2012 Ruling 2010-0376811R3 - Greenhouse Gases Act

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: The tax treatment of the Province XXXXXXXXXX's plan to reduce carbon emissions.

Position: See Document

Reasons: See Document

XXXXXXXXXX
2010-037681

XXXXXXXXXX, 2012

Attention: XXXXXXXXXX

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Fund")
XXXXXXXXXX (the "Research Corporation")
XXXXXXXXXX (the "Environment Corporation")
XXXXXXXXXX (the "Foundation")
________________________________________________________________________

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted entities (hereinafter collectively referred to as the "Entities") and the XXXXXXXXXX for the Province XXXXXXXXXX. We also acknowledge your subsequent submissions and our various emails and phone discussions.

You have advised us that to the best of your knowledge and that of the responsible officers of the Entities, none of the issues raised in this ruling are:

(a) identified in an earlier tax return of the Entities or of a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Entities or of a related person;

(c) under objection by the Entities or by a related person;

(d) before the courts; or

(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate of the Canada Revenue Agency, in relation to the above-noted taxpayers or a related person.

DEFINITIONS

In this letter the following terms or expressions have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended and all statutory references herein are to provisions of the Act, unless otherwise specified;

"Application Period" has the meaning assigned by paragraph 52 below;

"XXXXXXXXXX" means the price to be paid for the emission of one tonne of CO2e as prescribed in the Draft Climate Regulations;

"CCP" means a XXXXXXXXXX, further described in paragraph 50 below, that is an amount required to be paid by an Emitter to the Fund, pursuant to Section XXXXXXXXXX of the Climate Act, with respect to the Emitter's GHG emissions level as prescribed in the Draft Climate Regulations;

"Charity" has the meaning assigned by subsection 149.1(1) of the Act;

"Charitable Organization" has the meaning assigned by subsection 149.1(1) of the Act;

"Climate Act" means XXXXXXXXXX as enacted by the Province XXXXXXXXXX;

"CO2e" means the mass of carbon dioxide that would produce the same global warming potential as a given mass of another GHG determined in the manner prescribed in the Draft Climate Regulations;

"Contributor" means a contributor of funds to the Research Corporation;

"Draft Climate Regulations" means the draft version of XXXXXXXXXX established under the Climate Act;

"Emitter" means a regulated emitter that is a prescribed person under the Climate Act, or a person who is a member of a class of prescribed persons, who:

(a) emits a GHG; and

(b) meets the prescribed requirements of the Climate Act and Draft Climate Regulations.

"XXXXXXXXXX" means the level of GHG emissions for a regulated Emitter after applying the reductions prescribed in the Draft Climate Regulations for GHG emissions;

"Environment Corporation" means the XXXXXXXXXX established pursuant to the Climate Act;

"Foundation" means the XXXXXXXXXX established pursuant to the Climate Act;

"Fund" means the XXXXXXXXXX established pursuant to the Climate Act;

"GHG" means greenhouse gas;

"GRF" means the XXXXXXXXXX of the Province XXXXXXXXXX;

"Greenhouse Gas Emission Baseline" means the baseline amount of GHG emissions for XXXXXXXXXX, expressed in CO2e, in the year;

"Minister" means the Minister of XXXXXXXXXX for the Ministry;

"Ministry" means the XXXXXXXXXX;

"NPO Act" means XXXXXXXXXX;

"OC" means the amount of other tonnes of CO2e that the Minister permits the Emitter to deduct;

"Offset Credits" or ("O") means credits received by an Emitter in respect of any of the following activities:

(i) a reduction in the release of a quantity of GHG as prescribed by the Draft Climate Regulations, expressed in CO2e;

(ii) the sequestration of GHG; or

(iii) any other activity prescribed in the Draft Climate Regulations.

"Performance Credits" or ("PC") means credits received by an Emitter from the Minister where the Emitter's actual GHG emissions are lower than the level prescribed in the Draft Climate Regulations;

"Pre-Certified Investment" means a large-scale and transformative project that is undertaken by an Emitter that is designed to result in a reduction in GHG emissions and is determined by the Minister to be a Pre-Certified Investment;

"PCI" means credits allocated for approved Pre-Certified Investment Expenditures;

"Province" means the Province XXXXXXXXXX;

"Provincial Legislature" means the Legislature XXXXXXXXXX;

"Public Foundation" has the meaning assigned by subsection 149.1(1) of the Act;

"Recognition for Early Action" means a certificate specifying an amount of tonnes of CO2e provided by the Minister to an Emitter to recognize actions taken before the coming into force of the Climate Act by that Emitter to reduce GHG emissions;

"REA" means credits allocated for approved Recognition for Early Action expenditures;

"Registered Charity" has the meaning assigned by subsection 248(1) of the Act;

"Research Corporation" means the XXXXXXXXXX established pursuant to the Climate Act;

"XXXXXXXXXX Initiatives" means initiatives, targets, plans, proceedings and goals for XXXXXXXXXX that:

(i) relate to climate change and GHG emissions; and

(ii) are prescribed in the Draft Climate Regulations or otherwise established by the Lieutenant Governor in Council XXXXXXXXXX;

"Second Tier Entities" means the Research Corporation, the Environment Corporation and the Foundation;

"SR&ED" means scientific research and experimental development as defined in subsection 248(1) of the Act; and

"149(1)(l) entity" means an entity described in paragraph 149(1)(l) of the Act.

Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:

FACTS

BACKGROUND

1. The Ministry has initiated a "XXXXXXXXXX" climate change policy that is designed to be proactive and effective at reducing the GHG emission levels of the Emitters in the Province. The Province has enacted the Climate Act and has prepared the Draft Climate Regulations to govern the implementation and operation of the climate change policy.

2. Under the provisions of the Climate Act, the following entities will be established: the Fund; and the Second Tier Entities, which consist of the Research Corporation, the Environment Corporation and the Foundation.

3. Under the provisions of the Climate Act and the Draft Climate Regulations, the Emitters are required to calculate their Greenhouse Gas Emission Baseline and to reduce this amount to a level prescribed in the Draft Climate Regulations. Where an Emitter's actual GHG emission exceeds the level prescribed in the Draft Climate Regulations, the Emitter has an obligation under the Climate Act. An Emitter can satisfy this obligation by choosing several compliance options, including utilizing certain credits, reductions or certificates (collectively referred to as the "Credits"), such as "Os", "OCs", "PCIs", "PCs" or "REAs", that are owned by the Emitter. These Credits are generally received by Emitters where they have achieved GHG emissions that are lower than their level as prescribed by the Draft Climate Regulations or where they have made certain investments that are designed to reduce their GHG emissions. Some of the Credits can be acquired from other Emitters or other taxpayers. Where an Emitter has an outstanding obligation under the Climate Act at the end of the calendar year, after taking into account the utilization of the Credits, the Emitter is required to provide a CCP to the Fund as further described in paragraph 50 below.

Proposed Structures and Governance

The Fund

4. The Fund will be established pursuant to the Climate Act as a non-share capital corporation and will be subject to certain provisions of the NPO Act.

5. The Climate Act provides that the Fund can pass by-laws consistent with its purposes, the Climate Act and the Draft Climate Regulations. The Fund will pass a by-law stating that the Fund will be organized and operated exclusively for any purpose except profit and no part of the income will be payable to, or otherwise available for the personal benefit of any of its members.

6. The Fund:

(a) will not be a charity;

(b) will be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;

(c) will be operated exclusively for the same purpose for which it was organized or for any of the other purposes mentioned in paragraph 6(b); and
will have no part of its income payable to or otherwise available for the personal benefit of a member.

7. Pursuant to the Climate Act, the purposes of the Fund are:

(a) to manage CCPs collected from Emitters and any other money that the Fund is authorized to hold pursuant to the Climate Act or the Draft Climate Regulations;

(b) to issue receipts to:

1) an Emitter for CCPs made to the Fund by the Emitter; and

2) any other person that makes a payment to the Fund;

(c) to promote the development of climate change programs and procedures by and among Emitters that, in the opinion of the Fund, will assist in achieving the XXXXXXXXXX Initiatives and will result in Emitters reducing their GHG emissions in XXXXXXXXXX;

(d) to promote the development, achievement and sustainability of the XXXXXXXXXX Initiatives, other climate change initiatives and other matters related to climate change and adaptation to climate change; and

(e) to promote the reduction of GHG emissions and other matters related to climate change and adaptation to climate change generally by supporting the work of the Second Tier Entities established pursuant to the Climate Act, including transferring or paying moneys of the Fund to the Second Tier Entities in any amounts and at any times that the Fund may determine.

8. The by-laws of the Fund will provide that it will not be a charity as a result of its ability to lobby for legislative change.

9. The by-laws of the Fund will allow for the holding and investing of CCPs during the Application Period. Generally, the Fund will hold and invest a pool of money made up of CCPs that have not yet been allocated and for which the Application Period has not expired.

At no time will CCPs be accumulated for the purpose of generating investment income. The accumulation and investment of CCPs will be entirely due to the long-term nature of the operations of the Fund, and will never exceed what is necessary to fulfil the not-for-profit purposes of the Fund. Any income generated on the invested CCPs will first be used to pay administrative expenses of the Fund and then will flow to one or more of the Second Tier Entities.

10. The Fund will not levy any membership fees or dues.

11. The membership of the Fund will consist of not more than XXXXXXXXXX individual persons appointed by the Lieutenant Governor in Council XXXXXXXXXX. The same persons will comprise the board of directors of the Fund. The members will be paid a reasonable honorarium for their services provided with respect to their board position and will be reimbursed for reasonable expenses for attendance at board or other meetings or conventions required to perform their duties.

12. An appointee to the board of directors for the Fund may include the following types of individuals:

(a) an officer, employee or other representative of an Emitter;

(b) an officer, employee or other representative of an industry or environmental group;

(c) an officer, employee or other representative of a university;

(d) an officer, employee or other representative of government;

(e) an officer, employee or other representative of a charity; or

(f) any other nominee as identified by the Lieutenant Governor in Council.

13. Each board member will have a fiduciary duty to the Fund to act in the Fund's best interest. The by-laws of the Fund will stipulate that a member is precluded from participating in any voting procedure where there may be a perceived conflict of interest. For example, an officer, employee or other representative of an Emitter will be precluded from voting on matters with respect to that Emitter receiving grants or other money from the Fund.

14. In the event of the dissolution or the winding-up of the Fund, any assets of the Fund, after satisfying all obligations of the Fund, will be distributed to one or more of the Second Tier Entities in such manner as the Lieutenant Governor in Council shall direct. If none of the Second Tier Entities exist at the time of the dissolution of the Fund, the assets after satisfaction of all liabilities of the Fund will be transferred to the GRF for use in programs, initiatives or activities relating to matters dealt with in the Climate Act and for the purposes consistent with the objectives and operations of the Fund.

