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 intangible costs relating to development of wind farm projects which do not proceed may be included in CRCE
Position: question of fact
Reasons: interpretation of the relevant provisions
XXXXXXXXXX T. Harris
January 18, 2005
Re: Canadian Renewable and Conservation Expense
We are writing in response to your electronic message of January 6, 2005, wherein you requested clarification of whether the intangible costs of developing a renewable energy project may be included as "Canadian renewable and conservation expense" ("CRCE"), as defined in subsection 66.1(6) of the Income Tax Act (the "Act") and section 1219 of the Income Tax Regulations (the "Regulations"), in the situation where it is not feasible to proceed with the project. You have also asked whether any of the intangible costs incurred in the development of a wind farm project would be classified as the capital cost of depreciable property.
You have described a situation where a "principal-business corporation" (as defined in subsection 66(15) of the Act) has raised money through the issue of "flow-through shares" (also as defined in subsection 66(15) of the Act) and has used this money to do wind power development work, including site selection, wind feasibility, hydro connection feasibility, environmental feasibility, geotechnical study and process engineering relating to several proposed wind farm projects. However, as a result of this development work, the corporation is not able to obtain a power contract for all of the proposed wind farm projects with the result that those projects for which a power contract is not obtained are abandoned.
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.
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 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 (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, amounts that would otherwise be included in the capital cost of depreciable property, other than costs incurred:
A) for a temporary access road to the project,
B) for clearing land as required to complete the project,
C) for process engineering for the project, or
D) for a test wind turbine,
or any amount that would otherwise be included in the capital cost of intangible property, other than costs incurred:
E) for making a service connection to transmit electricity to a purchaser,
F) for a right of access to the project site during the start-up phase, or
G) as described in A) to C) above,
will not generally qualify as CRCE.
As described above, not all intangible expenditures related to the development of a renewable energy project will necessarily be eligible for inclusion in CRCE. However, the fact that the development of a renewable energy project is subsequently abandoned due to factors that were not foreseen at the time that the initial stages of the project development were undertaken will not necessarily preclude such project development costs from being included in CRCE. In such circumstances, it will be necessary to establish that such developmental activities were in respect of a "project" and that at the time the expenditures were incurred it was reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the proposed project would be the capital cost of any property that is described in Class 43.1.
With respect to your second question, paragraph 8 of Interpretation Bulletin IT-285R2 Capital Cost Allowance - General Comments indicates that the expression "capital cost of property" generally means the full cost of acquiring the property, including any legal, accounting, engineering or other expenses relating to the acquisition of the property. Consequently, any cost related to the acquisition of a capital property (other than an expenditure described in any of A) to G) above) will not be eligible for inclusion in CRCE by virtue of either of subparagraph 1219(2)(b)(iv) or (v) of the Regulations. It is our understanding that you have a copy of the Technical Guide to Canadian Renewable and Conservation Expense published by Natural Resources Canada. This guide contains a number of project tables that identify how various expenditures to be incurred in developing such projects should be classified. Project Table # 4 Wind Farm (electricity) lists the various types of expenditures which may be incurred in developing a wind farm project and identifies those which will be eligible for inclusion as CRCE, as well as those which are deductible as ordinary business expenses and those that should be capitalized as the cost of capital property.
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. Consequently, a taxpayer that qualifies as a "principal-business corporation" may be able to renounce amounts, in respect of the CEE incurred by it, to an investor that has acquired a "flow-through share" in its capital stock. However, amounts may only be renounced to a particular investor in respect of CEE incurred by the "principal-business corporation" on or after the date the agreement in writing relating to the acquisition of the flow-through share was made.
Pursuant to subsection 66(12.6) of the Act, qualifying expenses incurred by a "principal-business corporation" in a particular calendar year may be deemed, in certain circumstances, to have been incurred by the "principal-business corporation" on the last day of the immediately preceding calendar year (this provision is generally referred to as the "look-back rule"). Where a "principal-business corporation" renounces CEE pursuant to subsection 66(12.6) of the Act having reliance on the "look-back rule" to an investor who has acquired a flow-through share of the "principal-business corporation", it will be subject to tax under Part XII.6, as determined under subsection 211.91(1) of the Act.
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.
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.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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