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Ottawa, July 26, 2002
2002-063

Federal Government Enhances Renewable Energy Tax Incentives

Related documents:

• Backgrounder.
• Draft Income Tax Regulations (Test Wind Turbines).
• Technical Notes.

John Manley, Deputy Prime Minister and Minister of Finance, announced today two proposed changes to the income tax rules to enhance the tax incentives for investments in renewable energy and energy conservation projects.

Specifically, these changes would:

• treat as Canadian Renewable and Conservation Expenses (CRCE) the cost of acquiring and installing more than one test wind turbine as part of a taxpayer’s wind farm; and

• allow corporations to renounce CRCE to flow-through share investors in a year, where the CRCE will be incurred in the subsequent year.

The first change, to be effected by regulations, would be generally applicable to expenditures incurred after today, and to previously incurred expenditures on an elective basis.

The second change, which would apply to both wind electricity projects and qualifying renewable energy and energy conservation projects, would provide greater flexibility in the timing of investments financed using flow-through shares. The treatment of flow-through share investments in such projects would parallel that of investments in non-renewable energy projects. This change is proposed to apply to CRCE incurred after 2002 in respect of flow-through share agreements entered into after today. The Minister indicated he intends to introduce legislation implementing this proposed change in Parliament at the earliest opportunity.

“I am confident that Canadians will support our efforts to encourage the production of more renewable energy in Canada,” said Minister Manley. He added that today’s announcement provides greater certainty for those taxpayers engaged in the production of wind power and ensures that renewable energy projects can raise financing in the same manner as non-renewable energy projects.

The changes will complement existing programs such as the Wind Power Production Incentive announced in December 2001 and the green power procurement commitment.

References to ANNOUNCEMENT DATE in the draft regulations refer to the date of this release.

A backgrounder, draft regulations and technical notes are attached.

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Backgrounder

Test Wind Turbines

The 1996 budget introduced a new category of expenses called Canadian Renewable and Conservation Expenses (CRCE). These expenses are fully deductible by the taxpayer or may be transferred to investors purchasing flow-through shares. The purpose of the CRCE rules is to make the tax treatment of renewable energy exploration expenses more consistent with that of non-renewable energy exploration expenses.

The 1997 budget proposed to amend the CRCE definition to include the costs of acquiring and installing “test wind turbines.” The current Income Tax Regulations restrict eligibility for this expense treatment to the “first device at a taxpayer’s site.” The wind energy industry has recommended that this restriction be changed to allow for more than one test wind turbine as part of a taxpayer’s wind farm project.

In August 2001 the Government announced that new criteria for test wind turbines would be developed following consultations with industry. Draft regulations released today reflect these consultations and address industry concerns. Specifically, they provide that more than one test wind turbine may qualify in respect of a taxpayer’s wind farm project, if certain conditions are met. These changes are generally applicable to expenditures incurred after ANNOUNCEMENT DATE, and to previously incurred expenditures on an elective basis.

Natural Resources Canada will update the criteria for test wind turbines in the Technical Guide to Canadian Renewable and Conservation Expenses.

“Look-Back” Rule for Flow-Through Share Investments

The look-back rule is currently available only for flow-through share investments in the oil and gas and mining sectors. It allows corporations one full year to incur expenses that have been renounced to flow-through share investors in a previous year. This rule was intended to facilitate a more efficient and orderly spending of exploration budgets. The look-back rule has three components:

i) expenses incurred by the issuing corporation by the end of February may be renounced at the end of the previous year without a charge being levied;

ii) the issuing corporation is required to pay a charge based on a prescribed interest rate on any amounts renounced at the end of the previous year that are expended between March 1 and December 31 of the following year; and

iii) if the full amount is not expended by December 31 of the following year, the corporation is subject to a penalty of 10% on the unexpended balance and investors are subject to reassessment to eliminate the deduction of CRCE.

The renewable energy industry has not had access to any look-back provision related to their flow-through share financings. Representatives from the industry, including the wind energy sector, have requested that the look-back rule be extended to apply to CRCE to parallel the treatment provided to investments in the non-renewable energy sector. This change will provide greater flexibility in the timing of energy conservation and renewable energy investments financed using flow-through shares. Accordingly, it is proposed that the look-back rule be extended to CRCE incurred after 2002 in respect of flow-through share agreements entered into after ANNOUNCEMENT DATE.