30 April 2013 External T.I. 2013-0475931E5 - Application of Farm-Out Position

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 the CRA's farm-out position described in IT-125R4 will apply to an investment in a solar project

Position: No

Reasons: This administrative position is limited to the situations described in the bulletin.

XXXXXXXXXX
2013-047593
L. Zannese
(613) 941-0782
April 30, 2013

Dear XXXXXXXXXX:

Re: Investment in a Solar Farm

We are writing in response to your request dated January 23, 2013 for our views on several questions regarding your client's proposed investment in a solar farm project located in Ontario. Specifically, you provided us with the following facts:

Your client proposes to enter into development agreements with one or more solar developers that have filed applications to participate in Ontario's FIT program. Pursuant to these agreements, you advise that your client will incur expenses that you believe would qualify as Canadian renewable and conservation expense ("CRCE") as that term is defined in subsection 66.1(6) of the Income Tax Act and section 1219 of the Income Tax Regulations (the "Regulations"). As consideration for incurring these expenses, your client will earn an interest of up to 20% in the solar projects.

You believe that the transactions described above are similar to farm-out transactions carried out in the resource sector and request whether the Canada Revenue Agency ("CRA") would apply the administrative position contained in paragraph 14 of Interpretation Bulletin IT-125R4 "Dispositions of Resource Properties" ("IT-125R4") to your client's situation. If the administrative position contained in IT-125R4 for farm-out transactions does not apply you ask for our comments on the tax consequences of this transaction.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed, and are the subject matter of an advance income tax ruling, submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments.

The CRA's administrative position on farm-out transactions contained in paragraph 14 of IT-125R4 is limited to certain situations involving Canadian resource property and will not apply to your situation. The determination of tax consequences relating to your particular situation can only be made after an examination of the relevant legal agreements and other documents.

We note that an expense incurred by a taxpayer in respect of the development of a 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 either Class 43.1 or 43.2 of Schedule II to the Regulations may qualify as CRCE provided that it meets the requirements of section 1219 of the Regulations. However, it is our position that the taxpayer must own or have the intention of owning the depreciable property described in Class 43.1 or 43.2 in order for the expenses to qualify as CRCE. Accordingly, the expenses incurred by your client will not be eligible as CRCE.

Yours truly,

Fiona Harrison, CA
Manager, Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch