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Cash Management

industry guide:
energy

The capitalization and deduction of power plant construction costs
nergy industry taxpayers contemplating the construction of a power plant must become familiar with tax rules covering the capitalization and depreciation of power plant assets and related-party transactions. Initial construction costs are a major expense in any power plant project, with the deductibility of these costs significantly influencing the project’s feasibility. Investors considering such projects must account for the various income tax rules governing the deductibility of costs. These rules include provisions related to: ❚ capitalizing project development expenses; ❚ distinguishing between direct and indirect project costs; ❚ general depreciation methods and annual depreciation rates; and ❚ limitations on deductions for interest paid to related persons. If a foreign company expects to receive construction cost payments or reimbursements from a related company, withholding taxes may apply to the payments/reimbursements. This article considers the relevant rules of a number of countries.

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Canada
Canada allows for accelerated capital cost allowance rates for renewable and efficient power generation systems. These systems include small hydro (annual generating capacity up to 50 megawatts), wind power, solar power, efficient co-gen and enhanced combined cycle systems. Further, if 50% of the capital costs qualify for accelerated capital cost allowance rates, certain intangible costs associated with the development of the project will be deductible in the year incurred or can be carried forward indefinitely to be deducted in a subsequent year. Otherwise, such development costs are included in the capital cost of the project. Additionally, interest on loans specifically identified with construction of the building and ownership of the land must be capitalized to the building or land. Also, during the period of construction of a building, interest that can...