28 April 2004 External T.I. 2004-0072611E5 - Biogas system - 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 costs of feasibility study for a project involving co-generation of electricity, with methane gas produced in an anaerobic digester from dairy cow manure being one of the fuels utilized, may qualify as CRCE.

Position: Would not appear to qualify.

Reasons: Methane gas produced in the above manner would not be a fuel specified in clause (c)(i)(A) to Class 43.1 as it would not appear to qualify as "digester gas" as defined in subsection 1104(13) of the Regulations.

2004-007261
XXXXXXXXXX A.A. Cameron
(613) 347-1361
April 28, 2004

Dear XXXXXXXXXX:

Re: Canadian Renewable and Conservation Expense ("CRCE")

We are writing further to your request, by facsimile transmission dated April 8, 2004, for our views with regards to whether costs for a feasibility study in respect of a "biogas system" under which methane gas produced in an "anaerobic digester from dairy cow manure" would be used as fuel "in a co-generator, feeding the generated electricity into the public grid", would qualify as CRCE.

Our Comments

Pursuant to subsection 66.1(6) of the Income Tax Act (the "Act") and subsection 1219(1) of the Income Tax Regulations (the "Regulations"), CRCE is defined, subject to certain express limitations and exclusions contained in section 1219 of the Regulations, to mean:

...an expense incurred by a taxpayer, and payable to a person or partnership with whom the taxpayer is dealing at arm's length, in respect of the development of a project for which it is reasonable to expect that at least 50% of the capital cost of the depreciable property [as defined in subsection 13(21) of the Act] to be used in the project would be the capital cost of any property that is described in Class 43.1 of Schedule II [to the Regulations] or that would be such property but for this subsection [of the Regulations], ...

The determination of whether a particular expense incurred by a taxpayer will qualify for inclusion in CRCE must be made based upon a review of all of the facts relevant to a particular situation. However, in our view, expenses incurred by a taxpayer for a feasibility study that is in respect of the development of a project for which it is reasonable to expect that the above 50% or more test with regard to property described in Class 43.1 is satisfied, may constitute CRCE provided those costs are payable to a person with whom the taxpayer is dealing at arm's length and to the extent they are not specifically limited or excluded from CRCE under section 1219 of the Regulations. For example, expenses excluded under subsection 1219(2) of the Regulations include certain expenses in respect of overhead and management, financing and interest, or the acquisition, or use of, land.

In order for property related to the proposed electrical generating project to qualify for inclusion under paragraph (a) to Class 43.1 it would, in accordance with clause (c)(i)(A) to that Class, have to be:

...part of a system (other than an enhanced combined cycle system)...used by the taxpayer, or by a lessee of the taxpayer, to generate electrical energy, or both electrical energy and heat energy, using only fuel that is fossil fuel, wood waste, municipal waste, landfill gas or digester gas, or any combination of those fuels,...

								[Emphasis added.]

In addition, subparagraph (d)(viii) to Class 43.1 encompasses certain "above-ground equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of collecting landfill gas or digester gas". Finally, subparagraph (d)(ix) to Class 43.1 encompasses certain "equipment used by the taxpayer, or by a lessee of the taxpayer, primarily for the purpose of generating heat energy from the consumption of wood waste, municipal waste, landfill gas or digester gas, if the heat energy is used directly in an industrial process carried on by the taxpayer or lessee".

For purposes of Class 43.1, subsection 1104(13) of the Regulations defines the term "digester gas" to mean "a mixture of gases that are produced from the decomposition of organic waste in a digester and that are execrated from an eligible sewage treatment facility for that organic waste." The term "eligible sewage treatment facility" is defined in that subsection of the Regulations to mean "a sewage treatment facility that is situated in Canada and for which a permit or licence is issued under any law of Canada or of a province."

In summary, unless the proposed biogas system is used in connection with an "eligible sewage treatment facility", the methane gas produced in an anaerobic digester from dairy cow manure would not appear to be an eligible fuel for the purposes of Class 43.1. As such, any expenses incurred in respect of the development of a project concerning the proposed biogas system would not qualify as CRCE.

With respect to your suggestion during our recent telephone conversation (Cameron/XXXXXXXXXX) that the provisions of the Regulations relating to Class 43.1 be amended to encompass a biogas system of the above type, we are forwarding a copy of this letter to the Department of Finance which is responsible for all matters relating to tax policy and the drafting of tax legislation. If you wish to express your concerns directly to the Department of Finance, you should contact:

Mr. James Greene

Chief, Resource and Environmental Taxation Section
Business Income Tax Division
Department of Finance Canada
140 O'Connor Street
Ottawa, ON
K1A 0G5

If we can be of further assistance with regard to this matter, please contact the writer.

Yours truly,

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

c.c. James Greene

Department of Finance