Vol. 139, No. 19 — September 21, 2005

Registration
SOR/2005-266 August 31, 2005

INCOME TAX ACT

Regulations Amending the Income Tax Regulations (Test Wind Turbines)

P.C. 2005-1510 August 31, 2005

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), hereby makes the annexed Regulations Amending the Income Tax Regulations (Test Wind Turbines).

REGULATIONS AMENDING THE INCOME TAX REGULATIONS (TEST WIND TURBINES)

AMENDMENTS

1. (1) The portion of subsection 1219(1) of the Income Tax Regulations (see footnote 1) before paragraph (a) is replaced by the following:

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

(2) Paragraph 1219(1)(g) of the Regulations is replaced by the following:

(g) for a test wind turbine that is part of a wind farm project of the taxpayer.

(3) The portion of subsection 1219(3) of the French version of the Regulations before paragraph (a) is replaced by the following:

(3) Pour l'application de l'alinéa (1)g), « éolienne d'essai » s'entend d'une installation fixe consistant en un système de conversion de l'énergie cinétique du vent qui, en l'absence du présent article, serait compris dans la catégorie 43.1 de l'annexe II par l'effet de son sous-alinéa d)(v) si le ministre, en consultation avec le ministre des ressources naturelles, établit ce qui suit :

(4) Paragraphs 1219(3)(a) and (b) of the Regulations are replaced by the following:

(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

(b) the project does not share with any other project a point of interconnection to an electrical energy transmission or distribution system;

(c) if the project does not have a point of interconnection to an electrical energy transmission or distribution system, the project has a point of interconnection to an electrical system

(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.

(5) Section 1219 of the Regulations is amended by adding the following after subsection (3):

(4) For greater certainty, a Canadian Renewable and Conservation Expense includes an expense incurred by a taxpayer to acquire a fixed location device that is a wind energy conversion system only if the device is described in paragraph (1)(g).

APPLICATION

2. (1) Subsections 1(1) and (5) apply to expenses incurred after April 8, 2005.

(2) Subsections 1(2) to (4) apply to expenditures incurred after July 25, 2002.

(3) If a taxpayer so elects in writing filed with the Minister of National Revenue within 90 days after the day of the publication of these regulations in Part II of the Canada Gazette, subsections 1(2) to (4) also apply to expenditures incurred by the taxpayer after December 5, 1996 and before July 26, 2002, and for the purpose of applying those subsections to those expenditures, paragraph 1219(3)(a) of the Income Tax Regulations, as enacted by subsection 1(4) of these regulations, is deemed to read as follows:

(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 35% of the project's planned nameplate capacity;

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

These Regulations concern the definition "test wind turbine" in subsection 1219(3) of the Income Tax Regulations (the "Regulations").Section 1219 of the Regulations defines Canadian Renewable and Conservation Expenses (the "CRCEs") for the purposes of subsection 66.1(6) of the Income Tax Act (the "Act"). CRCEs are expenses associated with a project whose assets are expected to be primarily included in capital cost allowance Class 43.1 of Schedule II to the Regulations. Unlike depreciable property, a CRCE is included in calculating a taxpayer's Canadian Exploration Expense and is eligible to be renounced under a flow-through share agreement. Thus, a CRCE is fully deductible in the year it is incurred and a corporation that incurs such an expense can renounce it to investors under a flow-through share agreement. The cost of a "test wind turbine" is considered to be a CRCE.

The amendments allow for more than one test turbine to be located at a wind farm under certain conditions. These conditions include a minimum spacing of 1500 meters between each test wind turbine and a separate point of interconnection between the taxpayer's wind farm project and an electrical energy transmission system. The primary purpose of installing the device must be to test the level of electrical energy produced by the device from wind at the place of installation. The amendments to section 1219 of the Regulations were first announced by the Minister of Finance in news release 2002-063 on July 26, 2002. That release included detailed explanatory notes concerning each proposed change to section 1219 of the Regulations.

In addition, these amendments state, for greater certainty, that wind turbines cannot receive CRCE treatment unless they are "test wind turbines". This change applies to expenses incurred on or after April 9, 2005, the date on which these amendments were pre-published in the Canada Gazette Part I.

Alternatives

These amendments are necessary to extend and clarify the definition of a "test wind turbine."

Benefits and Costs

These amendments will treat as a CRCE the cost of acquiring more than one test wind turbine as part of a taxpayer's wind farm project if certain conditions are met. These expenses are fully deductible by the taxpayer undertaking the project and may be transferred to investors purchasing flow-through shares.

Consultation

The criteria established for the new definition "test wind turbine" were developed through consultations held by the Department of Finance with various parties, including the Department of Natural Resources, the Canada Revenue Agency, the Canadian Wind Energy Association and other industry stakeholders. In addition these Regulations were pre-published in the Canada Gazette Part I on April 9, 2005. The department received no comments following that pre-publication and no changes were made other than in subsection 2(1), replacing "on or after the date of the pre-publication of the text of those subsections in Part I of the Canada Gazette" with "April 9, 2005".

Strategic Environmental Assessments

Under the present wording of the Regulations only one test-wind turbine per project can qualify for CRCE treatment. By allowing for more than one qualifying test wind turbine to be located at a wind farm project of a taxpayer, these amendments are expected to encourage the development of a domestic wind energy sector.

While the environmental impact of these Regulations is difficult to quantify, these Regulations are expected to have an indirect positive impact. To the extent these amendments encourage the development of wind farms, significant environmental benefits could accrue in the form of reduced greenhouse gas emissions and reduced reliance on fossil fuels. These measures will also help Canada diversify its energy supply.

Compliance and Enforcement

The Income Tax Act provides the necessary compliance mechanisms. These mechanisms allow the Minister of National Revenue to assess and reassess tax payable, conduct audits and seize relevant records and documents. The "Class 43.1 technical guide and technical guide to Canadian Renewable and Conservation Expense (CRCE)", which is published by Natural Resources Canada, sets out engineering and scientific criteria applicable in determining if an outlay is a CRCE or is included in Class 43.1.

Contact

Gurinderpal Grewal
Tax Legislation Division
Department of Finance
L'Esplanade Laurier
140 O'Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: (613) 992-1862

Footnote a

S.C. 2000, c. 12, s. 142 (Sch. 2, par. 1(z. 34))

Footnote b

R.S., c. 1 (5th Supp.)

Footnote 1

C.R.C., c. 945

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