15. The Fund will not be an agent of the Crown.

16. The Fund will constitute a public authority since it has a duty to the public, it is subject to a significant degree of government control and its profits are used for the public benefit.

17. The Fund will have its head office in XXXXXXXXXX and its operations will be carried on within XXXXXXXXXX.

The Research Corporation

18. The Research Corporation will be established pursuant to the Climate Act as a non-share capital corporation resident in Canada and will be subject to certain provisions of the NPO Act.

19. The Research Corporation will be a non-profit corporation for SR&ED pursuant to paragraph 149(1)(j) of the Act in that:

(a) it will be constituted exclusively for the purpose of carrying on or promoting SR&ED in Canada;

(b) it will not acquire control, (as defined in subsection 149(8) of the Act), of any other corporation;

(c) it will not carry on any business;

(d) it will carry on its operations without the purpose of gain for its members and any profits or other accretions to the Research Corporation will be used in promoting its objectives; and

(e) no part of the income of the Research Corporation will be payable to, or otherwise available for the personal benefit of any member of the Research Corporation.

20. Pursuant to the Climate Act, the purposes of the Research Corporation are:

(a) to carry on activities that further and promote SR&ED in Canada in matters relating to climate change, adaptation to climate change and reduction of GHG emissions;

(b) to provide financial assistance to further and promote SR&ED in Canada in matters relating to climate change, adaptation to climate change and reductions of GHG emissions; and

(c) to provide financial assistance to universities, colleges, research institutes or similar institutions for SR&ED in Canada in matters relating to climate change, adaptation to climate change and reductions of GHG emissions.

21. Subsection XXXXXXXXXX of the Climate Act provides that the Research Corporation will not seek status as a charity pursuant to the Act nor will it carry on activities that would be considered as making it a charity pursuant to the Act.

22. The Research Corporation will not levy any membership fees or dues.

23. The membership of the Research Corporation will consist of not more than XXXXXXXXXX persons appointed by the Lieutenant Governor in Council XXXXXXXXXX. The same persons will comprise the board of directors of the Research Corporation.

24. An appointee to the board of directors for the Research Corporation may include the following types of individuals:

(a) an officer, employee or other representative of an Emitter;

(b) an officer, employee or other representative of an industry or environmental group;

(c) an officer, employee or other representative of a university;

(d) an officer, employee or other representative of government;

(e) an officer, employee or other representative of a charity; or

(f) any other nominee as identified by the Lieutenant Governor in Council XXXXXXXXXX.

25. Each board member will have a fiduciary duty to the Research Corporation to act in the Research Corporation's best interest. The by-laws of the Research Corporation will stipulate that a member will be precluded from participating in any voting procedure where there may be a perceived conflict of interest. For example, an officer, employee or other representative of a university will be precluded from voting on matters with respect to that university receiving grants or other money from the Research Corporation.

26. The by-laws of the Research Corporation will provide that the directors, members and those directors and members who also serve as officers of the Research Corporation will serve without remuneration, and no director, member or officer who is a director or member will directly or indirectly receive any profit or benefit from his or her position as a director, member or officer except that a director or officer may be reimbursed for reasonable expenses incurred by him or her in the performance of his or her duties. However, a director, member or officer may serve the Research Corporation in another capacity (e.g., as a SR&ED researcher) and receive reasonable compensation in respect of these other duties.

27. In carrying on or promoting SR&ED for a specified period, the Research Corporation will expend amounts in Canada on expenditures described in clauses 149(1)(j)(ii)(A) and (B) of the Act, the total of which will not be less than 90% of the amount by which the Research Corporation's gross revenue exceeds the total of all amounts paid in the period because of subsection 149(7.1) of the Act. In this regard, gross revenue will be computed with reference to paragraph 149(8)(b) and subsection 149(9) of the Act.

28. In the event of the dissolution or the winding-up of the Research Corporation, any assets of the Research Corporation, after satisfying all obligations of the Research Corporation at the time of such dissolution or winding-up, will be distributed to one or more Canadian entities referred to in clauses 37(1)(a)(ii)(A), (B), (C) or (E) of the Act.

29. The Research Corporation will not be an agent of the Crown.

30. The Research Corporation will constitute a public authority since it has a duty to the public, it is subject to a significant degree of government control and its profits are used for the public benefit.

31. The Research Corporation will have its head office in XXXXXXXXXX and its operations will be carried on throughout Canada.

The Environment Corporation

32. The Environment Corporation will be established as a non-share capital corporation pursuant to the Climate Act and will be subject to certain provisions of the NPO Act.

33. The Climate Act provides that the Environment Corporation can pass by-laws consistent with its purposes, the Climate Act and the Draft Climate Regulations. The Environment Corporation will pass a by-law stating that it will be organized and operated exclusively for any purpose except profit and that no part of its income will be payable to, or otherwise available for the personal benefit of any of its members.

34. The Environment Corporation:

(a) will not be a charity;

(b) will be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit;

(c) will be operated exclusively for the same purpose for which it was organized or for any of the other purposes mentioned in paragraph 34(b); and

(d) will have no part of its income payable to or otherwise available for the personal benefit of a member.

35. Pursuant to the Climate Act, the purposes of the Environment Corporation are:

(a) to provide financial assistance to any person by way of a non-interest-bearing loan, grant, or investment, and any other similar means, with respect to activities related to any of the following:

1) carbon capture and storage;

2) energy conservation;

3) low-emitting technologies and processes;

4) adaptation to climate change;

5) biodiversity and water conservation; and

6) education and public awareness programs related to climate change and adaptation to climate change;

(b) to promote, coordinate, facilitate or otherwise assist in any effort, endeavour, undertaking, activity, program, enterprise or plan that deals with matters mentioned in paragraph 35(a); and

(c) to promote education, awareness and demonstration respecting GHG emissions, climate change and adaptation to climate change.

