16 May 2006 External T.I. 2006-0179851E5 - test 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 certain proposed wind turbines will qualify as test wind turbines within the meaning of Regulation 1219(3)

Position: Yes; provided project is carried out as described

Reasons: opinion from NRCan and compliance with legislation

                                          2006-017985
XXXXXXXXXX                                T. Harris
(613) 957-2114
May 16, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

We are writing in response to your request of April 5, 2006 for an opinion concerning the eligibility of each of XXXXXXXXXX proposed 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").

The Corporation is pursuing the development of a proposed wind park involving wind turbines to be located in the vicinity of the XXXXXXXXXX on a site of approximately XXXXXXXXXX acres (the "Project"). The Corporation has signed an option to lease agreement with each of the XXXXXXXXXX landowners for the right to enter into XXXXXXXXXX-year leases for the purpose of installing wind turbines on the land encompassed by the Project. At the termination of the leases, the Corporation will either negotiate another agreement with the landowners or remove the wind turbines. The Corporation will own all of the wind turbines relating to the Project and will also develop and operate the Project. The electrical energy generated by the Project will be sold through power purchase agreements with XXXXXXXXXX. The Corporation will receive all revenue from the generation of electrical energy by 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:

Turbine Name Description of land and coordinates of installation site

XXXXXXXXXX

The capacity of each of the Test Turbines to be installed as described above will be XXXXXXXXXX megawatts ("MW"), for an aggregate of XXXXXXXXXX MW. The planned nameplate capacity for the Project is XXXXXXXXXX MW. It is anticipated that the Test Turbines will be commissioned and enter into service before the end of 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 XXXXXXXXXX additional wind turbines, each having a capacity of XXXXXXXXXX MW, with completion of these infill turbines anticipated by the end of XXXXXXXXXX. The interconnection for the Project will be done in two phases. In the first phase, the Test Turbines will be connected to a substation owned by the Corporation via an array of XXXXXXXXXX kV collection feeders. At the substation the voltage will be stepped up to XXXXXXXXXX and the electricity will be transmitted by means of a new transmission line owned by the electrical company to the XXXXXXXXXX distribution station (the "DS") and tie into the existing grid. For the second phase, the substation will need to be upgraded to accommodate the additional capacity of the infill turbines. Prior to commissioning the second phase, the electrical company will need to upgrade a portion of its transmission system connecting to the DS to a XXXXXXXXXX kV level. The Project substation will then be reconnected at XXXXXXXXXX kV.

Natural Resources Canada ("NRCan") has reviewed the applications for technical opinions for the Test Turbines (the "Applications"; NRCan file numbers XXXXXXXXXX).

It is our understanding, based upon representations and information provided on behalf of the Corporation in the Applications, that:

(i) at least 50% of the capital cost of the depreciable property to be used in the Project would 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 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 particular Test Turbine from wind at its place of installation;

(v) 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 the Test Turbines has been tested for at least 120 calendar days; and

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

Our Opinion

Provided that:

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

(b) the facts and representations relating to the Project remain as stated in the Applications and as described herein

it is our opinion that each of the Test Turbines will constitute a test wind turbine for purposes of subsections 1219(1) and (3) of the Regulations at the time the wind energy conversion system that it forms 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. In other words, the cost of each Test Turbine will not qualify as a "Canadian renewable and conservation expense" ("CRCE"), as defined in subsection 66.1(6) of the Income Tax Act (the "Act"), until such time as it is commissioned and enters into service.

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, the proposed infill wind turbines forming part of the Project that would otherwise qualify for inclusion in Class 43.1 may potentially qualify for this new class. The Budget Plan 2006 tabled in the House of Commons on May 2, 2006 confirmed that it was the federal government's intention to enact the Regulations to implement this change.

Our 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 property, including the Project substation, may be considered to be CRCE.

(II) CRCE does not include any amount that is paid or payable to a person or partnership with whom the taxpayer does not deal at arm's length.

(III) 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.

(IV) 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.

(V) 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
Legislative Policy and Regulatory Affairs Branch

c.c. France Bernier

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