6 December 2004 External T.I. 2004-0099571E5 - 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 certain revisions to the transactions detailed in our files 2002-016666 and 2002-017507 would alter our opinion regarding the ability of each of certain wind turbines to qualify as a "test wind turbine" for purposes of CRCE under proposed amendments to section 1219 of the Regulations.

Position: No. Provided the amendments come into force as proposed and the taxpayer proceeds with the development of the wind farm project under the revised plan, each of the wind turbines would so qualify.

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

XXXXXXXXXX 							2004-009957
A. A. Cameron
(613) 347-1361
Attention:  XXXXXXXXXX 

December 6, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Wind Farm Project

We are writing further to your electronic mail message of October 13, 2004 (to Mr. Tom Jewett at Natural Resources Canada), as well as your facsimile of November 24, 2004, setting out certain changes relating to the proposed XXXXXXXXXX wind farm project (the "Project") that was the subject of our letter of November 15, 2002 (our file 2002-016666, the "Opinion", as amended by our letter of May 1, 2003 under file number 2002-017507). The Opinion concerned the eligibility of each of certain wind turbines, which XXXXXXXXXX was planning to have installed, as a "test wind turbine" within the meaning of the proposed amendments 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 changes you have outlined are as follows:

1) XXXXXXXXXX has transferred all of its interest in the Project, including the lease agreements relating to the land upon which the wind turbines would be located, to XXXXXXXXXX (the "Corporation"). As such, the Corporation will now be the party to pursue the development of the Project (at the same location at XXXXXXXXXX and will own all of the wind turbines relating to the Project.

2) The planned nameplate capacity for the Project remains XXXXXXXXXX megawatts and it is still intended that, subject to obtaining suitable wind test results, a total of XXXXXXXXXX megawatt wind turbine units would ultimately be installed as part of the Project. However, it is now proposed that the Corporation will initially acquire and install XXXXXXXXXX of the XXXXXXXXXX MW wind turbine units by the end of XXXXXXXXXX in order to test the level of electrical energy produced by each of these XXXXXXXXXX wind turbines from wind at the place of installation. If the test results are acceptable, the Corporation will then start to acquire and install the remaining XXXXXXXXXX wind turbines for the Project (i.e., at least after 120 calendar days of testing on each of the XXXXXXXXXX wind turbines). The locations of these XXXXXXXXXX wind turbines for testing (the "Turbines") are now as follows (with the Turbines being more than 1,500 metres apart from each other and the turbine numbers and locations being as reflected on the revised layout dated October 11, 2004 which you have provided to Natural Resources Canada):

XXXXXXXXXX.

Natural Resources Canada ("NR Can") has reviewed the applications for technical opinions on the XXXXXXXXXX Turbines (the "Applications"; NR Can file numbers XXXXXXXXXX) including the revised information submitted on behalf of the Corporation. You have indicated that, except to the extent detailed above, the representations and information contained in the Applications remain unchanged.

It is our understanding, based upon representations and information provided in the Applications and on behalf of the Corporation, 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 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 Turbines is to test the level of electrical energy produced by the Turbine from wind at its respective place of installation;

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

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

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

Opinion

Notwithstanding the above-mentioned changes to the Project and provided that:

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

(b) the facts and representations relating to the 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 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. In the case of the cost of equipment, such as electrical substations including transformers, which is necessary for the testing program described above but will have sufficient capacity to handle the electrical energy generated by all of the anticipated turbines to be included in the Project, it is our view that the amount of such costs that may be included as "Canadian renewable and conservation expense" ("CRCE",) as defined in subsection 66.1(6) of the Income Tax Act (the "Act"), will be limited to that proportion of the total cost of such equipment that the number of proposed test wind turbines is of the total number of anticipated turbines to be included in the Project (which would include any future anticipated extension of the Project to be serviced by this equipment).

(II) Pursuant to paragraph (g.1) of the definition of "Canadian exploration expense" ("CEE") in subsection 66.1(6) of 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) 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.

(IV) 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

CANMET Energy Technology Centre
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