36. The by-laws of the Environment Corporation will provide that it will not be a charity as a result of its ability to lobby for legislative change.

37. The Environment Corporation will not levy any membership fees or dues.

38. The membership of the Environment Corporation will consist of not more than XXXXXXXXXX persons appointed by the Lieutenant Governor in Council of XXXXXXXXXX. The same persons will comprise the Board of Directors of the Environment Corporation. The members will be paid a reasonable honorarium for their services provided with respect to their board position and will be reimbursed for reasonable expenses for attendance at board or other meetings or conventions required to perform their duties.

39. An appointee to the board of directors for the Environment Corporation may include the following types of individuals:

(a) an officer, employee or other representative of an Emitter;

(b) an officer, employee or other representative of an industry or environmental group;

(c) an officer, employee or other representative of a university;

(d) an officer, employee or other representative of government;

(e) an officer, employee or other representative of a charity; or

(f) any other nominee identified by the Lieutenant Governor in Council.

40. Each board member will have a fiduciary duty to the Environment Corporation to act in the Environment Corporation's best interest. The by-laws of the Environment Corporation will stipulate that a member will be precluded from participating in any voting procedure where there may be a perceived conflict of interest. For example, an officer, employee or other representative of a university will be precluded from voting on matters with respect to that university receiving grants or other money from the Environment Corporation.

41. In the event of the dissolution or the winding-up of the Environment Corporation, any assets of the Environment Corporation, after satisfying all obligations of the Environment Corporation will be distributed to the Research Corporation or Foundation in such manner as the Lieutenant Governor in Council shall direct. If neither of these entities exist at the time of the dissolution of the Environment Corporation, the assets after satisfaction of all liabilities of the Environment Corporation will be transferred to the GRF for use in programs, initiatives or activities relating to matters dealt with in the Climate Act and for the purposes consistent with the objectives and operations of the Environment Corporation.

42. The Environment Corporation will not be an agent of the Crown.

43. The Environment Corporation will constitute a public authority since it has a duty to the public, it is subject to a significant degree of government control and its profits are used for the benefit of the public.

44. The Environment Corporation will have its head office in XXXXXXXXXX.

The Foundation

45. The Foundation will be established as a non-share capital corporation pursuant to the Climate Act and will be subject to certain provisions of the NPO Act. The Foundation is intended to be a public foundation and a registered charity exempt from tax pursuant to paragraph 149(1)(f) of the Act in that:

(a) it will be constituted and operated exclusively for charitable purposes;

(b) no part of the income will be payable to, or will be otherwise available for, the personal benefit of any member thereof; and

(c) it will not be a charitable organization.

46. The Climate Act provides that the Foundation can pass by-laws consistent with its purposes, the Climate Act and the Draft Climate Regulations. The Foundation will pass a by-law stating that it will be organized and operated exclusively for charitable purposes and that no part of the Foundation's income will be payable to or otherwise available to the personal benefit of any of its members.

47. The Foundation will be submitting an application to the Minister of National Revenue for registration as a public foundation.

Proposed Operations and Activities

The Fund

48. The Fund will establish by-laws that are consistent with the terms of the Climate Act and the Draft Climate Regulations, such that the Fund will have the following general powers in order to meet its objectives:

(a) to issue receipts to an Emitter in respect of CCPs provided by the Emitter to the Fund;

(b) to invest any of its money that it does not immediately require for its purposes in any securities that are authorized as investments for the GRF and to dispose of those investments and reinvest the proceeds in similar investments;

(c) to provide financial assistance by way of a non-interest-bearing loan, grant, investment or any other similar means to Emitters to assist in activities related to any of the following:

1) carbon capture and storage;

2) energy conservation;

3) low-emitting technologies and processes; and

4) reductions of GHG emissions

(d) to pay to the Second Tier Entities any moneys that the Fund may determine and that are not otherwise required by the Fund for its purposes;

(e) the by-laws will stipulate that the Fund will operate as a 149(1)(l) entity;

(f) the Fund will do all things that it considers necessary, incidental or conducive to the carrying out of its purposes.

49. For each year following the enactment of the Draft Climate Regulations, an Emitter will be required to reduce the Emitter's GHG emissions by an amount prescribed in the Draft Climate Regulations.

50. For each calendar year in which an Emitter has not reduced its GHG emissions by the required amount, the Emitter will be required to compute and pay to the Fund a CCP equal to the positive amount calculated in accordance with the following formula:

CCP = XXXXXXXXXX
where:
A is the Emitter's actual GHG emissions level for the year;
P is the Emitter's GHG emissions level for the year as prescribed in the Draft Climate Regulations after the application of the reductions required by the Draft Climate Regulations;
O is any offset credit utilized by the Emitter for the year towards achievement of its required reductions;
PC is the number of tonnes of CO2e of Performance Credits utilized by the Emitter for the year towards the achievement of its required reductions;
PCI is the number of tonnes of CO2e allocated to the Emitter by the Minister as a result of investment by that Emitter in a Pre-Certified Investment that the Emitter is able to include during the year towards the achievement of its required reductions;
REA is the number of tonnes of CO2e allocated to the Emitter by the Minister with respect to recognition for early action that the Emitter is able to include in the year towards the achievement of its required reductions;
OC is the amount of other tonnes of CO2e that the Minister permits the Emitter to deduct; and
C is the XXXXXXXXXX as prescribed in the Draft Climate Regulations.

51. All CCPs made by Emitters will be forfeited by the Emitters and become the absolute property of the Fund at the time of payment

52. Pursuant to the Climate Act and the Draft Climate Regulations, an Emitter may apply for financial assistance from the Fund in respect of the activities described in paragraph 48(c) above. Under sections XXXXXXXXXX of the Draft Climate Regulations, all Emitters, including those Emitters that have not previously made CCPs to the Fund, will be eligible to apply for financial assistance from the Fund. An application to the Fund by an Emitter can be made at any time after the XXXXXXXXXX for the Emitter has been approved and regardless of whether there has been any CCPs made to the Fund by that Emitter. The application period for each CCP made to the Fund by an Emitter (the "Application Period") is defined as the period ending on XXXXXXXXXX of the year that is the XXXXXXXXXX year after the year in which the CCP was paid to the Fund. An Emitter will not have an exclusive, enforceable right to financial assistance with respect to the CCPs made by that Emitter to the Fund.

53. An Emitter that wishes to obtain financial assistance from the Fund for the purpose of reducing the Emitter's GHG emissions must complete an application for financial assistance. The application must propose a plan that will reduce the applicant's GHG emissions in a manner that the Fund considers reasonable and achievable and must be in a form acceptable to the Fund and contain any information that the Fund may require.

54. The Fund may approve the application or refuse to approve the application. In considering whether or not to approve an application, the Fund will consider the following:

(a) the impact that the proposed plan may have or has had on climate change and the reduction of GHG emissions in XXXXXXXXXX;

(b) the impact of the proposed plan on the GHG emissions of the Emitter;

(c) the proposed cost incurred or to be incurred for the proposed plan;

(d) the record of the Emitter in achieving other initiatives respecting reductions of GHG emissions and complying with the Climate Act, the Draft Climate Regulations and any codes;

(e) the extent to which the Emitter has made a CCP to the Fund;

(f) the evidence, scientific or otherwise, that supports the proposed plan;

(g) any terms, conditions, restrictions and parameters prescribed by the Draft Climate Regulations;

(h) any terms, conditions, restrictions and parameters established by the Fund; and

(i) any other matters that the Fund considers appropriate.

55. When approving an application or at any time after the approval, the Fund may impose any terms and conditions on the payment of financial assistance that the Fund considers appropriate, including terms and conditions establishing timelines to achieve the matters dealt with in the proposed plan, specifying how payment of financial assistance is to be made to the Emitter and specifying how the Emitter will carry out the proposed plan and how that carrying out is to be monitored and measured.

56. The financial assistance that can be made by the Fund may be in the following forms:

(a) Unconditional grants that an Emitter will not be required to repay.

(b) Conditional grants that an Emitter may not be required to repay if certain objectives are achieved.

(c) Forgivable loans, whereby a loan initially granted to an Emitter is subsequently forgiven, in whole or in part, if certain objectives are achieved.

(d) Investments, where the term "investment" does not include investment in the equity or securities of applicants or others that might result in a return with a view to profit as either a main or secondary purpose.

57. Under subsection XXXXXXXXXX of the Draft Climate Regulations, prior to the expiry of the Application Period, the Fund may pay all or a portion of the CCP to any of the Second Tier Entities if the Fund receives written confirmation from an Emitter that the Emitter is not intending to apply for financial assistance.

58. Under subsection XXXXXXXXXX of the Draft Climate Regulations, the Fund will pay to the Second Tier Entities the amount of CCP that has not, at the expiry of the Application Period, been provided as financial assistance to an Emitter or been committed by the Fund as approved financial assistance to an Emitter.

The Research Corporation

59. The Research Corporation will establish by-laws that are consistent with the terms of the Climate Act and the Draft Climate Regulations, such that the Research Corporation will have the following general powers in order to meet its SR&ED objectives:

(a) to invest any of its money that it does not immediately require for its purposes in any securities that are authorized as investments for the GRF and dispose of those investments and reinvest the proceeds in similar investments;

(b) to provide financial assistance by way of a non-interest-bearing loan, grant, investment or any other similar means, respecting activities that relate to the purposes of the Research Corporation; and

(c) to do all those things that it considers necessary, incidental or conducive to the carrying out of its purposes.

60. In addition to monies that may be received from the Fund, the Research Corporation will accept funding from the Parliament of Canada, the Provincial Legislature, individual members of the Canadian public, Canadian corporations, non-profit organizations and universities and research institutes.

61. Where a Contributor carries on a business in Canada, an agreement will be entered into between the Research Corporation and that Contributor whereby that Contributor agrees to financially support specific SR&ED carried on in Canada that is related to the business of the Contributor and whereby it is agreed that the Contributor will be entitled to exploit the results of the particular research project being funded by that Contributor. The project will be monitored to ensure that the Contributor will be the party to the agreement entitled to exploit the results of the particular research project.

62. Alternatively, a Contributor that is a corporation may provide funds to the Research Corporation to be used to support basic research or applied research

(a) the primary purpose of such payment is the use of the results by that Contributor in conjunction with other SR&ED activities in the area of research into climate change, adaptation to climate change and reduction of GHG emissions undertaken or to be undertaken by or on behalf of that Contributor that relate to its business; and

(b) that has the technological potential for application to other businesses of a type unrelated to that carried on by that Contributor.

