| File #: 7-922564 | |
| Prepared by: Bruce Rankin |
Date: September 2, 1992
REVENUE CANADA FORESTRY TAX CONFERENCE
PRESENTATION BY RULINGS
HYDROELECTRIC EQUIPMENT OWNED BY PULP AND PAPER MANUFACTURERS
We recently considered a District Office request for clarification of the classification for the purposes of capital cost allowance of electrical generating and distributing equipment associated with the owner's newsprint and paper manufacturing plants.
When the equipment was purchased in 1986, a number of different CCA classes were relevant. Electrical generating equipment would qualify for CCA in Class 2, 8, 10(r), 29 or 34 depending on the particular circumstances. However, if the equipment qualified for Class 8 and was used directly or indirectly in manufacturing and processing, it would be included in Class 29.
On reviewing the details of the pulp mill owner's expenditures we concluded that certain costs incurred to upgrade and replace equipment located in the mill qualified for inclusion in Class 29. These expenditures included the costs to rewire various areas in the mill, to replace an existing cable which carried electricity to the equipment in the mill's "Woodroom", and to purchase and install a new 20 ton trolley for the "Grinder Room" crane bridge.
Other expenditures incurred to upgrade and replace electrical generating equipment located outside the mill were found to qualify for inclusion in Class 2(a). These expenditures included the costs to replace existing steam engines used at the hydroelectric site to operate winches and a debris plough, to acquire and install generator protection equipment and instrument transformers, and to purchase and install a new turbine for the generator. Other hydroelectric related equipment costs were incurred to upgrade the facility and convert it into an unattended facility. It was noted that spare parts acquired in conjunction with the above items should be considered for inclusion in Class 8 as capital spares in accordance with the Federal Court Trial Division decision in Sterns Catalytic Ltd., 90 DTC 6286.
We found that the owner of the mill would not be viewed as being a producer or distributor of electrical energy. The mill is not a public utility nor is it part of a process that includes the production and distribution of electricity to the public. The hydroelectric generating activity at the mill is not a separate business but, rather, is an activity that is conducted indirectly in conjunction with the newsprint and paper manufacturing business. The mill was the end user of substantially all the electricity that was produced. Since Class 2(c) was intended to include the assets that an electric utility uses to generate and distribute electric energy, we do not feel that this classification is applicable.
With respect to similar property that is acquired after 1987, Class 2(a) is replaced with Class 1(k) and Class 2(c) is replaced with Class 1(m). The wording of the two new paragraphs is not identical to the previous paragraphs. We are advised by the Department of Finance that Class 1(m), the more specific of the two is intended to apply to electrical generating and distribution equipment and plant of electrical utilities or other entities that are a part of the process of production and distribution of electricity to the public.
As a result, we feel that if the asset is described in Class 1(m) that classification would take precedence over the more general Class 1(k).