2 April 1998 External T.I. 9715845 - JOINT VENTURE - CLASS 43.1 ASSET

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a sale by a joint venture to one of the joint venturers constitutes a sale. Also, qualification of asset for Class 43.1 treatment.

Position:

It is a sale only for the other joint venturers. The asset may qualify as a Class 43.1 even if there is no sale of steam.

Reasons:

The joint venture is not a separate legal entity. The owner of the assets are the joint venturers and one cannot sell an asset to oneself. Consequently, there will be a sale only by the other joint venturers. With respect to qualification for Class 43.1, it is not required that steam be sold. The requirements are that the asset be part of a system which is used by a taxpayer to generate electrical energy... and which has a heat rate attributable to fossil fuel not exceeding 6,000 BTU per Kw-hr. This heat rate has to be calculated as the fossil fuel used by the system that is chargeable to gross electrical energy output on an annual basis. The fossil fuel must be allocated between the two products, electricity and steam. However, when the steam is wasted, 100% of the fossil fuel has to be charged to the production of electricity. The allocation between the two should be made using a method that most accurately and reasonably reflects the true reality, as there are no specific provisions in the Act in this respect.

971584

XXXXXXXXXX N.Mondou,M.Fisc.

(613) 957-8961
Attention: XXXXXXXXXX

April 2, 1998

Dear Sirs:

Re: Steam Sales for Class 43.1 Qualification

This is in reply to your letter received on June 12, 1997, in which you requested our opinion with respect to a sale of steam by a joint venture for purposes of qualification of the assets as Class 43.1 property. We apologize for the delay in responding to your request.

The facts disclosed in your letter indicate that

XXXXXXXXXX.

Our comments

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate Tax Services Office, since the review of such transactions falls within their responsibility. If it relates to a proposed transaction, assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3, dated December 30, 1996. However, we offer the following general comments.

As a joint venture is not a legal entity, it cannot itself own any property. The ownership of the assets remains with the joint venturers and the capital cost allowance is to be claimed by them pursuant to their interest in the asset.

For the purpose of this letter, we assume that XXXXXXXXXX will each own an undivided interest in all the assets of the joint venture.

Because the ownership of the assets remains at the joint venturer level, the sale of steam by the joint venture to XXXXXXXXXX will be, in our view, a sale only to the extent of the interest of XXXXXXXXXX in that steam. XXXXXXXXXX cannot sell this product to itself.

With respect to the requirements for qualification as Class 43.1 property, there are no requirements in the Income Tax Regulations ("ITR") that a sale occurs. To qualify as a Class 43.1 asset, the property must be, among other things, part of a system that is used by the taxpayer to generate electrical energy, or both electrical and heat energy, using fossil fuel. This system must have a heat rate attributable to fossil fuel not exceeding 6,000 Btu per kilowatt-hour of electrical energy it generates, which heat rate is calculated as the fossil fuel used by the system that is chargeable to gross electrical energy output on an annual basis.

In the context of Clause (c)(i)(B) of Class 43.1, the word "chargeable" means allocated. When only electrical energy is produced, because for instance, the steam generated by the system is wasted, all the fossil fuel used will be allocated to the production of electrical energy only. On the other hand, as soon as the steam produced by the system ceases to be wasted, an allocation must be made between the two. This does not mean, however, that the steam has to be sold.

Finally, that allocation of the fossil fuel between the electrical energy and the steam should be made using the method that will most accurately reflect the true reality as to whether the 6,000 Btu per kilowatt-hour condition in clause (c)(i)(B) has been met.

We trust that these comments are of assistance but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transactions.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch