22 March 2006 External T.I. 2006-0171351E5 - test wind turbine CRCE

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 qualify as a test wind turbine under subsection 1219(3) of the Regulations.

Position: Yes, provided the taxpayer proceeds with the development of the wind farm project as planned.

Reasons: Based upon the wording of the relevant provisions of the Regulations, a written opinion obtained from Natural Resources Canada dated March 6, 2006 and the facts of the situation.

XXXXXXXXXX 						2006-017135
							Catherine Bowen
March 22, 2006					(613) 957-8284

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Wind Farm Project

We are writing in response to your request of February 7, 2006 concerning the eligibility of a planned wind turbine to be installed by XXXXXXXXXX (the "Corporation") as a "test wind turbine" within the meaning of subsection 1219(3) of the Income Tax Regulations (the "Regulations"). We also acknowledge our telephone conversation (Bowen/XXXXXXXXXX) regarding this matter.

The Corporation is pursuing the development of a proposed wind farm project involving wind turbines to be located near XXXXXXXXXX on a site encompassing approximately XXXXXXXXXX acres (the "Project"). The Corporation has signed an option to lease agreement with the landowners for the right to enter into a XXXXXXXXXX-year lease for the purpose of installing wind turbines on the land encompassed by the Project. At the termination of the agreement, the Corporation will either negotiate another agreement with the landowners or remove the wind turbines. The Corporation will own all of the wind turbines relating to the Project and will also develop and operate the Project. The electrical energy generated will be sold either on the spot electrical wholesale market or through standard offer contract or some other mechanism as may be available. The Corporation will receive all the revenue from the generation of electrical energy.

The wind turbine referred to above (referred to herein as the "Test Turbine") will be located at the following site:

XXXXXXXXXX

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

Provided successful results are obtained from the Corporation's testing program involving the Test Turbine, the Corporation plans to complete a second phase of the Project, which would involve the erection of XXXXXXXXXX additional wind turbines having a total capacity of XXXXXXXXXX MW with completion anticipated by the end of XXXXXXXXXX. The step up transformers for the Test Turbine and the XXXXXXXXXX infill turbines will be in each turbine tower and the voltage generated will be stepped up to line voltage as a medium voltage stage. The Corporation will be required to pay for the installation of a XXXXXXXXXX volt distribution line which will be used to take the electrical energy produced by the Test Turbine, as well as the second phase infill wind turbines, to a point of connection on the existing XXXXXXXXXX phase XXXXXXXXXX volt feeder circuit located at the edge of the Project. The distribution line will be owned by the Corporation. The existing circuit is connected to a distribution station that is less than XXXXXXXXXX from the Project. The electrical power will be sold to the local utility XXXXXXXXXX.

Natural Resources Canada ("NRCan") has reviewed the application (including subsequent amendments thereto) 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 Class 43.1 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 respective 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 such Test Turbine has been tested for at least 120 calendar days; and

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

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 this 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 subsection 1219(1) and (3) of the Regulations at the time the respective wind energy conversion system that it forms part of would, but for section 1219 of the Regulations, be property included in Class 43.1 to Schedule II of the Regulations because of subparagraph (d)(v) thereof. 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 it is commissioned and enters into service.

We would also note that the federal budget of February 23, 2005 contains a proposal under which renewable energy generation equipment, including wind turbines, otherwise eligible for inclusion in Class 43.1 would be eligible for inclusion in a new class, having a capital cost allowance rate of 50 per cent, if such equipment is acquired on or after February 23, 2005 and before 2012. Should this change be promulgated, the XXXXXXXXXX proposed infill wind turbines forming part of the Project that would otherwise qualify for inclusion in Class 43.1 may potentially qualify for this new class.

Other 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, or a portion thereof, of any particular property, such as the XXXXXXXXXX volt distribution line proposed to be installed from the XXXXXXXXXX wind turbines to the existing electrical grid, may be considered to be CRCE.

(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.

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.

Yours truly,

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

c.c. France Bernier

Engineering, Research and Technical Team
Industrial Programs Division
Office of Energy Efficiency
Natural Resources Canada
580 Booth St., 18th Floor
Ottawa ON K1A 0E4