17 May 1990 Ruling 59241 F - CCA Class 34 in Relation to Cogeneration Stations

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.

Mr. Don J. Skinner
Chief
Energy Efficiency Division
Technology Branch	File No. 5-9241
Energy, Mines and Resources Canada	Bill Guglich
580 Booth Street	(613) 957-2102
Ottawa, Ontario
K1A 0E4

May 17, 1990

Dear Sirs:

Re:  Class 34

In response to your letter of December 12, 1989 and our meetings (Skinner/Burke/Wheeler/Guglich) of December 20, 1989 and January 3, 1990 we are providing the following comments concerning Class 34 of the Income Tax Regulations (the Regulations) in relation to cogeneration stations.

General Overview

The term electrical generating equipment and steam generating equipment are not defined in the Income Tax Act, therefore we must employ the ordinary meaning as found in a dictionary.  The courts have held that where the common ordinary meaning is inconclusive one can as an aid consider the generally accepted commercial view of the term.  In this regard please refer to the case of Nova, an Alberta Corporation v. The Queen 88 DTC 6386 (a copy of which is attached).  However the courts have not been entirely consistent in this regard.  In the case of Northern and Central Gas Corporation Ltd. v. The Queen 87 DTC 5439 (copy attached), on a somewhat different factual situation it was held that the broad and general (common, ordinary) meaning was to be used rather than the more restrictive industry meaning.

Subparagraphs (a)(i) to (iv) of Class 34 of the Regulations describe specific types of equipment eligible for inclusion in the class.  Subparagraphs (b), (c) and (e) state additional conditions that must be met to qualify for inclusion in Class 34.  Clause (e)(ii)(B) requires that the equipment described in subparagraphs (a)(i) to (iv) must be part of a plan designed to produce electrical energy by utilizing certain fuel in an energy efficient manner.  Therefore, Class 34 contemplates that in the plan to produce electrical energy there could be employed many types of equipment (i.e. storage, distribution, transmission, electrical generating, steam generating, etc.).  However only the equipment described in subparagraphs (a)(i) to (iv) would qualify for inclusion in Class 34 - all other property (e.g. storage, transmission and distribution equipment) would be included in other classes.

We can distinguish the scope of paragraph (c) of Class 2 which refers to generating equipment and plant from the scope of subparagraphs (a)(i) to (iv) of Class 34 which only refer to steam generating and electrical generating equipment (and not to plant).

It is therefor our view that the terms in subparagraphs (a)(i) to (iv) of Class 34 can not be interpreted in a broad and general sense.  Where a broad and general interpretation is intended the legislators have used in Class 34 such terms as "other equipment ancillary thereto" in subparagraph (e)(ii) "ancillary equipment such as" in subparagraph (e)(iii) and "related equipment" and "complete with equipment ancillary thereto" in subparagraph (e)(iv).

Consequently it is our view that the terms in subparagraphs (a)(i) to (iv) of Class 34 should be defined in a restricted manner taking into account both the dictionary meaning and the commercial or industry view.  Your Department will be in a better position to determine the commercial or industrial view of those terms.

We note that the proper classification of any property is a question of mixed fact and law.  The question of fact will depend to a greater or lesser extent on the technical expertise brought to bear, which we assume to be the reason for the certification procedure in Class 34.  Our comments are based on our understanding of your technical comments coupled with our understanding of the law as enacted in Class 34, and is not to be taken as attempting to substitute our views for your technical expertise.

Building and other Structures

We agree that buildings and other structures would not be eligible for inclusion in Class 34.

Spare Parts

We agree that spare parts would not be eligible for inclusion in Class 34.

Gas Supply Line

We agree that the shut-off valve that isolates the supply of gas to the cogeneration unit could be the appropriate place to divide Class 34 assets from assets of other classes if the supply line can be considered a component part of the electrical or steam generating equipment.  If on the other hand it is not a component part then the appropriate place to divide Class 34 assets from other assets could be where the gas enters the cogeneration unit.

Hopper and Conveyor Belt (Municipal Wastes)

You described two types of situations:  one where there is pre-processing of the wastes and the other where there is no pre-processing.  It is our view that where there is pre-processing those assets which are considered component parts of the electrical or steam generating equipment would qualify for inclusion in Class 34.  Where there is no pre-processing of the wastes, the hopper and conveyor belt would not qualify for inclusion in Class 34.

Oil Storage Tanks

It is our view that oil storage tanks would not qualify for inclusion in Class 34 as they are storage equipment and not electrical or steam generating equipment.

Auxiliary Boiler

An oil fired auxiliary boiler which is used when natural gas supply fails or to "peak shave" would in our view qualify for inclusion in Class 34.

Boiler Feed Water Treatment System

The feedwater treatment system is necessary to meet the high steam purity required by the steam turbine.  Consequently the feedwater treatment system could qualify for inclusion in Class 34 provided it is a component part of the electrical or steam generating equipment.

Condensate Pumps/Demineralized Water Tank

We understand that the condensate pumps and the demineralized water tank are a part of the Boiler Feed Water System.  Therefore for the reasons stated above the condensate pumps and demineralized water tank may be eligible for inclusion in Class 34.

Turbine Condenser

You indicate that a turbine condenser serves as a means of rejection rather than recovery and distribution of the latent heat of the steam.  We agree that the condenser would not be eligible for inclusion in Class 34.  This condenser is not "production equipment and pipelines of a distributor of heat" as contemplated in subparagraph (a)(ii) of Class 34 and neither is it electrical or steam generating equipment.

