24 May 2012 External T.I. 2011-0423451E5 - 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: Various questions regarding test wind turbines.

Position: See response

Reasons: Prior positions and wording of the Regulations

XXXXXXXXXX
2011-042345
L. Zannese
(613) 957-2747
May 24, 2012

Dear Mr. XXXXXXXXXX:

Re: Test Wind Turbines

This is in response to your email dated November 10, 2011, in which you asked several questions regarding the conditions that must be met in order for a wind turbine to qualify as a test wind turbine pursuant to subsection 1219(3) of the Income Tax Regulations (the “Regulations”).

OUR COMMENTS

Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request, as described in Information Circular 70-6R5, dated May 17, 2002. The review of fact situations involving specific taxpayers and transactions or events that have already taken place is the responsibility of the local tax services office where the taxpayer resides and it is not the practice of the Canada Revenue Agency (“CRA”) to comment on such situations when the identity of the taxpayers is not known. However, we can provide you with the following general comments.

Taxpayers carrying out renewable energy and energy conservation projects may be able to deduct certain expenses incurred in the pre-production development phase of such projects.

In this regard, an expense incurred by a taxpayer in respect of the development of a project (e.g. a wind farm project) for which it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the project would qualify for inclusion in Class 43.2 of Schedule II may qualify as “Canadian renewable and conservation expense” (“CRCE”) as defined in subsection 1219(1) of the Regulations if, among other things, the expense is not

(a) payable to a person or partnership with whom the taxpayer is not dealing at arm’s length, or
(b) specifically excluded from CRCE under subsection 1219(2) of the Regulations .

Under paragraph 1219(1)(g) of the Regulations, CRCE includes an expense incurred for a “test wind turbine”.

Subsection 1219(3) of the Regulations defines a ”test wind turbine” as a device that is a wind energy conversion system that would otherwise be included in Class 43.2 and meets the other conditions contained in this subsection. To qualify as a test wind turbine, the CRA, in consultation with Natural Resources Canada, must make a determination that the proposed wind turbine system meets the capacity restrictions, spacing requirements and testing protocols outlined in paragraphs 1219(3)(a) to (f) of the Regulations. Taxpayers who wish to obtain a written opinion from the CRA as to whether a planned wind turbine system will qualify as a test wind turbine and whether the cost of the planned wind turbine system will qualify as CRCE should complete and submit the relevant documents to the CRA and Natural Resources Canada.

Whether any particular expense incurred by a taxpayer qualifies as CRCE can only be made upon a review of all of the facts relevant to the particular situation. However, we note that, pursuant to paragraph 1219(3)(d) of the Regulations, in order for a wind turbine to qualify as a test wind turbine, the “primary purpose” for installing the wind turbine must be “to test the level of electrical energy produced by the device from wind at the place of installation”. Further, under paragraph 1219(3)(f) of the Regulations, no other wind turbine can be installed within 1500 metres of the particular wind turbine until the level of electrical energy produced from that wind turbine has been tested for at least 120 calendar days.

You asked whether a taxpayer that undertakes certain preparatory activities relating to the installation of additional wind turbines would fail to satisfy the primary purpose test under paragraph 1219(3)(d) of the Regulations. Whether the “primary purpose” test is satisfied in respect of a particular wind farm project would have to be determined from the facts and circumstances relevant to that project.

In our view, preparatory work such as construction of footings or placing conditional orders for additional wind turbines that may ultimately form part of a particular wind farm project would generally not, in and by themselves, raise questions about the primary purpose test. However, the acquisition or taking delivery of such wind turbines prior to the end of the 120 calendar day testing period and before the results of such testing are available would generally be indicative that the primary purpose for installing the wind turbines was not “to test the level of electrical energy produced by the device from wind at the place of installation”. In addition, you inquired as to whether entering into a power purchase agreement would prevent a taxpayer from meeting the “primary purpose” test. The existence of such an agreement would generally not, in and of itself cause a taxpayer not to satisfy the “primary purpose test”. However, this can only be determined from the facts and circumstances relevant to that project and the agreement.

You noted that, during the testing period, some wind turbines will earn income as the electricity generated by the turbines is sold to the provincial power grid. We note that paragraph 1219(2)(ix) of the Regulations excludes from CRCE an expense incurred at any time after Class 43.2 equipment is used for the purpose of earning income from a project. Generally, earning a small amount of income during the testing period of a wind turbine would not, in and of itself, prevent a taxpayer from incurring CRCE. However, this can only be determined once all the facts are reviewed.

You also asked whether a taxpayer could claim the cost of a wind turbine as CRCE prior to the completion of the 120-day testing period. We note that, until such time as the CRA in consultation with Natural Resources Canada has determined that a proposed wind turbine system meets the requirements of a test wind turbine, the wind turbine system will not be eligible as a test wind turbine for purposes of subsection 1219(3) of the Regulations. Further, the cost of each test wind turbine will not qualify as CRCE until such time as it is commissioned and enters into service

Finally, you asked about the method used to determine the requirement in subparagraph 1219(3)(a)(ii) of the Regulations. This subparagraph provides that a device may be installed as part of a wind farm project if the electrical energy provided from the device and all other turbines does not exceed 20% of the project’s planned nameplate capacity. It is our understanding that Natural Resources Canada will determine whether this requirement is met based on the specifications of the equipment as provided by its manufacturer.

We trust that our comments will be of assistance.

Yours truly,

Fiona Harrison
Manager
Resources Industries Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch