18 January 2011 Internal T.I. 2010-0390971I7 - Wind Turbines and ITCs

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: Would a wind-turbine acquired under PEI's On-Farm Renewable Energy Program qualify for an investment tax credit?

Position: No.

Reasons: The law. Such property will not be prescribed machinery and equipment for the purposes of claiming an ITC.

									January 18, 2011

	London Tax Services Office				HEADQUARTERS
	Audit Professional Services Directorate		Income Tax Rulings
	Technical Applications and Valuations Division	  Directorate
	Attention:  Mr. William MacGregor			Michael Cooke

									2010-039097

Wind Turbines and ITCs

This is in response to your email of December 10, 2010, wherein you asked whether wind-turbines acquired under the "On-Farm Renewable Energy Program" (the "Program") described below would qualify for an investment tax credit ("ITC") under subsection 127(5) of the Income Tax Act (the "Act").

We understand that the Program is jointly funded (60/40) by the federal government and the provincial government of Prince Edward Island ("PEI") through the Agricultural Flexibility Fund as part of Canada's Economic Action Plan. The Program was announced on March 29, 2010. Under the Program funding will be provided for energy audits and the installation of agricultural-based renewable energy sources and equipment. The purpose of the Program is to reduce the environmental impact of some farming activities by reducing the dollars spent on fossil fuels and improve the profitability of farmers by introducing agricultural-based renewable energy. (footnote 1)

The Program appears to entail a three-step process. The first step involves the completion of an "on-farm energy audit", which will determine where energy costs are incurred in the particular operation and identify possible efficiencies as well as opportunities for alternative systems, whether solar, biogas, wind or biomass. Program funding of up to $1,500 per on-farm energy audit is available. Under the second step, applicants are eligible to receive up to $50,000 under the Program for the purchase and installation of certain renewable green energy systems, such as wind turbines. The third step involves a post-installation energy audit, also funded under the Program, which is intended to measure the impact on energy consumption and the environment.

Under the Program participants appear to be able to receive a credit for any excess green electricity produced and fed into the grid of XXXXXXXXXX using the existing "net metering system". Generally speaking, it is our understanding that under the net metering system, rather than receiving cash, it appears that a participant will receive a credit on their hydro bill where the amount of energy produced exceeds the amount of energy consumed by the participant.

The main question is whether the cost of a wind turbine acquired under the Program would be eligible for ITC on the basis that a wind turbine is "qualified property" as that term is defined in subsection 127(9) of the Act.

Our Comments

A wind turbine (i.e., essentially a fixed location device that is a wind energy conversion system that is used primarily for the purpose of generating electrical energy) will only be a qualified property where each of the following conditions are met: 1) such property is "prescribed machinery and equipment" pursuant to subsection 4600(2) of the Income Tax Regulations (the "Regulations"); 2) such property has not been used for any other purpose before it was acquired by the taxpayer; and 3) such property is used in Canada primarily for an accepted purpose described in either paragraph 127(9)(c) or (c.1) of the definition of qualified property.

It will be assumed that any wind turbine acquired by a taxpayer under the Program will meet the condition described in 2 above of being unused.

A particular property's accepted purposes referred to in condition 3 above include, in paragraph 127(9)(c), farming or fishing, and, in paragraph 127(9)(c.1), producing or processing electrical energy in a prescribed area, where all or substantially all of the energy is, generally speaking, used by the taxpayer for the purpose of earning income from a business (other than the business of selling the product of the particular property) or to be sold directly (or indirectly through a provincially regulated power utility in the prescribed area) to a related person and the energy is used by the taxpayer or the related person primarily for the purposes of manufacturing or processing goods in a prescribed area for sale or lease. Pursuant to section 4610 of the Regulations, the prescribed area is comprised of the Provinces of Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and the Gaspé Peninsula.

While a question of fact, given the general parameters of the Program described above, it appears that a wind turbine would be acquired by a taxpayer primarily for the purpose of earning income from a farming business (presumably by reducing electricity costs associated with the taxpayer's farming business). Thus a wind turbine acquired under the Program would appear to meet one of the accepted purposes of condition 3 above.

However, in order to meet the definition of qualified property in subsection 127(9), it is not sufficient for a property to simply meet conditions 2 and 3 above; it must also meet condition 1. That is, in order for a wind turbine acquired under the Program to be qualified property for ITC purposes, such property would have to be "prescribed machinery and equipment" as noted under condition 1 above.

