2019-0813761E5 Taxable Canadian property-solar and wind projects

Principal Issues: 1. For the purpose of determining the extent to which assets are TCP, should Solar Projects and Wind Projects be considered as a whole or as an aggregation of separate parts? 2. Are the components of the Solar Equipment TCP? 3. Are the components of Wind Turbines TCP? 3. Are the contractual rights granted under power purchase agreements TCP?

Position: 1. Question of fact; likely should be considered as a whole. 2. Yes. 3. Yes. 4. Question of fact; possibly yes.

Reasons: 1. Where Solar Projects and Wind Projects are in the nature of power plants, they may be considered property used or held in a business carried on in Canada and meet paragraph (b) of the definition of TCP in subsection 248(1). 2. Components of Solar Equipment are fixtures and meet paragraph (a) of the definition of TCP in subsection 248(1). 3. Wind Turbines are fixtures and meet paragraph (a) of the definition of TCP in subsection 248(1). 4. Contractual rights may meet paragraph (b) of the definition of TCP in subsection 248(1).

Author: Graham, Kanwal
Section: 248(1) "taxable Canadian property"; 116.

XXXXXXXXXX                                                             2019-081376
                                                                                     K. Graham

May 26, 2022

Dear XXXXXXXXXX:

Re: solar and wind power projects

We are writing in reply to your letter requesting our view on the qualification of certain parts of a solar electric power generating project (“Solar Project”) and a wind electric power generating project (“Wind Project” or “Wind Farm”) as taxable Canadian property (“TCP”) pursuant to the definition thereof in subsection 248(1) of the Income Tax Act (the “Act”). Please note that all legislative references in this letter refer to the Act.

In your letter, you presented a scenario, which can be summarized as follows:

1. A Canadian-based portfolio management corporation (“Taxpayer”) invests, through the funds it manages, in core infrastructure assets including energy assets in Canada and the United States. As part of this business, the Taxpayer occasionally acquires, from non-residents of Canada, Wind Projects and Solar Projects located in Canada (individually referred to as a “Project” and collectively referred to as the “Projects”), and shares of corporations or interests in partnerships that hold Projects. The Taxpayer’s intention when acquiring a Wind Project or Solar Project is to the hold it as a long-term investment.

2. The Projects consist of an aggregation of interests in real property, tangible personal and movable property, and other rights related to such property. The Projects also include contractual rights granted under power purchase agreements with local utilities (“PPAs”) providing for a fixed power purchase price for the power produced from the Projects for a certain number of committed years, usually 20 years. As the Solar Projects and Wind Projects are utility-scale in size, they appear to be in the nature of power plants.

3. A Solar Project in which the Taxpayer invests, either directly or through the acquisition of shares in a corporation or interests in a partnership, typically includes the following components (“Solar Equipment”):

a. a leasehold interest in land;

b. solar photovoltaic panels;

c. steel racking system upon which the panels are fastened;

d. wires, inverters and transformers; and

e. metal posts upon which the racking system sits.

Generally, between six and nine solar panels are attached to a frame with screws or clips. Each framed grouping is slid onto the racking one after another, and attached to the racking with bolts or clips. The racking system is held in place on metal posts which have been installed vertically into the ground.

Under the terms of the land lease for a Solar Project, the Taxpayer is generally required to restore the land (remove the Solar Equipment) at the end of the lease period.

4. A Wind Project in which the Taxpayer invests, either directly or through the acquisition of shares in a corporation or interests in a partnership, typically includes the following:

a. a leasehold interest in the land;

b. a foundation, made of concrete and steel rebar, which is buried into the ground;

c. a tower, made of concrete or steel sections that are bolted together, and then bolted onto the foundation; and

d. various wind turbine components including a nacelle, a rotor, shaft, gearbox, and two or three blades. These components, along with the tower described in paragraph c, are hereafter referred to as a “Wind Turbine.”

The nacelle houses the electric generating components of a Wind Turbine, sits on top of the tower, and is generally attached to the tower with bolts. The nacelle and blades are designed to be removed for maintenance and replacement.

Under the terms of the land lease for a Wind Project, the Taxpayer is required to restore the land (remove the Wind Turbines, towers, and top part of the foundations) at the end of the lease period.

Where a person acquires a Project from a non-resident vendor, the withholding requirements under section 116 may apply to the extent that the particular Project is TCP.

You have asked for CRA’s view in this regard; in particular, you have asked the following questions:

1. For the purpose of determining whether assets are TCP pursuant to the definition in subsection 248(1), is it CRA’s position that the Solar Projects and Wind Projects should be considered as a whole or as an aggregation of separate parts?

2. Do the various components of the Solar Equipment qualify as TCP, such that their acquisition from a non-resident would be subject to the withholding requirements provided for in section 116?

3. Do the various components of the Wind Turbines qualify as TCP, such that their acquisition from a non-resident would be subject to the withholding requirements provided for in section 116?

4. Do the contractual rights arising from PPAs qualify as TCP such that their acquisition from a non-resident would be subject to the withholding requirements provided for in section 116?

Our Comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.

Subsection 116(5) imposes an obligation to withhold tax on a purchaser who acquires certain TCP from a vendor who is a non-resident person. TCP is defined in subsection 248(1) and includes certain property used or held by a taxpayer in a business carried on in Canada, real or immovable property situated in Canada, and a share of the capital stock of certain corporations or an interest in a partnership if, at any time during the 60-month period that ends at the particular time, more than 50% of the fair market value of the share or interest was derived directly or indirectly (with certain exceptions) from real or immovable property situated in Canada, options in respect of or interests in real or immovable property situated in Canada, or any combination thereof.

The question of whether the Solar Projects and Wind Projects should be considered as a whole or as an aggregation of separate parts is not determinative of the TCP issue.

