In response to a request as to the tax treatment of various expenses incurred as part of a typical geothermal project, CRA first noted that during the exploration phase “subsurface exploration of the geothermal resource may be effected through the drilling of smaller diameter “exploratory wells” (sometimes called “core holes” or “slim wells”) to determine the extent and quality of the geothermal resource,” and that “Following a successful exploration program, the Project may proceed with the drilling and completion of larger diameter production and re-injection wells and flow testing of the geothermal resource,” and after indicating that various types of testing expenditures would qualify as CRCE, CRA stated:
The cost of drilling geothermal wells (either an exploratory well or a production well) would also be CRCE, based on the assumption 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 subparagraph (d)(vii) of Class 43.1, provided the other requirements in section 1219 of the Regulations are also met.
The cost of completing an exploratory well whose sole purpose is to determine the extent and quality of a geothermal resource could also qualify as CRCE. However, the cost of completing either (i) a production well or (ii) an exploratory well that is used for production (including small-scale heat or electricity production) will not qualify as CRCE but rather may form part of the cost of depreciable property and may be eligible for an inclusion in Class 43.2 of the Regulations.