Assuming a wind turbine is acquired for an income earning purpose such property would appear to be depreciable property described in paragraph (b) of Class 43.2 of Schedule II of the Regulations at the time of its acquisition. Under subsection 4600(2) of the Regulations, property is "prescribed machinery and equipment" if, inter alia, it is depreciable property of the taxpayer that is

"...

(k) a property included in class 21, 24, 27, 29, 34, 39, 40, 43, 45, 46, 50 or 52;

...

(m) a property included in Class 43.1 because of paragraph (c) of that Class; or

...

(n) a property included in Class 43.2 because of paragraph (a) of that Class."

In the present circumstances, paragraph 4600(2)(m) of the Regulations would not appear to apply to a wind turbine because such property would only be included in Class 43.1 because of subparagraph (d)(v) of that Class and not paragraph (c). Similarly, paragraph 4600(2)(n) of the Regulations would not apply to a wind turbine acquired under the Program because such property would be included in Class 43.2 by reason of paragraph (b) of that Class and not paragraph (a). (footnote 2) As such, it appears that a wind turbine acquired by a taxpayer under the Program would not be "prescribed machinery and equipment" as such property would normally be property included in Class 43.2 because of paragraph (b) of the Class.

However, the next question is whether a taxpayer is able to use the election in subsection 1102(16.1) of the Regulations to treat a wind turbine acquired under the Program as property described in Class 29. If such an election is possible then the wind turbine would be "prescribed machinery and equipment" because of paragraph 4600(2)(k) of the Regulations.

Subsection 1102(16.1) of the Regulations provides that where a taxpayer acquires a property after March 18, 2007 and before 2012 that is manufacturing or processing machinery or equipment the taxpayer may (by letter attached to the return of income of the taxpayer filed with the Minister in accordance with section 150 of the Act for the taxation year in which the property is acquired) elect to include the property in Class 29 in Schedule II if:

1. Class 43.1 or 43.2 would otherwise apply to the property; and

2. Class 29 would apply to the property if that schedule were read without reference to Classes 43.1 and 43.2.

In the present circumstances, and assuming a wind turbine under the Program is acquired before 2012, the first condition of the election would appear to be met (i.e., a wind turbine would otherwise appear to be property described in Class 43.2). However, the second condition of the election requires that Class 29 would apply to the wind turbine if Classes 43.1 and 43.2 were not otherwise applicable.

Class 29 includes, inter alia, property (other than property included in Class 41 solely because of paragraph (c) or (d) of that Class or property included in Class 47 because of paragraph (b) of that Class) that would otherwise be included in another class in Schedule II of the Regulations

"(a) that is property manufactured by the taxpayer, the manufacture of which was completed by him after May 8, 1972, or other property acquired by the taxpayer after May 8, 1972,

(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease, or

...

or

(b) that is

...

(iv) electrical generating equipment described in Class 9, (footnote 3)

...."

The terms "manufacturing" and "processing" ("M&P") are not defined in the Act. However, each of section 125.1, paragraph 127(11)(a) of the Act and subsection 1104(9) of the Regulations lists certain activities that do not qualify as M&P activities for certain purposes. For instance, pursuant to subsection 1104(9) of the Regulations, for the purposes of paragraph 1100(1)(a.1), subsection 1100(26) and Class 29 in Schedule II (and thus effectively for Class 43 purposes) of the Regulations, M&P does not include amongst other things, (a) farming and fishing; or (h) producing or processing electrical energy or steam, for sale.

While a question of fact, given the objectives of the Program, it appears that the primary purpose for a taxpayer acquiring a wind turbine under the Program would be to produce electricity for use in the taxpayer's farming business and not for the production and sale of such electricity to XXXXXXXXXX . However, given that subsection 1104(9) of the Regulations specifically excludes farming and the producing or processing of electrical energy for sale from the meaning of manufacturing or processing for purposes of Class 29, it does not appear that a taxpayer can make an election under subsection 1102(16.1) of the Regulations to include a wind turbine in Class 29.

Accordingly, it appears that if a wind turbine is acquired by a taxpayer under the Program it will not be "prescribed machinery and equipment" for the purposes of claiming an ITC.

We would like to mention that our review did not include consideration of GST implications.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained
in the original document are shown below instead:

1 The Program appears to be a pilot project. See News Release dated March 29, 2010 at http://www.gov.pe.ca/news/index.php3?number=news&dept=&newsnumber=6937&lang=E.

2 See Rulings document 2010-037395.

3 This paragraph should not be applicable as it only applies to such property where it is acquired before May 26, 1976 and also only appears to apply to property used as a back-up generator or power source since it can't be used regularly. It is assumed that the wind turbines are going to be used regularly.