28 January 2011 External T.I. 2010-0379651E5 - Test Wind Turbine

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 a wind turbine will be a test wind turbine per 1219(3) of the Regulations

Position: Yes

Reasons: favourable opinion received from NRCan also otherwise meets criteria.....also turbine has not yet been commissioned

XXXXXXXXXX
									2010-037965
									L. Holloway
      								(613) 946-3553

January 28, 2011

Dear XXXXXXXXXX :

Re: Test Wind Turbine

We are writing in response to your application dated August 31, 2010, requesting a determination that a planned wind turbine (the "Test Turbine") will qualify as a "test wind turbine" within the meaning of subsection 1219(3) of the Income Tax Regulations (the "Regulations"). The Test Turbine will be installed by XXXXXXXXXX (the "Corporation") on a XXXXXXXXXX parcel of land owned by XXXXXXXXXX (the "land owners") as part of a XXXXXXXXXX megawatt project (the "Project").

The Corporation is pursuing the development of the Project to be located on XXXXXXXXXX Ontario. On XXXXXXXXXX the land owners entered into an agreement (the "Agreement") which granted exclusive license and option for exclusive easement to their property to XXXXXXXXXX . On XXXXXXXXXX , XXXXXXXXXX sold, transferred and assigned all right titles and interests under the Agreement to the Corporation. The Agreement gives the Corporation the right to conduct studies for a wind farm project and an option for an easement to install and operate a wind farm project for XXXXXXXXXX years less one day with an option for one renewal for one additional term of XXXXXXXXXX years less one day. The Agreement also sets out several terms and conditions for the installation and operation of wind energy conversion equipment.

The name of the Test Turbine is XXXXXXXXXX . The Test Turbine will be the first of XXXXXXXXXX wind turbines planned for the Project. It is planned that the Test Turbine and the XXXXXXXXXX in-fill turbines will interconnect through a common point of interconnection. It is the intention of the Corporation to develop and operate the Project. The capacity of the Test Turbine to be installed as described above will be XXXXXXXXXX megawatts ("MW"). The planned nameplate capacity for the Project is XXXXXXXXXX MW.

The Test Turbine will be located at XXXXXXXXXX . It is anticipated that the Test Turbine will be commissioned and enter into service before the end of XXXXXXXXXX .

The Corporation will acquire all of the required permits including building permits from the municipality and a road use agreement with the municipality for the construction of a XXXXXXXXXX km distribution line to connect to XXXXXXXXXX 's XXXXXXXXXX kV distribution system. The Corporation on behalf of the Project, is applying for a Customer Impact Assessment, will enter into a Customer Cost Recovery Agreement and is working on the interconnection agreement with XXXXXXXXXX . The Project is expected to participate in the Ontario Power Authority's Feed-In Tariff Program.

The Corporation will apply for a generator license from the Ontario Energy Board which can take up to 90 days, however it is anticipated this timing will coincide with the completion of construction of the Project distribution line and interconnection to XXXXXXXXXX 's system.

Natural Resources Canada ("NRCan") has reviewed the application for a technical opinion on the Test Turbine (the "Application"; NRCan file number XXXXXXXXXX ).

It is our understanding, based upon representations and information provided on behalf of the Corporation in the Application, that:

(i) at least 50% of the capital cost of the depreciable property to be used in the Project would be the capital cost of property that is described in either Class 43.1 or 43.2 of Schedule II to the Regulations or that would be such property but for subsection 1219(1) of the Regulations;

(ii) the Test Turbine will be a fixed location device that is part of a wind energy conversion system that would, but for section 1219 of the Regulations, be property of the Corporation that is described in subparagraph (d)(v) of Class 43.1 of Schedule II;

(iii) the Project will not share with any other project a point of interconnection to an electrical energy transmission or distribution system;

(iv) the primary purpose for installing the Test Turbine is to test the level of electrical energy produced by the Test Turbine from wind at its place of installation;

(v) no other test wind turbine (as defined in subsection 1219(3) of the Regulations) will be installed within 1,500 meters of the Test Turbine;

(vi) no other wind energy conversion system will be installed within 1,500 meters of the Test Turbine until the level of electrical energy produced from wind by the Test Turbine has been tested for at least 120 calendar days; and

(vii) the electrical energy produced from wind by the Test Turbine will not exceed 20% of the planned nameplate capacity for the Project.

