6 October 1997 External T.I. 9704165 - LEGALLY BINDING OBLIGATION IN WRITING.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether in specific fact situation cogen property qualifies for Class 34.

Position:

No.

Reasons:

Taxpayer does not have a legally binding obligation entered into in writing before February 22, 1994 to sell electricity as required by clause (j)(i)(B).

970416

XXXXXXXXXX Wm. P. Guglich

Attention: XXXXXXXXXX

October 6, 1997

Dear Sirs:

Re: XXXXXXXXXX - Cogeneration Project

This is in reply to your letter of January 31, 1997, wherein you requested our views concerning the eligibility of cogeneration property for inclusion in Class 34 under clause (j)(i)(B).

We previously wrote to you on this matter on December 6, 1996 and February 3, 1997. You have now forwarded to us additional documentation.

To qualify for inclusion in Class 34 under clause (j)(i)(B), the property must be acquired by the taxpayer in order to satisfy a legally binding obligation entered into by the taxpayer in writing before February 22, 1994, to sell electricity to a public power utility in Canada. It is your view that the Rate Offer Agreement is a "legally binding obligation entered into by the taxpayer in writing before February 22, 1994".

OUR COMMENTS

In addition to a legally binding obligation entered into by the taxpayer in writing before February 22, 1994, clause (j)(i)(B) of Class 34 requires that the property be acquired to satisfy a legally binding obligation to sell power to a public utility in Canada.

In our view, the Rate Offer Agreement does not constitute a legally binding obligation to sell power, as it only sets out the rates applicable to electrical power.

As regards the Power Purchase Agreement, it is dated XXXXXXXXXX, which is also the effective date. Therefore, there does not appear to be a legally binding obligation entered into, in writing, before February 22, 1994, to sell electricity. In addition we note that section XXXXXXXXXX of the Power Purchase Agreement, states that the agreement provides XXXXXXXXXX with an opportunity, but not an obligation, to deliver electricity to XXXXXXXXXX.

In our view, as the requirements of clause (j)(i)(B) of Class 34 are not met, the cogeneration property would not qualify for inclusion in Class 34.

We trust our comments will be of assistance to you.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c.Class 34/43.1 Secretariat

Natural Resources Canada
Building 3, Room 213
1 Haanel Drive
Nepean, Ontario
K1A 1M1