63. The Research Corporation may earn royalty income resulting from research undertaken or research funded by the Research Corporation (other than in situations as described in paragraph 64 below). Any such royalty income, if earned by the Research Corporation, should be insignificant in relation to its income from other sources and would be used to pay its general administrative expenses and more particularly expended on funding SR&ED. The Research Corporation does not anticipate regularly accumulating any income in excess of its expenditures and an accumulated excess, if any, will not be excessive.

64. The Research Corporation may undertake research projects directly or fund research projects by expending amounts in Canada each of which is an expenditure in respect of SR&ED directly undertaken by or on behalf of the Research Corporation. Recipients of funding will include research institutes, universities, and private and consulting corporations undertaking qualifying SR&ED on behalf of the Research Corporation.

65. The Research Corporation may make payments to institutions described in clause 149(1)(j)(ii)(B) of the Act to be used by such institutions for SR&ED that pertains to climate change, adaptation to climate change and reduction of GHG emissions.

66. Applicants seeking funding from the Research Corporation will be required to submit a research proposal to the Research Corporation for approval. Each application will be reviewed by the Research Corporation to ensure that it adheres to the objects and purposes of the Research Corporation. In determining whether to approve a particular project for funding, the Research Corporation may consider the following factors:

(a) the scientific merit of the project and whether the research will be considered SR&ED pursuant to the Act;

(b) the relevance of the given project to the Research Corporation;

(c) how the project fits with other research being funded by the Research Corporation;

(d) whether or not the Research Corporation will be able to solicit funding for the project; and

(e) whether or not the project respects the Research Corporation's objects, purposes, by-laws and regulations.

67. Research grants awarded by the Research Corporation will not be provided directly to any individual applicant, but will be given to and administered by the entity which employs the individual.

68. All funding approvals will require contractual agreements containing monitoring and reporting information that meet the conditions established in the Research Corporation's by-laws.

69. The board of directors of the Research Corporation will be the final executive authority of the Research Corporation and will have overall responsibility for the management and financial accountability of the Research Corporation. All SR&ED projects will be selected on the basis of board-approved request for proposal competitions measured and verified by approved non-interested, third parties against the SR&ED project selection criteria and approved by the board of directors of the Research Corporation. These projects will all meet the criteria for SR&ED as defined in the Act. These SR&ED criteria will be contained in the by-laws of the Research Corporation regarding project selection and approval.

70. The Research Corporation will expend its money in a manner consistent with the requirements of paragraph 149(1)(j) of the Act. The by-laws of the Research Corporation will preclude the Research Corporation from engaging in any activities that would not be in accordance with paragraph 149(1)(j) of the Act.

The Environment Corporation

71. The Environment Corporation will establish by-laws that are consistent with the terms of the Climate Act and the Draft Climate Regulations, such that the Environment Corporation will have the following general powers in order to meet its objectives:

(a) subject to the Climate Act, the Draft Climate Regulations and its by-laws, to provide financial assistance by way of a non-interest-bearing loan, grant, investment or any other means to an accepted applicant;

(b) to invest any of its money that it does not immediately require for its purposes in any securities that are authorized as investments for the GRF and dispose of those investments and reinvest the proceeds in similar investments;

(c) the by-laws will stipulate that the Environment Corporation will operate as a 149(1)(l) entity; and

(d) to do all those things that it considers necessary, incidental or conducive to the carrying out of its purposes.

72. The Environment Corporation may hold contributed money (generally money contributed by the Fund) until such time as it is paid out in pursuit of its objects. While the money is held in the Environment Corporation, it may generate some income or capital gains, depending on the type of security in which the Environment Corporation invests, as provided for in its by-laws. However, it is not intended that money will be held in the Environment Corporation in the absence of a specific project.

At no time will contributed money be accumulated for the purpose of generating investment income. In particular, the Environment Corporation will not rely on invested money in order to fund itself or its objectives. The accumulation of any money will not exceed what is necessary to fulfil the not-for-profit purposes of the Environment Corporation. Any income generated from the money will first be used to pay administrative expenses of the Environment Corporation and then be used in pursuit of the Environmental Corporation's purposes.

73. The Environment Corporation will be allocated money from the Fund as determined by the board of directors of the Fund. It is anticipated that the Research Corporation and Foundation will first be allocated available Fund money based on identified qualifying projects and activities and that the Environment Corporation will receive the remainder of available money from the Fund.

74. In addition to money that may be received from the Fund, the Environment Corporation may also receive money from the Parliament of Canada or the Provincial Legislature. It is anticipated that the initial start-up funding for the Environment Corporation will come from the XXXXXXXXXX.

75. The Environment Corporation will provide money to the Research Corporation and the Foundation, should its board of directors determine it is in alignment with the Environment Corporation's objects.

76. The Environment Corporation will have the ability to provide financial assistance, through a request for proposal process, to organizations. As part of the approval process, the agreements will describe whether the money provided will be used by the recipients toward capital acquisitions or non-capital acquisitions. Recipients will use the money as funding for

(a) approved GHG emissions reducing projects;

(b) the acquisition of depreciable capital property; or

(c) the acquisition of non-depreciable capital property.

77. The financial assistance that can be provided by the Environment Corporation may be in the following forms:

(a) Unconditional grants that an applicant will not be required to repay.

(b) Conditional grants that an applicant may not be required to repay if certain objectives were achieved.

(c) Forgivable loans, whereby a loan initially granted to an applicant is subsequently forgiven, in whole or in part, on the achievement of certain objectives by the applicant.

(d) Investments whereby the "investment" does not include investment in the equity or securities of applicants or others with a view to profit as either a main or secondary purpose.