Our Opinion

Provided that:

(a) the Project will be undertaken as described in the Application with the Test Turbine being installed and used for the testing program described therein; and

(b) the facts and representations relating to the Project remain as stated in the Application and as described herein

it is our opinion that the Test Turbine will constitute a test wind turbine for purposes of subsections 1219(1) and (3) of the Regulations at the time the wind energy conversion system that it forms part of would, but for section 1219 of the Regulations, be property included in either subparagraph (d)(v) of Class 43.1 or paragraph (b) of Class 43.2 of Schedule II to the Regulations. In other words, the cost of the Test Turbine will not qualify as a "Canadian renewable and conservation expense" ("CRCE"), as defined in subsection 66.1(6) of the Income Tax Act (the "Act"), until such time as it is commissioned and enters into service.

Our Comments

(I) Except as expressly stated, our opinion does not imply acceptance or approval of any income tax implications relating to the Project. In particular, we are not providing any confirmation as to the extent to which the cost of any particular property (such as the cost of permits and agreements acquired by the Corporation) may be considered to be CRCE. Further, the Corporation has provided certification that no other wind energy conversion system will be installed within 1,500 meters of the device until the level of electrical energy produced from wind by the device has been tested for at least 120 calendar days. However, it is noted that there are many other wind farm projects in the XXXXXXXXXX area and if this project does not proceed on schedule it is possible that other wind turbines in other projects could be installed within 1500 meters of the Test Turbine before the testing program is completed. Our opinion is based on the certification provided by the Corporation.

(II) CRCE does not include any amount that is paid or payable to a person or partnership with whom the taxpayer does not deal at arm's length.

(III) Pursuant to paragraph (g.1) of the definition of "Canadian exploration expense" ("CEE") in subsection 66.1(6) of Act, expenses incurred by a taxpayer that qualify for inclusion in CRCE will be included in the taxpayer's CEE. Consequently, a taxpayer that qualifies as a "principal-business corporation" ("PBC", as defined in subsection 66(15) of the Act) may be able to renounce amounts, in respect of the CEE incurred by it, to an investor that has acquired a "flow-through share" (also as defined in subsection 66(15) of the Act) in its capital stock. However, amounts may only be renounced to a particular investor in respect of CEE incurred by the
PBC on or after the date the agreement in writing relating to the acquisition of the flow-through share was made.

(IV) Pursuant to subsection 66(12.66) of the Act, qualifying expenses incurred by a PBC in a particular calendar year may be deemed, in certain circumstances, to have been incurred by the PBC on the last day of the immediately preceding calendar year (this provision is generally referred to as the "look-back rule"). Where a PBC renounces CEE pursuant to subsection 66(12.6) of the Act having reliance on the look-back rule to an investor who has acquired a flow-through share of the PBC, it will be subject to tax under Part XII.6, as determined under subsection 211.91(1) of the Act.

(V) Where the amount of CEE that a PBC has renounced relying on the look-back rule exceeds the actual amount that it is entitled to renounce due to its failure to incur sufficient CEE in the next calendar year, the PBC must file form T101B with the Minister of National Revenue on or before March 31 of Year 3 (with Year 1 being the year in which the agreement to issue the flow-through shares was entered into) and must apply the excess fully to reduce one or more of the renunciations.

(VI) Except for the purpose of Part XII.6 of the Act, any amount that has been renounced to any person will be deemed under paragraph 66(12.73)(d) of the Act, after the form T101B is filed, to have always been reduced by the portion of the excess identified therein in respect of that renunciation.

(VII) If the Corporation's plan to develop the Project does not proceed due to unfavourable test results or other circumstances beyond the Corporation's control, the cost of the Test Turbine will generally still qualify as CRCE assuming that all
the other criteria are met.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

c.c. T.J. Jewett
Class 43.1/43.2 Secretariat,
Industry Group,
CANMET Energy Technology Centre- Ottawa
Natural Resources Canada
Bells Corners Complex, Building 3, Room 204
1 Haanel Drive
Nepean ON K1A 1M1