbines to be installed by XXXXXXXXXX (the "Corporation") as a "test wind turbine" within the meaning of the proposed amendment to subsection 1219(3) of the Income Tax Regulations (the "Regulations"), described in News Release 2002-063 issued by the Department of Finance on July 26, 2002 (the "Proposed Amendments").

The Corporation is pursuing the development of three wind farm projects involving wind turbines at three separate locations in XXXXXXXXXX (the "Projects") and will own all the wind turbines relating to each of the Projects. One of the three wind turbines referred to above (collectively referred to herein as the "Wind Turbines") will be located at each of the following sites:

XXXXXXXXXX.

The maximum capacity of each of the Wind Turbines, as well as that of any other wind turbine which may be installed as part of any of the Projects, will be XXXXXXXXXX kW. Since it is anticipated that no more than three wind turbines will be installed at the site of each of the Projects, the maximum planned nameplate capacity for each of the Projects is XXXXXXXXXX kW. It is anticipated that each of the Wind Turbines will be commissioned and enter into service before the end of XXXXXXXXXX.

Natural Resources Canada ("NR Can") has reviewed the applications for technical opinions on the Wind Turbines (the "Applications"; NR Can file numbers XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX) made by the Corporation. In the opinion of NR Can, the planned nameplate capacity for each of the Projects is limited from an engineering or scientific perspective.

It is our understanding, based upon representations and information provided by the Corporation in the Applications, that:

(i) at least 50% of the capital cost of the depreciable property to be used in each of the Projects is projected to 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 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 the Corporation that is described in subparagraph (d)(v) of Class 43.1 of Schedule II;

(iii) each of the Projects will, individually, be connected through a single point of interconnection to a transmission grid owned by a power company with which the Corporation deals at arm's length and none of the Projects will share with any other project a point of interconnection to an electrical energy transmission or distribution system;

(iv) the primary purpose for installing each of the Wind Turbines is to test the level of electrical energy produced by the Wind Turbine from wind at its respective place of installation;

(v) there will be at least 1,500 meters between the respective bases of the Wind Turbines and no other test wind turbine (as defined in proposed subsection 1219(3) of the Regulations as described in the Proposed Amendments) will be installed within 1,500 meters of any of the Wind Turbines;

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

(vii) the electrical energy produced from wind by each of the Wind Turbines will not exceed one third of the planned nameplate capacity for its particular Project.

Opinion

Provided that:

(a) the Projects will be undertaken as described in the Applications with the Wind Turbines being installed and used for the testing programs described therein;

(b) the facts and representations relating to these Projects, including those referred to above, remain as stated in the Applications; and

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

it is our opinion that 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 that 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", also as defined in the above subsection of the Act) will 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 XII.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 Planning Branch

c.c. Mr. Tom Jewett

Class 43.1 Secretariat
CANMET Energy Technology Centre
Natural Resources Canada