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 alterations to a small hydro-electric installation are eligible for inclusion in Class 43.1
Position: yes- provided that proposed amendments to Class 43.1 are promulgated
Reasons: compliance with technical requirements and technical opinion from Natural Resources Canada
2005-012530
XXXXXXXXXX T. Harris
(613) 957-2114
April 19, 2005
Dear XXXXXXXXXX:
Re: Class 43.1 Applications
Your letters of January 19 and January 30, 2004 that were addressed to Natural Resources Canada have been forwarded to us for reply. In these letters you requested an opinion concerning the eligibility of the penstocks that were replaced at your company's XXXXXXXXXX hydro-electric installations for inclusion in Class 43.1 of Schedule II ("Class 43.1") of the Income Tax Regulations (the "Regulations").
Our understanding of the facts relating to your requests is as follows:
XXXXXXXXXX.
In each case, an increase in annual output was obtained through a reduction in head losses by upgrading from woodstave to steel penstock and through the elimination of excessive leakage from the old woodstave penstock. In addition, each of the XXXXXXXXXX hydro-electric installations was acquired by your company before February 21, 1994.
Natural Resources Canada ("NR Can") has reviewed the applications for technical opinions relating to the penstock replacement at the XXXXXXXXXX hydro-electric installations (the "Applications"; NR Can file numbers XXXXXXXXXX). In the opinion of NRCan, the penstocks that have been replaced at these XXXXXXXXXX installations are eligible components of a small-scale hydro-electric installation as described in subparagraph (d)(ii) of Class 43.1 as currently promulgated and each of the penstock replacements constitutes an alteration to such a small-scale hydro-electric installation which has resulted in an increase in the generating capacity at the site. Furthermore, the resulting annual average generating capacity of each hydro-electric installation does not exceed 15 MW.
Our Opinion
Proposed amendments to Class 43.1, which were published in the Canada Gazette Vol. 138, No. 51 on December 18, 2004, and which are applicable after December 10, 2001 (the "Draft Amendments"), need to be considered in determining whether the alterations described above are eligible for inclusion in Class 43.1. Pursuant to these proposed amendments, subparagraph (d)(iii) of Class 43.1, as amended thereby, will apply to the penstock replacement described in XXXXXXXXXX above as that property was acquired before December 10, 2001. However, the penstock replacements described in XXXXXXXXXX above, which were acquired after December 10, 2001, will have to qualify for inclusion in Class 43.1 under proposed subparagraph (d)(iii.1) thereof. The proposed amendments to subparagraph (d)(iii) to Class 43.1, as well as proposed subparagraph (d)(iii.1) thereof, encompass property that is an addition or alteration to a hydro-electric installation described in subparagraph (d)(ii) to Class 43.1 provided the addition or alteration results in an increase in generating capacity and, in the case of subparagraph (d)(iii) the resulting annual average generating capacity of the hydro-electric installation does not exceed 15 MW, or in the case of subparagraph (d)(iii.1) the resulting rated capacity at the hydro-electric installation site does not exceed 50 MW. Under clause (d)(ii)(B) to Class 43.1 [and subject to the generating capacity limitations contained in the proposed amendments to clause (d)(ii)(A)], the hydro-electric installation of a producer of hydro-electric energy includes the electrical generating equipment, including a penstock, of that producer but does not include distribution equipment and property otherwise included in Class 10 or 17 to Schedule II of the Regulations.
Based on our understanding of the facts as described herein, our review of the representations and information provided on behalf of your company in the Applications and the views of NRCan as a result of its technical review of the Applications, it is our opinion, subject to the comments below, that each of the penstock replacements would be eligible for inclusion in Class 43.1 by virtue of the proposed amendments to subparagraph (d)(iii) and proposed subparagraph (d)(iii.1) thereof provided that the Draft Amendments are promulgated substantially in the form that was published in the Canada Gazette as referred to above.
You should, however, note that a proposed amendment to Class 17 of Schedule II to the Regulations, which was announced on March 16, 2001, provides that electrical generating equipment (subject to certain exceptions that are not relevant to your situation) acquired after February 27, 2000 will be included in that class by virtue of proposed paragraph (a.1) thereof. As noted above, the closing words to subparagraph (d)(ii) of Class 43.1 provide that property otherwise included in Class 17 of Schedule II to the Regulations is excluded from Class 43.1 under that subparagraph. Consequently, if proposed paragraph (a.1) of Class 17 is promulgated in the form announced on March 16, 2001, the new penstocks described in XXXXXXXXXX above would not be eligible for inclusion in Class 43.1. We understand, however, that the Department of Finance issued a comfort letter on October 17, 2003 indicating that it was aware of this issue and intended to recommend to the Minister of Finance that the proposed CCA regulations relating to Classes 17 and 43.1 be clarified to ensure that electrical generating equipment that is currently described in proposed subparagraph (a.1)(i) of Class 17 will be eligible for inclusion in Class 43.1.
We trust that these comments will be of assistance.
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
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