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 property forming part of certain planned solution gas facilities would be eligible for inclusion in Class 43.1.
Position: Property described in paragraph (a) to Class 43.1 which satisfies the tests contained in paragraphs (b) and (c) of that class, would qualify for inclusion in Class 43.1.
Reasons: Based upon the wording of the relevant provisions of the Regulations, a written opinion received from Natural Resources Canada and the facts of the situation.
XXXXXXXXXX A.A. Cameron
July 21, 2004
Re: Class 43.1 - Solution Gas Facilities
We are writing in reply to your letter to the CANMET Energy Technology Centre of Natural Resources Canada ("NRCan"), which they received December 1, 2003, and in which you asked for an opinion regarding the eligibility of costs relating to certain "solution gas facilities", which XXXXXXXXXX (the "Corporation") has acquired or constructed or is planning to construct, for inclusion in Class 43.1 to Schedule II ("Class 43.1") of the Income Tax Regulations (the "Regulations").
It is our understanding that the Corporation's solution gas facilities are constructed adjacent to an oil production facility at which oil (with associated water and natural gas) produced from a number of oil wells will be collected. While the water is generally re-injected back into the producing formation, the natural gas would generally be uneconomic to process by conventional methods and is considered a waste gas by oil production companies, i.e., it would generally be "flared" by flowing up a flare stack and being burnt at the top thereof. The Corporation acquires this "waste gas" for use in its solution gas facilities to power a generating unit featuring reciprocating engines that drive an induction generator. These facilities generally produce from XXXXXXXXXX of electricity with some locations utilizing several XXXXXXXXXX generators while others utilize a single XXXXXXXXXX generator. The electricity produced is supplied into the power grid in XXXXXXXXXX.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Paragraph (a) of Class 43.1 encompasses certain property, other than reconditioned or remanufactured equipment, which would otherwise be included in Class 1, 2 or 8 to Schedule II of the Regulations. In addition, draft Regulations released on March 16, 2001 propose that property, acquired after February 27, 2000, that would otherwise be included in Class 17 by virtue of subparagraph (a.1)((i) of that class will be eligible for inclusion in paragraph (a) of Class 43.1). Eligible property includes electrical generating equipment along with other equipment that is ancillary thereto but excludes buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), transmission equipment, distribution equipment, fuel storage facilities and fuel handling equipment.
In addition, property encompassed by paragraph (a) of Class 43.1 must meet the conditions described in paragraphs (b) and (c) of that class. Property situated in Canada that is acquired by a taxpayer for use by the taxpayer for the purpose of gaining or producing income from a business carried on in Canada will satisfy the requirements under paragraph (b) if it has not been used for any purpose before it was acquired by the taxpayer or the property was depreciable property [as defined in subsection 13(21) of the Income Tax Act (the "Act")] that:
(a) (i) was included in Class 34 or 43.1 of the person from whom it was acquired, or
(ii) would have been included in Class 34 or 43.1 of the person from whom it was acquired had the person made a valid election to include the property in Class 43.1 pursuant to paragraph 1102(8)(d) or 1102(9)(d) of the Regulations, and
(b) was acquired by the taxpayer not more than five years after the time it is considered to have become available for use, for the purpose of subsection 13(26) of the Act, by the person from whom it was acquired and remains at the same site in Canada as that at which that person used the property.
Where the property is part of a system [other than an "enhanced combined cycle system" as defined in subsection 1104(13) of the Regulations] used by a taxpayer to generate electrical energy using only fuel that is solution gas (also as defined in the same subsection of the Regulations), that property will satisfy the requirements of paragraph (c) to Class 43.1. Pursuant to subsection 1104(13) of the Regulations, the term "solution gas" is defined to mean "a fossil fuel that is gas that would otherwise be flared and has been extracted from a solution of gas and produced oil." If a fossil fuel other than solution gas is also utilized by the system to generate the electrical energy, the heat rate attributable to such other fossil fuel cannot exceed 6,000 BTU per kilowatt-hour of electrical energy generated by the system as determined in accordance with clause (c)(i)(B) to Class 43.1.
As such, it is our opinion that, property forming part of a planned solution gas facility of the Corporation, which property is described in paragraph (a) to Class 43.1 as outlined above, would be eligible for inclusion in Class 43.1 where the requirements of paragraphs (b) and (c) to Class 43.1, as outlined above, are satisfied.
Pursuant to paragraph (g.1) of the definition of "Canadian exploration expense" ("CEE") in subsection 66.1(6) of 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.
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 general terms, expenses incurred by a taxpayer 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 to be used in the project would be the capital cost of any property that is described in Class 43.1 may constitute CRCE to the taxpayer provided they are payable to a person with whom the taxpayer is dealing at arm's length and to the extent they are not specifically excluded from CRCE under subsections 1219(1) or 1219(2) of the Regulations, e.g., certain expenses in respect of overhead and management, financing and interest, or the acquisition, or use of, land. In addition, the capital cost of depreciable property described in Class 43.1 will not generally qualify as CRCE.
We trust that these comments will be of assistance.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
c.c. Mr. Mark Byron
Class 43.1 Secretariat
CANMET Energy Technology Centre
Natural Resources Canada
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