9 April 2003 External T.I. 2003-0183755 - Class 43.1 and Expansion Engines

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 CCRA.

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

Principal Issues: Must the owner of an expansion engine own the branch distribution line in order to be eligible for Class 43.1 treatment of the equipment?

Position: No. The owner of an expansion engine may qualify for Class 43.1 treatment without owning the branch distribution line.

Reasons: Wording in subparagraph (d)(x) of Class 43.1 in the Regulations supports this position.

XXXXXXXXXX 2003-018375
Luisa A. Majerus
April 9, 2003 (613) 946-3558

Subject: Class 43.1 and Expansion Engines

We are writing in response to your letter of January 15, 2003, wherein you requested our views regarding the eligibility of an expansion engine for Class 43.1 treatment where the owner of the expansion engine is not the owner of a natural gas branch distribution line.

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Our Comments

Schedule II of the Income Tax Regulations (the "Regulations") describes the type of depreciable assets that qualify for Class 43.1 treatment. In particular, subparagraph (d)(x) of Class 43.1 in the Regulations describes:

an expansion engine with one or more turbines, or cylinders, that convert the compression energy in pressurized natural gas into shaft power that generates electricity, including the related electrical generating equipment and ancillary controls, where the expansion engine

(A) is part of a system that is installed

I. on a distribution line of a distributor of natural gas, or
II. on a branch distribution line of a taxpayer primarily engaged in the manufacturing or processing of goods for sale or lease if the branch line is used to deliver natural gas directly to the taxpayer's manufacturing or processing facility, and

(A) is used instead of a pressure reducing valve.

In a hypothetical situation, equipment of a taxpayer, that is an expansion engine that converts compression energy in pressurized natural gas into shaft power that generates electricity, is part of a system installed on a branch distribution line of another taxpayer.

It is our opinion that "a taxpayer" as referred to in sub-clause (d)(x)(A)(II) of Class 43.1 in the Regulations could be considered any taxpayer. Therefore, in the above noted situation the expansion engine may qualify as a Class 43.1 asset even though the taxpayer that owns the branch distribution line and is primarily engaged in the manufacturing or processing of goods for sale or lease is not the same taxpayer that owns the expansion engine, provided that the other requirements of Class 43.1 are met.

We trust these comments will be of assistance.

Yours very truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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