11 January 2005 External T.I. 2004-0103601E5 - Test Wind Turbine - Proposed Amendments

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, given the reference in proposed paragraph 1219(3)(f) of the Regulations to a wind energy conversion system being "installed", work with regard to non-test wind turbines which may ultimately form part of a wind farm project may proceed without limitation during the 120 calendar day testing period provided the wind turbines are not fixed to their respective foundations.

Position: No.

Reasons: The provisions of proposed paragraph 1219(3)(f) of the Regulations represent only one of the conditions that must be satisfied in order to obtain test wind turbine status. While a wind turbine may not be installed from an engineering perspective prior to being fastened to its foundation at the fixed location at which it is to be used, it must also be considered that the above proposed paragraph requires a 120 calendar day testing period and that proposed paragraph 1219(3)(d) of the Regulations requires that the "primary purpose" for installing a wind turbine intended to be a test wind turbine must be to perform the "test" described therein. As such, while preparatory work with regard to non-test wind turbines intended to form part of a wind farm project is not precluded during the relevant 120 calendar day testing period, it will be a question to be determined from the facts and circumstances of a particular wind farm situation whether the extent of such preparatory work would preclude satisfaction of the above-mentioned "primary purpose" test.

2004-010360
XXXXXXXXXX A.A. Cameron
(613) 347-1361
January 11, 2005

Dear XXXXXXXXXX:

Re: Tax Incentives for Wind Farms

We are writing further to your electronic mail messages of November 9 and 17, 2004 (to Mr. Tom Jewett at Natural Resources Canada), regarding certain requirements to the definition of the term "test wind turbine" as contained in 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"). Your query relates to proposed paragraph 1219(3)(f) to the Regulations which reads as follows:

(f) no other wind energy conversion system is installed within 1,500 meters of the device until the level of electrical energy produced from wind by the device has been tested for at least 120 calendar days.

In particular, your question concerns "construction of the rest of the wind turbines" forming part of a wind farm project in light of the requirement in the above proposed paragraph that "no other wind energy conversion system is installed".

Our Comments

Written confirmation of the income tax implications inherent in proposed transactions is given by this Directorate only where the transactions 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.

The provisions of proposed paragraph 1219(3)(f) of the Regulations represent one of a number of conditions to be satisfied under the definition of the term "test wind turbine" contained in subsection 1219(3) thereto. Under paragraph 1219(1)(g) of the Regulations, as found in the Proposed Amendments, costs incurred by a taxpayer for a test wind turbine that is part of a wind farm project of the taxpayer may constitute Canadian renewable and conservation expense ("CRCE"). The definition of CRCE contained in subsection 66.1(6) of the Income Tax Act, indicates, essentially, that for the purpose of determining whether an outlay or expense meets the criteria set out in the Regulations in respect of CRCE, the views of Natural Resources Canada ("NRCan") apply conclusively with respect to "engineering or scientific matters."

In light of the above factors, determinations as to whether conditions relating to test wind turbine status (such as those contained in proposed paragraph 1219(3)(f) of the Regulations) have been satisfied in a particular situation are made by the Canada Revenue Agency in consultation with NRCan. In addition, NRCan has previously indicated that, from an engineering perspective, a wind turbine may not be considered "installed" prior to being fastened to its concrete foundation at the relevant fixed location at which the wind turbine is to be used.

Notwithstanding NRCan's view regarding the meaning of "installed" from an engineering perspective, it must also be considered that the provisions of proposed paragraph 1219(3)(f) of the Regulations call for a testing period of "at least 120 calendar days". In addition, in order for a wind turbine to potentially qualify as a test wind turbine under the Proposed Amendments [pursuant to proposed paragraph 1219(3)(d) of the Regulations] the "primary purpose" for installing the wind turbine must be "to test the level of electrical energy produced by the device from wind at the place of installation", i.e., such "testing" must be the primary purpose for installing any wind turbine intended to be a test wind turbine.

It is our view that the provisions of proposed paragraph 1219(3)(f) of the Regulations do not preclude the undertaking of some preparatory work with respect to the additional wind turbines that may ultimately form part of a particular wind farm project, i.e., work regarding wind turbines other than a test wind turbine, during the above-mentioned 120 calendar day testing period. However, it is also our view that the extent of this preparatory work may lead to the conclusion that the primary purpose for installing the alleged test wind turbines in respect of the particular wind farm project was not "to test the level of electrical energy produced by the device from wind at the place of installation".

Whether or not the "primary purpose" test contained in proposed paragraph 1219(3)(d) of the Regulations is satisfied in respect of a particular wind farm project would have to be determined from the facts and circumstances relevant to that project. However, in our view, preparatory work such as construction of footings or placing conditional orders for additional wind turbines that may ultimately form part of a particular wind farm project would generally not, in and by themselves, raise questions about the primary purpose test. On the other hand, the acquisition or taking delivery of such wind turbines prior to the end of the relevant 120 calendar day testing period and before the results of such testing are available would generally be indicative that the primary purpose for installing the alleged test wind turbines was not "to test the level of electrical energy produced by the device from wind at the place of installation". In other words, orders placed for additional wind turbines should generally be conditional upon the results to be obtained from the 120 calendar day testing period such that any penalties or costs for not proceeding with such orders would be minimized.

We trust our comments will be of assistance.

Yours truly,

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

c.c. Mr. Vaughn Munroe, P. Eng.

Chief - Engineering, Technical & Research Team
Industrial Programs Division
Office of Energy Efficiency
580 Booth St., 18th Floor
Ottawa ON K1A 0E4