2017-0695101E5 Test Wind Turbine Determination

Principal Issues: Whether each of the XXXXXXXXXX proposed wind turbines will qualify as a test wind turbine within the meaning of subsection 1219(3) of the Regulations.

Position: Yes.

Reasons: Satisfies the criteria in the Regulations and a favourable opinion from NRCan.

Author: Christov, Boriana
Section: Subsections 1219(1) and (3) of the Income Tax Regulations

XXXXXXXXXX                                                                                                      2017-069510
                                                                                                                              Boriana Christov
August 31, 2017

Dear XXXXXXXXXX,

Re: XXXXXXXXXX

We are writing in response to your application of March 20, 2017 as a general partner of and on behalf of XXXXXXXXXX (the “Applicant”) requesting a determination that each of XXXXXXXXXX planned wind turbines (“Test Wind Turbines”) to be installed by the Applicant as part of XXXXXXXXXX will qualify as a “test wind turbine” within the meaning of subsection 1219(3) of the Income Tax Regulations (the “Regulations”). The limited partner of the Applicant is XXXXXXXXXX. The Applicant is indirectly wholly owned by XXXXXXXXXX.

The Applicant is pursuing the development of the proposed XXXXXXXXXX (the “Project”) located approximately XXXXXXXXXX.

The majority of the land encompassed by the Project is privately owned, except for XXXXXXXXXX where the transmission line crosses some Crown land. The Applicant has entered into lease agreements with the landowners granting access to the area. At the termination of the term of the lease agreements, the Applicant will be required to remove the wind turbines and will be responsible for any related land reclamation costs.

The Project is a XXXXXXXXXX MW wind farm development which will consist of a total of XXXXXXXXXX wind turbines, each with a nameplate capacity of XXXXXXXXXX MW. The Project will be developed in two phases. The initial phase of the Project will consist of XXXXXXXXXX wind turbines and the second phase of the Project will consist of XXXXXXXXXX additional wind turbines.  The Applicant proposes to install XXXXXXXXXX of the Test Wind Turbines as part of the initial phase of the Project while the remaining XXXXXXXXXX Test Wind Turbines will be installed as part of the second phase of the Project. More specifically, the site locations of the Test Wind Turbines are as follows:

Name of Test Wind                    Coordinates XXXX                                             Legal Description of Land
    Turbine
    XXXX                                     XXXX                                                                  XXXX

The Applicant will use each of the XXXXXXXXXX Test Wind Turbines for the primary purpose of testing the level of electrical energy produced by the Test Wind Turbine at its place of installation. The most significant existing uncertainties relating to electrical energy production from Test Wind Turbines are uncertainties relating to (i) losses in respect of turbine performance, availability (i.e., turbine shut-down), electrical interconnection and wakes, (ii) spatial variability, and (iii) shear. The Applicant intends to use each of the Test Wind Turbines to reduce the level of uncertainty associated with these and various other factors relating to the electrical energy production at the place of installation of each Test Wind Turbine. The Test Wind Turbines will be commissioned and entered into service by no later than XXXXXXXXXX.

Provided that successful results are obtained from the Applicant’s testing program involving the Test Wind Turbines, the Applicant proposes to install the remaining XXXXXXXXXX wind turbines, each having a capacity of XXXXXXXXXX megawatts (“MW”) for a total nameplate capacity of XXXXXXXXXX MW. The maximum output will be limited to XXXXXXXXXX MW due to interconnection requirements and inherent losses. The construction of the remaining XXXXXXXXXX wind turbines is scheduled for XXXXXXXXXX with commissioning planned for XXXXXXXXXX.

The Applicant will own all of the wind turbines and will develop and operate the Project. On XXXXXXXXXX, the XXXXXXXXXX approved the initial phase of the Project with a XXXXXXXXXX MW capacity. On XXXXXXXXXX, the Applicant has registered its application for the second phase of the Project with an additional XXXXXXXXXX MW capacity.

The Test Wind Turbines and the remaining wind turbines for the Project will be installed through a substation interconnection to the existing XXXXXXXXXX. The Applicant will build a new XXXXXXXXXX transmission line XXXXXXXXXX which will be transferred to XXXXXXXXXX for operation.

Power generated from the wind turbines will be sold to the XXXXXXXXXX for consumption by local customers and to private entities with whom the Applicant has entered into bilateral agreements or contracts through the XXXXXXXXXX. The Applicant will receive all the revenue from the sale of the electricity. The Applicant could also acquire and sell renewable energy credits as auctioned by the XXXXXXXXXX.

Natural Resources Canada (“NRCan”) has reviewed the application for a technical opinion for the planned Test Wind Turbines (the “Application” NRCan file number XXXXXXXXXX).

It is our understanding, based upon representations and information provided on behalf of the Applicant in the Application, that:

a) at least 50% of the capital cost of the depreciable property to be used in the Project would be the capital cost of property that is described in either Class 43.1 or 43.2 of Schedule II to the Regulations or that would be such property but for subsection 1219(1) of the Regulations;

b) each of the Test Wind 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 Applicant that is described in subparagraph (d)(v) of Class 43.1 of Schedule II to the Regulations;

c) the Project will not share with any other project a point of interconnection to an electrical energy transmission or distribution system;

d) the primary purpose for installing each of the Test Wind Turbines is to test the level of electrical energy produced by that Test Wind Turbine from wind at its place of installation;

e) no other test wind turbine (as defined in subsection 1219(3) of the Regulations) will be installed within 1,500 metres of each of the Test Wind Turbines;

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

g) the electrical energy produced from wind by the Test Wind Turbines will not exceed 20% of the planned nameplate capacity for the Project.

OUR OPINION

Provided that:

i. the Project will be undertaken as described in the Application with the Test Wind Turbines being installed and used for the testing program described therein,

ii. the facts and representations relating to the Project remain as stated in the Application and as described herein, and

iii. all of the XXXXXXXXXX Test Wind Turbines are installed no later than XXXXXXXXXX,

it is our opinion that each of the Test Wind Turbines will constitute a test wind turbine for purposes of subsections 1219(1) and (3) of the Regulations at the time the wind energy conversion system that it forms part of would, but for section 1219 of the Regulations, be property described in subparagraph (d)(v) of Class 43.1 and included in paragraph (b) of Class 43.2 of Schedule II to the Regulations. In other words, the cost of the Test Wind Turbine will not qualify as a “Canadian renewable and conservation expense” (“CRCE”), as defined in subsection 66.1(6) of the Income Tax Act (the “Act”), until such time as it is commissioned and enters into service.

OUR COMMENTS

1. 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 the cost of any particular property or any expenditure may be considered to be CRCE.

2. CRCE does not include any amount that is paid or payable to a person or partnership with whom the taxpayer does not deal at arm’s length.

3. Subsection 1219(2) of the Regulations describes certain amounts that are not included in CRCE including, among others, certain financing expenses listed in paragraphs 20(1)(c), (d), (e) or (e.1) of the Act.

Yours truly,

Kimberley Wharram
Acting Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

c.c. XXXXXXXXXX
Natural Resources Canada
Class 43.1/43.2 Secretariat XXXXXXXXXX
Policy and Planning Branch
Innovation and Energy Technology Sector

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