Additional Information

78. An Emitter for the purpose of the Climate Act will include industrial facilities as follows:

(a) electricity generation;

(b) petroleum refining facilities;

(c) oil sands facilities;

(d) pulp and paper facilities

(e) steel production facilities;

(f) natural gas pipelines – facility based with a minimum of 50 kt CO2e per year;

(g) upstream oil and gas facilities – facility based with a minimum threshold of 50 kt CO2e per year;

(h) fertilizer plants – facility based with a minimum threshold of 50 kt CO2e per year;

(i) chemical plants - facility based with a minimum threshold of 50 kt CO2e per year;

(j) potash mines - facility based with a minimum threshold of 100 kt CO2e per year;

(k) coal carbonizing plants - facility based with a minimum threshold of 50 kt CO2e per year;

(l) Ethanol plants, biodiesel facilities or canola crushing plants.

Subject to consultations with the Emitters, the Draft Climate Regulations will establish the GHG reduction targets to be attained by the Emitters and the timelines for accomplishing those reductions.

PROPOSED TRANSACTIONS

79. The Ministry proposes to carry out the implementation of the climate change policy as described herein upon the enactment of the Climate Act and the Draft Climate Regulations.

80. Each of the Fund, Research Corporation, Environment Corporation and Foundation will be established and operated in accordance with the purposes, rules and procedures as contained in the Climate Act, the Draft Climate Regulations and their respective by-laws as described herein.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the proposed transactions is as follows:

81. The Ministry is interested in establishing a climate change policy that is designed to reduce GHG emissions in the Province. Under the provisions of the Climate Act and the Draft Climate Regulations, the Ministry is offering several measures, such as the issuance of OCs, PCs, PCIs, REAs and Os, that are available to the Emitters to enable them to satisfy their GHG emissions reduction obligations. In addition, the Emitters can make CCPs to the Fund in respect of any outstanding GHG obligation under the Climate Act. The goal of the Fund is to provide Emitters with financial assistance to design, develop and implement technological solutions that accelerate the reduction of GHG emissions.

82. The goal of the Second Tier Entities is to distribute and allocate funds into research and development, low carbon technologies and processes, adaptation and education and public awareness projects that will be a catalyst for the Province of XXXXXXXXXX to emerge as a leader in climate change management and technologies. The Second Tier Entities are anticipated to undertake a range of activities including participation in joint venture projects, advanced research and development, sustainable community projects and community education awareness initiatives.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. The Fund

The Fund will be considered to be an association organized exclusively for any other purpose except profit, with no part of its income payable to or otherwise available for the personal benefit of any member, so that in any year in which it in fact operates exclusively for any purpose except profit, it will qualify for that year as an organization described in paragraph 149(1)(l) of the Act and will be exempt from Part I tax on its taxable income.

B. The Research Corporation

a) Provided the Research Corporation is established as described in paragraph 19 above, the Research Corporation will be considered, at that time, to be a corporation that is constituted exclusively for the purpose of carrying on or promoting SR&ED for the purpose of paragraph 149(1)(j) of the Act.

b) Where a Contributor carries on a business in Canada in a taxation year and makes a payment to the Research Corporation described in paragraph 61 above such payment will qualify as a payment described in clause 37(1)(a)(ii)(C) of the Act provided that the Research Corporation is a corporation resident in Canada and exempt from tax under paragraph 149(1)(j) of the Act. Accordingly, provided that the Contributor files with its return of income for the year form T661 containing the required information, such payment may, subject to subsection 18(9) of the Act and to the extent that it exceeds the aggregate of the amounts described in subparagraphs 37(1)(d) to (h) of the Act, be deducted by the Contributor in computing the Contributor's income from that business for that year.

c) Provided that a payment made by a Contributor described in Ruling B(b) qualifies under subparagraph 37(1)(a)(ii) of the Act and is not an expenditure prescribed for purposes of the definition of "qualified expenditure" in subsection 127(9) of the Act, or an expenditure in respect of which a prescribed form containing prescribed information has not been filed, such a payment will, subject to subsection 127(11.1) of the Act, be a qualified expenditure within the meaning of subsection 127(9) the Act for purposes of calculating the Contributor's investment tax credit, as defined in subsections 127(9) and 127(10.1) of the Act provided the Contributor files with its income tax return for that year the required form (T2038 for individuals or T2SCH31 for corporations) containing the required information.

d) Where a Contributor makes a payment to the Research Corporation in a taxation year as described in paragraph 62 above, and the Contributor is a corporation that carries on a business in Canada in that taxation year, such payment will qualify as a payment described in subparagraph 37(1)(a)(iii) of the Act, provided that:

(i) the payment is made for "basic research" or "applied research" carried on in Canada, as those terms are respectively defined in paragraphs (a) and (b) of the definition of SR&ED in subsection 248(1) of the Act;

(ii) the primary purpose of the payment is for the Contributor to use the results from the basic research or applied research, as the case may be, in conjunction with other SR&ED activities directly undertaken by or on behalf of the Contributor that relate to the Contributor's business, and

(iii) the basic research or applied research, as the case may be, has technological potential for application in other types of businesses that are unrelated to the business carried on by the Contributor.
Accordingly, provided that the Contributor files with its return of income for the year form T661 containing the required information, such payment may, subject to subsection 18(9) of the Act and to the extent that they exceed the aggregate of the amounts described in subparagraphs 37(1)(d) to (h) of the Act, be deducted by the Contributor in computing its income from the business for the year.

e) Provided that a payment referred to in Ruling B(d) above qualifies under subparagraph 37(1)(a)(iii) of the Act and is not an expenditure prescribed for purposes of the definition of "qualified expenditure" in subsection 127(9) of the Act or an expenditure in respect of which a prescribed form containing prescribed information has not been filed, such a payment will, subject to subsection 127(11.1) of the Act, be a qualified expenditure within the meaning of subsection 127(9) of the Act for purposes of calculating the Contributor's investment tax credit, as defined in subsections 127(9) and 127(10.1) of the Act provided the Contributor files with its income tax return for that year a prescribed form (a T2038 for individuals or a T2SCH31 for corporations) containing prescribed information.

f) By virtue of subsection 227(14) of the Act, Parts IV, IV.1, VI and VI.1 of the Act will not apply to the Research Corporation for any period throughout which it is exempt from tax under Part I of the Act by virtue of paragraph 149(1)(j) of the Act.

