5 April 2005 External T.I. 2004-0109141E5 - Leasing of Wind Turbines

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 wind turbines to be leased by a taxpayer developing a wind farm project, if favourable results are obtained from test wind turbines owned by the taxpayer in respect of the project, would form part of the wind farm project such that the leased wind turbines would be taken into account in determining the "project's planned nameplate capacity" for purposes of proposed paragraph 1219(3)(a) of the Regulations.

Position: Determination must be made based upon the facts and circumstances relevant to a particular wind farm project. However, the fact that wind turbines which are not test wind turbines and that will be included in Class 43.1 are leased should not, in and by itself, preclude such wind turbines from forming part of a particular wind farm project and being included in the above determination of the "project's planned nameplate capacity".

Reasons: Consideration of the relevant provisions of the Regulations and the nature of the determination.

2004-010914
XXXXXXXXXX A.A. Cameron
(613) 347-1361
April 5, 2005

Dear XXXXXXXXXX:

Re: Regulation 1219 - Wind Power

We are writing further to your letter of December 22, 2004 regarding the term "test wind turbine" as defined 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"). In particular, you have asked for our views as to whether certain wind turbines which may be leased by a taxpayer, i.e., wind turbines other than those intended to be test wind turbines, would be included in the determination of a wind farm project's "planned nameplate capacity" for purposes of proposed paragraph 1219(3)(a) of the Regulations.

The situation described in your letter is one where a taxpayer would undertake the development of a wind farm project by clearing the relevant site (which it would own or have the rights to), erecting and owning a number of wind turbines intended to be test wind turbines and proceeding with the 120 calendar day testing period [during which "the level of electrical energy produced from wind by the device" is to be tested as provided in proposed paragraph 1219(3)(f) of the Regulations] with regard to those wind turbines. You further indicate that, if favourable results were to be obtained from such testing, the taxpayer would lease additional wind turbines from a financing party with all wind turbines, those owned as well as those leased, then to be used and operated by the taxpayer to produce electricity at the site.

Our Comments

The particular situation outlined above appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Where the particular transactions have been completed, any enquiry should be addressed to the relevant tax services office. Although we cannot comment on your specific situation, the following general comments may be of assistance.

As noted in your letter, the preamble to subsection 1219(1) of the Regulations provides, in part, that in order for an expense incurred by a taxpayer to qualify for inclusion in "Canadian renewable and conservation expense" ("CRCE") the expense must be:

...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, ...

In our view, whether or not the above "at least 50%" test is satisfied with respect to a particular wind farm project must be determined from the facts and circumstances relevant to that project. It should be noted that, pursuant to proposed paragraph 1219(1)(g) of the Regulations, in order for costs relating to the acquisition of a wind turbine to qualify as CRCE, such costs would have to be incurred by the taxpayer undertaking the wind farm project, i.e., that party must be the owner of a wind turbine intended to be a test wind turbine. However, we would also note that pursuant to clause (d)(v)(A) to Class 43.1 a wind energy conversion system may qualify for inclusion in that class provided it is used, by either the owner or a lessee of the owner, primarily for the purpose of generating electrical energy. Therefore, with regard to wind turbines which are not test wind turbines and that will be depreciable property that is included in Class 43.1, it is our view that the fact that such wind turbines are leased should not, in and by itself, preclude such wind turbines from being considered depreciable property to be used in a particular wind farm project with such leased wind turbines being included in the determination of the "project's planned nameplate capacity" for purposes of proposed paragraph 1219(1)(a) of the Regulations.

We trust that these comments will be of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently is not binding on the Canada Revenue Agency in respect of any particular situation.

Yours truly,

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

c.c. Micheline Brown

Engineering, Research and Technical Team
Industrial Programs Division
Office of Energy Efficiency
Natural Resources Canada
580 Booth St., 18th Floor
Ottawa ON K1A 0E4