Property used or held in a business carried on in Canada

Paragraph (b) of the definition of TCP in subsection 248(1) provides that property used or held by a taxpayer in a business carried on in Canada (with certain exceptions) is TCP of the taxpayer. The term “property” is defined in subsection 248(1) to mean “property of any kind whatever whether real or personal, immovable or movable, tangible or intangible, or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action,

(b) unless a contrary intention is evident, money,

(c) a timber resource property,

(d) the work in progress of a business that is a profession, and

(e) the goodwill of a business, as referred to in subsection 13(34).”

Where the vendor of a Project operated the Project as a power plant, paragraph (b) of the definition of TCP in subsection 248(1) might be applicable. Where the vendor of such a Project is a non-resident person, paragraph 253(a) will deem that person to be carrying on business in Canada if the non-resident person produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs, in whole or in part, anything in Canada, in respect of the activity.

Other paragraphs in the definition of TCP in subsection 248(1) may also be relevant.

Real or immovable property

Paragraph (a) of the definition of TCP in subsection 248(1) provides that property of a taxpayer that is

real or immovable property situated in Canada is TCP. The term “real or immovable property” is not defined in the Act. Where a particular term or phrase is not defined in the Act, we look to other sources to determine its meaning, including the ordinary meaning. Real or immovable property generally includes land and structures or objects affixed to the land. The term “fixture” is often used to describe a property that has become so attached to land or to a building thereon as to become in law part of the land, and derives much of its meaning from provincial property law under personal property security acts.

The principles to be applied in determining whether something is a freely movable chattel and when something is a fixture were cited in the 1902 case of Stack v. T. Eaton Co. [4 O.L.R. 335], and affirmed in the 1995 case of Royal Bank of Canada v. Maple Ridge Farmers Market Ltd. [BCWLD 2244 (BCSC)] (“Maple Ridge”). The determination of whether or not an object has become a fixture requires consideration of the degree of annexation and the purpose of annexation. The Maple Ridge case provided guidance for making the determination, which included the following:

* Any item which is unattached to the property, except by its own weight, and can be removed without damage or alterations to the fixtures or land that will need repair, is a chattel.

* Any item which is plugged in and can be removed without any damage or alteration is a chattel.

* Any item which is attached even minimally (i.e. it cannot simply be unplugged) is a fixture; an example given was that if an item requires the removal of screws, nails, bolts, detachment of plumbing, or the cutting and capping of hardwire, it will be a fixture.

* If a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. In other words, the item will be a fixture if it losses its essential character because it is of no use unless attached to a permanent and substantial improvement to the premises of which it formed part.

* Where an item is determined to be a fixture, it may nevertheless be removed if it can be shown that it is a tenant’s fixture. A tenant’s fixture may be removed from the premises during the currency of the tenancy provided that the tenant leaves the premises in exactly the same condition as he or she received them.

* In very exceptional circumstances not covered by these rules the court should have resort to the purpose test. For example, a mobile home may be resting on the land by its own weight but it may be clearly established that it was intended to be a fixture. These circumstances should only arise rarely and in relation to very large or expensive items.

Whether the components of a Wind Project or a Solar Project are fixtures, and therefore are considered “real or immovable” property for the purpose of the definition of TCP, can be informed by the application of the guidance provided in the Maple Ridge case.

Although each component part of a Wind Turbine may be removed without damage to the land upon which the Wind Turbine is located and may have marketable value, all of the component parts are attached and are necessary for the Wind Turbine to function for its intended purpose. Further, a Wind Turbine cannot function for its intended purpose without being attached to the concrete foundation. Consequently, Wind Turbines and their concrete foundations are fixtures and are therefore TCP as described in paragraph (a) of the definition of TCP in subsection 248(1).

With regard to the Solar Equipment, certain components may have functional value without the other components. However, in the context of the Taxpayer’s investment in Solar Projects, the Solar Equipment is utility-scale power generation equipment, and all components of the Solar Equipment would be required to function effectively in order to provide power generation and transmission. As noted in the Maple Ridge case, any item which is attached even minimally (such as with screws or bolts) is a fixture and if a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. Solar panels would not lose their essential character nor be useless without the racking system however, they could not effectively function in the context of utility-scale power generation without the racking, which itself serves no purpose unless used with the attached framed solar panels. As all components of the Solar Equipment are attached to the land on which they are situated, it is our view that the Solar Equipment is described in paragraph (a) of the definition of TCP in subsection 248(1).

The lease agreements for both Solar Projects and Wind Projects specify that the Taxpayer is required to remove the Solar Equipment and Wind Turbines respectively, and to restore the land upon the termination of the lease. You have indicated that this evidences an intention that the relevant items retain their character as movable property. In the 1998 case of 859587 Ontario Ltd. v. Starmark Property Management Ltd. [123 O.A.C. 251], the distinction was made between immovable fixtures and trade fixtures, wherein it was stated that “Trade fixtures are different from immoveable fixtures in that they can be restored to the status of chattels at the option of the tenant. Despite that differences [sic], trade fixtures have been treated, certainly in this province, as true fixtures as long as they are attached to and part of the land.” Notwithstanding the requirement to remove them upon termination of the leases, once annexed to the land upon which they are located, the Solar Equipment and the Wind Turbines are fixtures and therefore, are described in paragraph (a) of the definition of TCP.

PPAs

The PPAs provide the Taxpayer with contractual rights to a fixed purchase price for the electrical energy generated by a Wind Project or Solar Project for a fixed number of years (usually 20). In the context of a technical interpretation, we are unable to comment upon whether a particular PPA meets the definition of TCP.

We trust our comments are of assistance.

Yours truly,

Nicolas Bilodeau
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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