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 wind turbines located at XXXXXXXXXX wind farm projects will qualify as "test wind turbines" under subsection 1219(3) of the Regulations.
Position: Yes, provided the test wind turbines installed have been and will be used for the testing program described in the Application; and the facts and representations relating to the projects remain as stated.
Reasons: Based upon the wording of the relevant provisions of the Regulations, written opinions obtained from Natural Resources Canada dated October 5, 2006 and the facts of the situation.
2006-020883
XXXXXXXXXX Catherine Bowen
(613) 957-8284
November 10, 2006
Dear XXXXXXXXXX:
Re: XXXXXXXXXX Test Wind Turbines
We are writing in response to your request received in our office on October 4, 2006 for an opinion concerning the eligibility of each of the XXXXXXXXXX wind turbines owned by XXXXXXXXXX (the "Corporation") as a "test wind turbine" within the meaning of subsection 1219(3) of the Income Tax Regulations (the "Regulations").
Development of the Wind Farms Projects
The Corporation is pursuing the development of XXXXXXXXXX wind farm projects involving wind turbines to be located on XXXXXXXXXX (individually the "Project", collectively the "Projects"). The Corporation owns, leases or has an option to lease all the farmland required for the purpose of installing wind turbines on the land encompassed by the Projects. At the termination of the lease agreements, 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 Projects and will receive all revenue from the generation of electrical energy by the Projects. The Corporation has a contract for services with XXXXXXXXXX. to manage the Projects.
The Test Wind Turbines
The Corporation has used or is currently using the XXXXXXXXXX wind turbines (individually the "Test Wind Turbine", collectively the "Test Wind Turbines) for the primary purpose of testing the level of electrical energy production at the place of installation. The site location and interconnection to the electrical grid of the Test Wind Turbines is as follows:
XXXXXXXXXX.
The electrical energy generated by the XXXXXXXXXX Test Wind Turbines is being sold to the Utility under a long-term power purchase agreement. The interconnection point for each Project is not shared with any other project. The capacity of each Test Wind Turbine is indicated below.
Description of the Wind Farm Projects
XXXXXXXXXX.
NRCan's Review
Natural Resources Canada ("NRCan") has reviewed the applications for technical opinions for the Test Wind Turbines (the "Applications") (NRCan file numbers
XXXXXXXXXX).
Our Opinion
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 each of the Projects would be the capital cost of property that is included in either Class 43.1 or 43.2 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 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 to the Regulations;
(iii) none of the Projects will 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 was 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 has been or 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 Turbine(s) will not exceed 20% of the planned nameplate capacity for its particular Project.
Provided that:
(a) the Projects are undertaken as described in the Applications with the Test Wind Turbines having been installed and used for the testing program described therein; and
(b) the facts and representations relating to these Projects 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 did 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 was commissioned and entered into service.
(I) Except as expressly stated, our opinion does not imply acceptance or approval of any income tax implications relating to any of the Projects. 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
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