27 September 2006 Income Tax Severed Letter 2006-0201271E5 - Test wind turbine

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.

SUMMARY: Test wind turbine—ITR-1219—Whether specific proposed wind turbines qualify as test wind turbines within the meaning of Reg. 1219(3).

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 subsection 1219(3) of theIncome Tax Regulations?

POSITION: Yes, provided the Project is carried out as described.

REASONS: Opinion from NRCan and compliance with the legislation.

XXXXXXXXXX 2006-020127

Fiona Harrison

September 27, 2006

Dear XXXXXXXXXX:

We are writing in response to your request of August 16, 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 theIncome Tax Regulations(the “Regulations”).

The Corporation is pursuing the development of a proposed wind farm project to be located in the XXXXXXXXXX (the “Project”). The Corporation proposes to use the XXXXXXXXXX wind turbines (the “Test Wind Turbines”) for the primary purpose of testing the level of electrical energy production at the place of installation. The Corporation has signed an option and/or lease agreement with each of the XXXXXXXXXX landowners for XXXXXXXXXX -year renewable terms for the land encompassed by the Project. At the termination of the leases, the Corporation will remove the turbines.

One of the XXXXXXXXXX Test Wind Turbines will be located at each of the following sites:

XXXXXXXXXX

The capacity of each of the Test Wind 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 Wind 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 Wind Turbines, the Corporation plans to complete a second phase of the Project which would involve the erection of XXXXXXXXXX in-fill turbines, each having a capacity of XXXXXXXXXX MW. The Corporation also plans to increase the Project's capacity with a third phase which would increase the nameplate capacity by XXXXXXXXXX MW that is dependant on securing the XXXXXXXXXX land to the XXXXXXXXXX of the existing parcels.

The Corporation will own all of the wind turbines relating to the Project upon completion of the Project and has contracted with XXXXXXXXXX to develop, construct and manage the Project. Pursuant to a telephone conversation of September 14, 2006, you advised that the Corporation will deal at arm's length with XXXXXXXXXX

The Corporation has executed a XXXXXXXXXX year power purchase agreement with XXXXXXXXXX (the “Utility”) for the output of the XXXXXXXXXX Test Wind Turbines. The Corporation is seeking a power purchase agreement for the second phase and expects that it will be successful in the next tender round issued by the Utility. If the land associated with the third phase can be secured, the scale would support an export contract to XXXXXXXXXX. The Corporation will receive all revenue from the generation of electrical energy by the Project.

Grid connection for the Test Wind Turbines will be at the XXXXXXXXXX. Utility will build a new XXXXXXXXXX access line from the site to the highway to facilitate the connection. The feeder line and grid connection equipment will be owned by the Utility.

Natural Resources Canada (“NRCan”) has reviewed the applications for technical opinions for the Test Wind 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 included in either Class 43.1 or 43.2 of ofofSchedule II to the Regulations or that would be such property but for subsection 1219(1) of the Regulations;
• (ii) each of the Test Wind 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 included in either subparagraph (d)(v) of Class 43.1 or paragraph (b) of Class 43.2 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 Wind Turbines is to test the level of electrical energy produced by the particular Test Wind 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 Wind Turbines;
• (vi) no other wind energy conversion system will be installed within 1,500 meters of any of the Test Wind Turbines until the level of electrical energy produced from wind by the Test Wind Turbines has been tested for at least 120 calendar days; and
• (vii) the electrical energy produced from wind by the Test Wind Turbines will not exceed 20% of the planned nameplate capacity for the Project.

Provided that:
• (a) the Project will be undertaken as described in the Applications with the Test Wind 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 Wind 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 or 43.2 of Schedule II to the Regulations. In other words, the cost of each Test Wind Turbine will not qualify as a “Canadian renewable and conservation expense” (“CRCE”), as defined in subsection 66.1(6) of theIncome Tax Act(the “Act”), until such time as it is commissioned and enters into service.

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