22 September 2005 External T.I. 2005-0149421E5 - 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 XXXXXXXXXX proposed exploratory wind turbines will qualify as test wind turbines under Reg. 1219(3).

Position: yes

Reasons: proposed project complies with Reg. 1219(3) and favourable written opinion has been provided by Natural Resources Canada dated August 30, 2005

2005-014942
XXXXXXXXXX Catherine Bowen
(613) 957-8284
September 22, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Wind Farm

We are writing in response to your request dated August 3, 2005, regarding the eligibility of each of the XXXXXXXXXX planned wind turbines 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"). Additional information was provided in a telephone conversation (XXXXXXXXXX/Bowen) on September 19.

The Corporation is pursuing the development of a proposed wind farm project involving wind turbines to be located near XXXXXXXXXX (the "Project"). The Corporation will own all the wind turbines relating to the Project and will also develop and oversee the management and operation of the Project. XXXXXXXXXX will act as the project manager on behalf of the Corporation and operate the Project for a fixed annual fee. XXXXXXXXXX owns XXXXXXXXXX% of the shares of the Corporation.

Long-term land lease options have been obtained by the Corporation for the Project. At the termination of the leases, the Corporation is required to and will remove the wind turbines from the land. The Corporation has signed a power purchase agreement with XXXXXXXXXX and will receive all revenue from the sale of electricity generated by the Project.

XXXXXXXXXX wind turbines referred to above (collectively referred to herein as the "Test Turbines") will be located at each of the following sites:

XXXXXXXXXX.

The maximum capacity of each of the Test Turbines to be installed as described above will be XXXXXXXXXX kW. It is anticipated that each of the Test Turbines will be commissioned and enter into service by XXXXXXXXXX. The Test Turbines will be connected to the local distribution network at XXXXXXXXXX kV, i.e., connected to XXXXXXXXXX via an existing XXXXXXXXXX substation at XXXXXXXXXX located a few kilometres on the west side of the site. Certain upgrades, including upgrading the distribution line between the site of the Project and the existing substation, will be required. Although the Corporation will pay for the costs of these upgrades, XXXXXXXXXX will have ownership of these upgrades.

If the test results from the Test Turbines are acceptable, construction of the second phase, consisting of XXXXXXXXXX wind turbines will commence. The infill turbines are expected to connect to the XXXXXXXXXX kV transmission line that runs in a XXXXXXXXXX direction about XXXXXXXXXX kilometres from the northern end of the site at its closest point. This development would likely require the Corporation to construct a new substation on the site. Connection could be achieved either at the XXXXXXXXXX kV line or by means of routing a XXXXXXXXXX kV line back to an existing substation following the XXXXXXXXXX line path. The planned nameplate capacity for the Project is XXXXXXXXXX MW.

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

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

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

(ii) each of the Test Turbines 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;

(iii) the Project will be connected through a single point of interconnection to a transmission grid owned by a power company with which the Corporation deals at arm's length and 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 each of the Test Turbines is to test the level of electrical energy produced by the Test Turbine from wind at its respective place of installation;

(v) there will be at least 1,500 meters between the respective bases of the Test Turbines and no other test wind turbine (as defined in subsection 1219(3) of the Regulations) will be installed within 1,500 meters of any of the Test Turbines;

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

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

(viii) the expenses to be incurred by the Corporation relating to the acquisition of the Test Turbine will be payable to a person or partnership with whom the Corporation is dealing at arm's length.

Our Opinion

Provided that:

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

(b) the facts and representations relating to this Project, including those referred to above, remain as stated in the Application

it is our opinion that each of the XXXXXXXXXX Test Turbines will constitute a test wind turbine for purposes of subsections 1219(1) and (3) of the Regulations at the time the respective wind energy conversion system that they form part of would, but for section 1219 of the Regulations, be property included in Class 43.1 because of subparagraph (d)(v) thereof.

Note: The February 23, 2005 federal budget announced that a wind energy electrical generation system that would otherwise be included in Class 43.1 and that is acquired on or after the date of the budget and before 2012 will qualify for a new capital cost allowance class with a 50% capital cost allowance rate. Should this change be promulgated, the above references to subparagraph (d)(v) of Class 43.1 should also be read as referring to 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 any particular equipment may be considered to be related to a particular wind-driven turbine or electrical generating equipment or whether any particular expenditures will be included as "Canadian renewable and conservation expense" ("CRCE"), as defined in subsection 66.1(6) of the Income Tax Act (the "Act") and section 1219 of the Regulations. However, it is our view that no portion of the costs related to the construction of the electrical substation required for the second phase of the Project will be eligible to be included as CRCE.

(II) Pursuant to paragraph (g.1) of the definition of "Canadian exploration expense" ("CEE") in subsection 66.1(6) of the Act, expenses incurred by a taxpayer that qualify for inclusion in CRCE will be included in the taxpayer's CEE. 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.

(III) A PBC will be subject to tax under Part XII.6 of the Act, as determined under subsection 211.91(1) thereof, in respect of the total of all amounts which it purports to renounce, in respect of a flow-through share it issues, pursuant to subsection 66(12.6) of the Act having reliance on subsection 66(12.66) thereof. Pursuant to the latter subsection, 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.

(IV) Where the amount of CEE that a "principal-business corporation" 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 "principal-business corporation" 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
Policy and Planning Branch

c.c. Micheline Brown
Engineering, Research and Technical Team
Industrial Programs Division
Natural Resources Canada
580 Booth St., 18th Floor
Ottawa ON K1A 0E4