Principal Issues: Whether certain wind turbines will qualify as test wind turbines under subsections 1219(1) and (3) of the Regulations?
Position: No.
Reasons: Based upon the wording of the relevant provisions of the Regulations, a written opinion obtained from Natural Resources Canada and the facts of the situation.
XXXXXXXXXX 2006-017097 Marc LeBlond March 14, 2006
Dear Sir,
Subject: Wind farm for test purposes
This letter is in response to your request for a technical opinion, dated February 15, 2004 (received April 4, 2005), regarding the eligibility of XXXXXXXXXX wind turbines as "test wind turbines", as defined in subsections 1219(1) and (3) of the Income Tax Regulations, for use in your company's proposed wind farm (the "Farm"). This letter also follows receipt of the notice from Natural Resources Canada, dated February 8, 2006, regarding the scientific and technical requirements of your request.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Regulations.
Brief description of the Farm
The Farm will be located near XXXXXXXXXX on a XXXXXXXXXX square foot land base. It is anticipated that the Farm will accommodate XXXXXXXXXX wind turbines. It is contemplated that XXXXXXXXXX of the wind turbines will be operated. The XXXXXXXXXX wind turbine will be acquired for its parts which will be used to maintain the operating wind turbines. The projected capacity of the Project is XXXXXXXXXX kW (XXXXXXXXXX MW).
The XXXXXXXXXX wind turbines acquired for testing purposes will be the XXXXXXXXXX model rated at XXXXXXXXXX kW each. The land descriptions and coordinates for the location of the XXXXXXXXXX wind turbines are as follows:
Wind turbine for test purposes
XXXXXXXXXX
It is expected that the Farm will have XXXXXXXXXX electrical interconnection points.
Natural Resources Canada
Natural Resources Canada has conducted a review of the scientific and technical aspects of your request and the additional information you provided on July 18, 2005, October 24, 2005, and January 27, 2006 (Natural Resources Canada file number: XXXXXXXXXX).
Our Opinion
In our view, the XXXXXXXXXX wind turbines proposed for the Farm do not qualify as "test wind turbines" as defined in subsection 1219(3) and, consequently, do not qualify as "Canadian renewable and conservation expenses". Our conclusion is based on the following observations.
Generally, expenses incurred in connection with the acquisition and installation of wind turbines may, under certain conditions, be deductible in computing a taxpayer's income and financed under a flow-through share agreement.
Several conditions must be satisfied for expenses relating to the acquisition and installation of wind turbines to be deductible in computing a taxpayer's income and to be financed by the issuance of flow-through shares. First and foremost, such expenditures must be "Canadian renewable and conservation expenses" ("CRCE"), as defined in subsection 1219(1), and satisfy the definition of "test wind turbine", as defined in subsection 1219(3).
The relevant portions of sections 1219(1) and (3), in your case, read as follows:
1219. (1) Subject to subsections (2) to (4), for the purpose of subsection 66.1(6) of the Act, “Canadian renewable and conservation expense” means an expense incurred by a taxpayer, and payable to a person or partnership with whom the taxpayer is dealing at arm’s length, in respect of the development of a project for which it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the project would be the capital cost of any property that is described in Class 43.1 of Schedule II or that would be such property but for this subsection, and includes such an expense incurred by the taxpayer
[...]
(g) for a test wind turbine that is part of a wind farm project of the taxpayer.
1219. (3) For the purpose of paragraph (1)(g), “test wind turbine” means a fixed location device that is a wind energy conversion system that would, but for this section, be property included in Class 43.1 of Schedule II because of subparagraph (d)(v) thereof, and in respect of which the Minister, in consultation with the Minister of Natural Resources, determines that
(a) the device is installed as part of a wind farm project of the taxpayer at which the electrical energy produced from wind by the device, and by all other test wind turbines that are part of the project, does not exceed
(i) one third of the project’s planned nameplate capacity if
(A) in the opinion of the Minister of Natural Resources, the project’s planned nameplate capacity is limited from an engineering or scientific perspective, and
(B) the project’s planned nameplate capacity does not exceed six megawatts, or
(ii) 20% of the project’s planned nameplate capacity, in any other case;
(b) the project does not share with any other project a point of interconnection to an electrical energy transmission or distribution system;
(c) [...]
(d) the primary purpose for installing the device is to test the level of electrical energy produced by the device from wind at the place of installation;
(e) no other test wind turbine is installed within 1500 metres of the device; and
(f) no other wind energy conversion system is installed within 1500 metres of the device until the level of electrical energy produced from wind by the device has been tested for at least 120 calendar days.
[emphasis added]
It has been determined in your case that the conditions described in paragraphs 1219(3)(e) and (f) are not satisfied since the distance between the XXXXXXXXXX wind turbines (XXXXXXXXXX meters) is less than the minimum distance (1,500 meters) specified in paragraphs 1219(3)(e) and (f). Furthermore, it could not be satisfactorily determined that the XXXXXXXXXX wind turbines satisfy the conditions of subsection 1219(1) and paragraphs 1219(3)(a), (b) and (d) due to conflicting or incomplete information provided to Natural Resources Canada.
For the reasons set out above, we are of the view that the XXXXXXXXXX wind turbines contemplated for the Farm do not qualify as "test wind turbines" within the meaning of subsection 1219(3) and consequently do not qualify as CRCE.
If you have any questions or comments regarding this opinion, please do not hesitate to contact Ms. France Bernier, Engineer, Industrial Energy Efficiency, Natural Resources Canada at (613) 992-3288 or Mr. Marc LeBlond, Income Tax Rulings Directorate, Canada Revenue Agency at (613) 946-3261.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
c.c. Ms. France Bernier
Natural Resources Canada
Industrial Programs Division
580 Booth Street, 15th Floor, Room: D7-1
Ottawa ON K1A 0E4