Cooling Water System

You stated that the primary or principal use of the cooling water system is to dispose of the latent heat from the turbine condenser.  We agree that the entire water cooling system (including the component parts such as the cooling water pumps, pump screens, cooling water wetwell and distribution pipes) would not be eligible for inclusion in Class 34.

Generating vs. Transmission Equipment

It is our view that transmission equipment would not qualify for inclusion in Class 34.  As for the dividing line between "generating and transmission" we agree that it could be the point where the electricity is ready to be put on transmission lines.

Free Waste Heat - Clause (d)(ii) B of Class 34

In interpreting statutes of law, all words and terms must be taken into consideration.  In clause (d)(ii)(B) the words "if any" appear between the terms "consumption of fossil fuel" and "chargeable electrical energy".  It is therefore our view that clause (d)(ii)(B) contemplates situations where all or a portion or none of the consumption of fossil fuel is chargeable to electrical energy.  Therefore there could be situations where some portion or all of the consumption of fossil fuel may be chargeable to other activities such as manufacturing or processing, etc.

Clauses (d)(ii)(C) vs. subparagraph (e)(iii)

You indicated that as compared to subparagraph (e)(iii), clause (d)(ii)(C) is too broad and should be narrowed.

In our view there is a difference in the scope of subparagraph (e)(iii) and clause (d)(ii)(C).  Subparagraph (e)(iii) describes property that is eligible for inclusion in Class 34 while clause (d)(ii)(C) describes a condition that must be met in order that property described in paragraph (a) may be eligible for inclusion in Class 34.  The interaction of subparagraph (a)(ii) and clause (d)(ii)(C) enables a distributor of heat to include in Class 34 pipelines and production equipment that is part of a plan to recover heat that is a by-product of an industrial process.

We understand that your concerns in this area are related to the broad meaning of the term "distributor of heat" which has been adopted for purposes of Class 34.  As for the meaning of the word "distributor" we have to refer to Class 2 where that word is used in paragraphs (c), (e) and (f).  In particular we must make a distinction between paragraphs (a) and (c) of class 2.  In our view paragraph (a) allows all taxpayers including those distributing for their own consumption to include their electrical generating equipment in class 2, whereas paragraph (c) allows a distributor of electrical energy (a taxpayer who carries on a business of distributing electricity) to include his generating and production equipment and plant in Class 2.  This restricted interpretation of distributor has been followed in a number of responses to taxpayer inquiries respecting Class 2.  In Class 34 the word distributor must be given the same restricted meaning in that it is only property that would otherwise be included in Class 1, 2 or 8 that can be included in Class 34.

Our files indicate that in the past we have accepted the broad interpretation of the term "distributor of heat" in subparagraph (a)(ii) of Class 34 to include taxpayers who distribute heat for their own consumption, on the basis that the objective of Class 34 was achieved.  However in view of our position in respect of Class 2 we will no longer be in a position to support that broad interpretation.

Active Solar Heating Equipment

It is our view that the context of subparagraph (e)(i) of Class 34 indicates that the term "active solar heating equipment" should be interpreted in a broad sense.  Unfortunately we are not in a position to provide any further comments as we have not had any inquiries or referrals regarding active solar heating equipment and have not dealt with this issue previously.

Communication of Information

It is our view that subsection 241(1) of the Income Tax Act prohibits the communication of any information concerning a taxpayers affairs to any of your staff not engaged in the Class 34 certification.  Should you have any doubts as to whether any specific staff member is entitled to the information we suggest you consult with your legal advisors.

Certificates

Please forward a copy of each certificate issued under Class 34 to:

     Claudia BarbourChiefTaxroll SectionWinnipeg Taxation CenterRevenue Canada, TaxationWinnipeg, ManitobaR3C 3N2

Revocations

Subsection 1104(11) provides for a revocation under certain conditions of Class 34 certificates.  Please forward a copy of each revocation notice issued by your Department together with a covering letter setting out any relevant particulars such as, name of the engineer who made the inspection, date of inspection, etc. to:

     DirectorAudit Applications DivisionAudit Programs DirectorateTaxation Programs BranchRevenue Canada Taxation875 Heron RoadOttawa, OntarioK1A 0L8

In addition we would suggest that in respect of each revocation, you retain indefinitely for your records copies of all relevant documentation such as engineers notes, taxpayers representations, etc.

Available for Use Rule

The proposed available for use rules would not have any implications respecting the issuance of interim Class 34 certificates.  The proposed available for use rules will effect the taxation year(s) that capital cost allowance may be claimed but will have no effect upon the classification of assets into the appropriate classes.

Change in Use

You inquired about the implications where after a few years of operation a cogeneration station is no longer producing steam for sale and therefore does not meet the Class 34 criteria.

Subsection 1104(11) of the Regulations provides that a certificate issued under subparagraph (d)(i) or (d)(ii) of Class 34 may be revoked where an incorrect statement was made in the furnishing of information for the purpose of obtaining the certificate or, the taxpayer does not conform to the plan described in subparagraph (d)(i) or (d)(ii) of Class 34.  A certificate that is revoked is void from the time of issue.

Revenue Canada Contact

When taxpayers request the name of a contact at Revenue Canada you may inform them that:

-      Written inquiries should be forwarded to the

     Director-GeneralSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs BranchRevenue Canada Taxation875 Heron RoadOttawa, OntarioK1A 0L8

-      For telephone inquiries they may call the Group #23 telephone person (613) 957-2088.

Enclosure

As requested we are enclosing photocopies of subsection 1104(11) of the Regulations, Class 1, 2, 8 and 34 of Schedule 11 of the Regulations and the two court cases referred to previously.

We trust this will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch