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 each of XXXXXXXXXX proposed exploratory wind turbines will qualify as a test wind turbine within the meaning of subsection 1219(3) of the Regulations
Position: yes
Reasons: NRCan opinion that criteria have been met
2007-025459
XXXXXXXXXX T. Harris
(613) 957-2114
February 25, 2008
Dear XXXXXXXXXX:
Re: XXXXXXXXXX (the "Project")
We are writing in response to your letters of October 1, 2007, December 11, 2007, January 30, 2008 and February 21, 2008 concerning your request for a determination that each of XXXXXXXXXX planned wind turbines to be installed by XXXXXXXXXX (the "Corporation") as part of the Project will qualify 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 the Project to be located XXXXXXXXX (the "Province").
XXXXXXXXXX
The Corporation will own all of the wind turbines relating to the Project and, upon termination of the License, will remove the wind turbines from the site. The electricity to be generated by the Project will be sold under a long-term power purchase agreement with XXXXXXXXXX.
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 XXXXXXXXXX.
Provided successful results are obtained from the Corporation's testing program involving the Test Turbines, the Corporation plans to commence the installation of the remaining XXXXXXXXXX wind turbines for the Project, each having a capacity of XXXXXXXXXX MW, in XXXXXXXXXX. The wind turbines for the Project will be connected to a XXXXXXXXXX kV transmission line that is owned and operated by XXXXXXXXXX . The Corporation will own and operate a substation, as well as approximately XXXXXXXXXX transmission line from the substation to the above-noted transmission line.
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 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 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 either subparagraph (d)(v) of Class 43.1 or paragraph (b) of Class 43.2 of Schedule II to the Regulations. 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.
(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 that any particular cost described in Appendix C of your letter of January 30, 2008 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. Tom Jewett
Class 43.1/43.2 Officer
CANMET Energy Technology Centre
Natural Resources Canada
1 Haanel Drive
Ottawa ON K1A 1M1
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