C. The Environment Corporation

The Environment Corporation will be considered to be an association organized exclusively for any other purpose except profit, with no part of its income payable to or otherwise available for the personal benefit of any member, so that in any year in which it in fact operates exclusively for any purpose except profit, it will qualify for that year as an organization described in paragraph 149(1)(l) of the Act and will be exempt from Part I tax on its taxable income.

D. Payment of CCPs to the Fund by Emitters

a) The terms and conditions of the Fund as described herein, will not, in and of themselves, preclude the deductibility of CCPs made by the Emitters under section 9 of the Act. In particular, any such deduction will not be limited by the application of paragraphs 18(1)(a) and 18(1)(b) of the Act.

b) Section 67.6 of the Act will not apply to the CCPs made by the Emitters to the Fund.

E. Receipt of Amounts from the Fund and Environment Corporation

a) Any financial assistance received by the Emitters from the Fund will be subject to the provisions of paragraph 12(1)(x) of the Act unless the amounts have already been included in the income of the Emitters under section 9 of the Act. Where applicable, the Emitters may file elections under subsection 13(7.4) and subsection 53(2.1) of the Act.

b) Where an Emitter has included in income, under paragraph 12(1)(x) of the Act, an amount in respect of the financial assistance referred to in Ruling E(a), the Emitter will be entitled to deduct a repayment of the amount in respect of the financial assistance referred to in Ruling E(a), pursuant to paragraph 20(1)(hh) of the Act, in computing the Emitter's income for the taxation year in which such repayment is made.

c) Any financial assistance received by the Emitters from the Environment Corporation will be subject to the provisions of paragraph 12(1)(x) of the Act unless the amounts have already been included in the income of the Emitters under section 9 of the Act. Where applicable, the Emitters may file elections under subsection 13(7.4) and subsection 53(2.1) of the Act.

d) Where an Emitter has included in income, under paragraph 12(1)(x) of the Act, an amount in respect of the financial assistance referred to in Ruling E(c), the Emitter will be entitled to deduct a repayment of the amount in respect of the financial assistance referred to in Ruling E(c), pursuant to paragraph 20(1)(hh) of the Act, in computing the Emitter's income for the taxation year in which such repayment is made.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency on May 17, 2002, and are binding on the Canada Revenue Agency provided that the Climate Act and Regulations are enacted before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein. In particular, our rulings do not take into account the amendments that were announced in the Federal Budget Supplementary Information dated March 29, 2012.

COMMENTS

Although we have received, for review, various documents relating to the proposed transactions, our rulings are based solely on the representations described herein.

Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications relating to the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

(a) that the Fund or Environment Corporation will be exempt from tax under Part I of the Act pursuant to paragraph 149(1)(l) at any particular time. In this regard, we note that the question of whether the Fund or Environment Corporation, as the case may be, does, in fact, operate exclusively for any purpose other than profit with no part of its income payable to or otherwise available for the personal benefit of any member is a question of fact the determination of which can only be made retrospectively for each taxation year. Such determinations fall within the responsibility of the Canada Revenue Agency's Compliance Programs Branch. However, based on the facts set out above, it is our view that the investment activities of the Fund with respect to accumulated CCPs, and the investment activities of the Environment Corporation, will not, in and of themselves, result in the organization failing to qualify as a 149(1)(l) entity. This opinion is not binding on the Canada Revenue Agency and relies in particular on the facts set out in paragraphs 9 and 72;

(b) the determination of whether the Research Corporation continues to qualify as a corporation that is constituted exclusively for the purpose of carrying on or promoting SR&ED for the purpose of paragraph 149(1)(j) of the Act is a question of fact which can only be made following a review of the Research Corporation's activities for the particular taxation year in respect of which it is seeking such exemption. Such a determination is a matter for which the Canada Revenue Agency's Compliance Programs Branch is responsible. It is nevertheless our opinion that a corporation operating in the manner described in Paragraphs 18 to 31 above would generally be exempt from tax under Part I of the Act by virtue of paragraph 149(1)(j) of the Act. However, while the receipt of investment income described in Paragraph 59 or royalty income described in paragraph 63, would not, in and by itself, cause the Research Corporation to cease to be a corporation described in paragraph 149(1)(j) of the Act the Research Corporation must, inter alia, expend not less than 90% of its annual income for each taxation year on SR&ED in order for it to maintain its tax exempt status;

(c) that the Canada Revenue Agency has agreed to or reviewed any income tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above. In particular the Canada Revenue Agency has not reviewed the income tax consequences associated with any transactions related to the acquisition, disposition, receipt or utilization of the Credits described in paragraph 3 above; and

(d) the reasonableness of any particular amount.

Yours truly,

XXXXXXXXXX
Manager
Resources Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

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