9 June 1992 External T.I. 921273A F - Purchasers Of Heat

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.

Class 34 Secretariat,Energy, Mines & Resources Canada,580 Booth St., 7th Floor, OttawaK1A 0E4

Attention:  D. Skinner

June 9, 1992

Dear Sirs:

Re:  Class 34 & Purchasers of Heat

This is further to our meeting of May 27, 1992 (Skinner, Titcomb, Guglich, Wheeler).  At that meeting, we had discussed the eligibility for Class 34 of the various segments of a proposed district heating system, under various possible ownership structures. 

The proposed district heating system will use waste heat generated by a natural gas fired electric power generation facility to heat a number of buildings in the vicinity of the facility.  The waste heat is presently discharged into a river in the form of warm water.  It was our common understanding that a district heating system such as that proposed, at least when considered as a whole, fits the spirit of Class 34 in the sense that it is the kind of project Class 34 was intended to encourage.

As we understand it, the district heating system can be visualized as consisting of three segments:

1.       heat exchangers and related pipes and valves in the power generation facility itself;

2.       pipes and related valves used to distribute warm water from the power generation facility to consumers of heat; and

3.       heat exchangers and related pipes and valves of each consumer of heat (there could be two hundred buildings in the system, each of which could have separate ownership), not including the component parts of any building.

You are of the view, and we agree, that there is little doubt the majority of the equipment in the first segment will qualify for Class 34, based on either subparagraph (e)(iii) or clause (d)(ii)(A) and subparagraph (a)(ii) of the Class.  Similarly, there is little doubt the majority of the equipment in the second segment will qualify for Class 34, based on clause (d)(ii)(A) and subparagraph (a)(ii) of the Class.  Further, in our view, the second segment should qualify whether it is owned by the owner of the power generation facility or by a separate entity carrying on a heat distribution business (i.e. purchasing heat from the power generation facility, distributing the heat to consumers and selling the heat to the consumers).

The third segment of the system presents a more difficult problem, in that eligibility for Class 34 appears to depend, in part, on ownership.  The property in the third segment would qualify if it was owned by the same entity that owned the second segment (whether that is the power generation facility or a separate entity), based on clause (d)(ii)(A) and subparagraph (a)(ii) of the Class, and this result would follow even in a case where that entity leased the third segment to the various owners of the buildings on the system.  This rationale cannot apply, however, where the third segment is owned by the various building owners, as they could not, in our view, be described as "distributors of heat" in order to fall within subparagraph (a)(ii) of the Class.  Rather, they are consumers of heat.

We understand that you have expressed the view that, in a case where the second segment is owned by the power generation facility, the third segment could qualify for Class 34 when owned by the owners of the buildings on the basis of subparagraph (e)(iii): the thermal waste of the power generation facility would retain its character as thermal waste up to the point where it left the pipes belonging to the power generation facility, so that the equipment in the third segment could be viewed as "heat recovery equipment" under subparagraph (e)(iii).  We have some difficulty with this view, as we would have thought that thermal waste ceases to be "waste" and becomes a commodity (heat) once it has been processed through heat exchangers and sent on its way through a distribution system; in which case, the owner of the equipment in the third segment would have equipment which was not being used to recover thermal waste, and so would not qualify for class 34.

You have asked us to express a view on whether the third segment would qualify for Class 34 when owned by the owners of the buildings in a case where the second segment was owned by a separate entity carrying on the business of a distributor of heat.  In such a case, we would view the power generation facility, or possibly the distributor of heat (depending on ownership of the heat exchangers which recover the thermal waste prior to its discharge into the river), as qualifying some or all of their equipment under subparagraph (e)(iii) of the Class; however, the owner of the third segment appears to be simply a consumer of heat which has been recovered from thermal waste by someone else and delivered to his door as a commodity.  The heat at that point does not, to us, appear to be waste.  Consequently, the owner of the third segment could not qualify the equipment under subparagraph (e)(iii) and, not being a distributor of heat, could not qualify it under subparagraph (a)(ii) either.

We trust these comments are of assistance to you.

Yours truly,

E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch