9 November 2005 External T.I. 2005-0152451E5 - 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 wind turbines will qualify as test wind turbines under subsection 1219(3) of the Regulations.

Position: Yes, provided the taxpayer proceeds with the development of the wind farm project as planned.

Reasons: Based upon the wording of the relevant provisions of the Regulations, a written opinion obtained from Natural Resources Canada and the facts of the situation.

2005-015245
XXXXXXXXXX A.A. Cameron
(613) 347-1361
November 9, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Wind Farm Project

We are writing in response to your request of September 23, 2005 concerning the eligibility of each of XXXXXXXXXX planned wind turbines to be installed by XXXXXXXXXX (the "Corporation") as a "test wind turbine" within the meaning of subsection 1219(3) of the Income Tax Regulations (the "Regulations"). We also acknowledge our telephone conversations (Cameron/XXXXXXXXXX) regarding this matter.

The Corporation is pursuing the development of a proposed wind farm project involving wind turbines to be located near XXXXXXXXXX (the "Project"). The Corporation has signed options, in each case having a term of XXXXXXXXXX years, to acquire land owner rights from the individual owners of the land encompassed by the Project. The term of the underlying land access rights agreements is XXXXXXXXXX years with the option to renew. At the termination of these agreements, the Corporation will be required to and will remove the wind turbines from the land. The Corporation will own all of the wind turbines relating to the Project and will also develop and operate the Project.

One of the XXXXXXXXXX wind turbines referred to above (collectively referred to herein as the "Test Turbines") will be located at each of the following sites (all being in Zone XXXXXXXXXX):

XXXXXXXXXX

The capacity of each of the XXXXXXXXXX Test Turbines to be installed as described above will be XXXXXXXXXX megawatts. The planned nameplate capacity for the Project is XXXXXXXXXX MW. It is anticipated that each of the Test Turbines will be commissioned and enter into service before XXXXXXXXXX.

Provided successful results are obtained from the Corporation's testing program involving the Test Turbines, the Corporation plans to complete a second phase of the Project, which would involve the erection of an additional XXXXXXXXXX wind turbines having a total capacity of XXXXXXXXXX MW, with completion anticipated by XXXXXXXXXX. The Project will be connected to XXXXXXXXXX stepping up to XXXXXXXXXX through a new substation that will be owned and operated by the Corporation and which will have sufficient capacity to handle the electrical energy for the entire proposed wind energy project.

Natural Resources Canada ("NRCan") has reviewed the application for a technical opinion on the XXXXXXXXXX Test Turbines (the "Application"; NRCan file number XXXXXXXXXX). NRCan has indicated, after considering factors including the size of the Project site, as well as variation in topography and the nature of the wind sheer component relative to the site, that there is a high level of uncertainty with respect to the intensity and distribution of the wind resource at the Project site. As such, NRCan has also indicated that an acceptable rationale exists for each location at which one of the Test Turbines is to be located as part of the Corporation's testing program.

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

(v) there will be at least 1,500 meters between the respective bases of the Test Turbines and no other test wind turbine (as defined in subsection 1219(3) of the Regulations) will be installed within 1,500 meters of any of the Test Turbines;

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

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

Opinion

Provided that:

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

(b) the facts and representations relating to this Project, including those referred to above, remain as stated in the Application

it is our opinion that each of the XXXXXXXXXX Test Turbines will constitute a test wind turbine for purposes of subsection 1219(1) and (3) of the Regulations 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.

We would also note that the federal budget of February 23, 2005 contains a proposal under which renewable energy generation equipment, including wind turbines, otherwise eligible for inclusion in Class 43.1 would be eligible for inclusion in a new class, having a capital cost allowance rate of 50 per cent, if such equipment is acquired on or after February 23, 2005 and before 2012. Should this change be promulgated, a wind energy conversion system forming part of the Project that would otherwise qualify for inclusion in Class 43.1 may potentially qualify for this new class.

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 the cost of any particular equipment, such as the proposed electrical substation, may be considered to be a "Canadian renewable and conservation expense" ("CRCE"), as defined in subsection 66.1(6) of the Income Tax Act (the "Act").

(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. Consequently, 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) Pursuant to subsection 66(12.66) of the Act, 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 (this provision is generally referred to as the "look-back rule"). Where a PBC 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 PBC, it will be subject to tax under Part XII.6, as determined under subsection 211.91(1) of the Act.

(IV) Where the amount of CEE that a PBC 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 PBC 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.

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