4 May 2005 External T.I. 2004-0099421E5 - 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 proposed exploratory wind turbines will qualify as test wind turbines under proposed Reg. 1219(3).

Position: yes, provided the amendments to the Regulations are promulgated as described

Reasons: proposed project complies with proposed amendments and favourable written opinion has been provided by Natural Resources Canada

2004-009942
XXXXXXXXXX Catherine Bowen
(613) 957-8284
May 4, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

We are writing in response to a request to Natural Resources Canada dated October 20, 2004, regarding the eligibility of each of XXXXXXXXXX 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"), published in Part I of the Canada Gazette, Vol. 139, No. 15 on April 4, 2005 (the "Proposed Amendments"). Additional information was provided in a letter dated February 16, 2005 and in various telephone conversations (XXXXXXXXXX/Bowen).

The Corporation is pursuing the development of a proposed wind farm project involving wind turbines to be located XXXXXXXXXX (the "Project"). The Corporation will own all the wind turbines relating to the Project and will also develop and operate the Project. Lease and right-of way agreements for access rights to the land required to construct and operate the monitoring towers, interconnection and proposed wind generating facilities have been obtained by XXXXXXXXXX.

One of the XXXXXXXXXX wind turbines referred to above (collectively referred to herein as the "Test Turbines") will be located at each of the following sites:

XXXXXXXXXX.

The maximum capacity of each of the XXXXXXXXXX Test Turbines to be installed as described above will be XXXXXXXXXX kW. It is anticipated that each of the Test Turbines will be commissioned and enter into service before the end of XXXXXXXXXX. The Test Turbines will be interconnected to XXXXXXXXXX.

If the test results from the Test Turbines are acceptable, construction of the second phase, consisting of XXXXXXXXXX wind turbines will commence. The planned nameplate capacity for the Project is XXXXXXXXXX MW.

Natural Resources Canada ("NRCan") has reviewed the applications for technical opinions on the Test Turbines along with revised information received concerning the location of some of the Test Turbines (the "Applications"; NRCan file numbers XXXXXXXXXX) made by the Corporation. It is NRCan's view that the cost of the proposed test facility is relatively high when compared with other wind energy test facility projects because the project is connecting to a XXXXXXXXXX kV transmission line as opposed to a XXXXXXXXXX kV transmission line. Connection at such high voltage levels entails more cost, in particular for the substation and transmission line. However, the only feasible option for the Corporation is to install a substation and a transmission line with enough capacity for the wind energy project from the outset.

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 the Project 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 Test 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) the Project will 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 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 each of the Test Turbines is to test the level of electrical energy produced by the Test Turbine from wind at its respective place of installation;

(v) there will be at least 1,500 meters between the respective bases of the Test 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 Test Turbines;

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

(vii) the electrical energy produced from wind by the Test Turbines will, in aggregate, not exceed 20% of the planned nameplate capacity for the Project: and

(viii) the expenses to be incurred by the Corporation relating to the acquisition of the Test Turbines will be payable to a person or partnership with whom the Corporation is dealing at arm's length.

Our Opinion

Provided that:

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

(b) the facts and representations relating to this Project, 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 XXXXXXXXXX Test 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

(I) Except as expressly stated, our opinion does not imply acceptance or approval of any income tax implications relating to the Project. In particular, we are not providing any confirmation as to the extent to which any particular equipment may be considered to be related to a particular wind-driven turbine or electrical generating equipment. However, in the case of the cost incurred by a taxpayer for a transmission line that makes a service connection to the taxpayer's project for the transmission of electricity to the purchaser of electricity where the taxpayer does not acquire the transmission line (e.g., the hydro company owns the transmission line), it is our view that such cost will be included as "Canadian renewable and conservation expense" ("CRCE"), as defined in subsection 66.1(6) of the Income Tax Act (the "Act"), by virtue of paragraph 1219(1)(a) of the Regulations (assuming that the other requirements of section 1219 of the Regulations have been met).

(II) 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 CRCE 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 PBC on or after the date the agreement in writing relating to the acquisition of the flow-through share was made.

(III) 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) of the Act. 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.

(IV) Where the amount of CEE that a "principal-business corporation" has renounced relying on the "look-back rule" exceeds the actual amount that it is entitled to renounce due to its failure to incur sufficient CEE in the next calendar year, the "principal-business corporation" must file form T101B with the Minister of National Revenue on or before March 31 of Year 3 (with Year 1 being the year in which the agreement to issue the flow-through shares was entered into) and must apply the excess fully to reduce one or more of the renunciations. Except for the purpose of Part XII.6 of the Act, any amount that has been renounced to any person will be deemed under paragraph 66(12.73)(d) of the Act, after the form T101B is filed, to have always been reduced by the portion of the excess identified therein in respect of that renunciation.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
c. c. Mr. Vaughn Munroe, Chief
Engineering, Research and Technical Team
Industrial Programs Division
Office of Energy Efficiency
Natural Resources Canada
580 Booth St., 18th Floor
Ottawa ON K1A 0E4