Profiles of the Clean Economy Investment Tax Credits
Executive Summary
Canada has introduced six clean economy investment tax credits intended to incentivize environmentally friendly activity in sectors such as manufacturing, mineral extraction and processing, energy generation and EVs. This article sets out a profile of each of these credits.
In recent years, six investment tax credits (ITC) to incentivize development of green technologies and clean energy in Canada were introduced. As refundable credits, the credits reduce the claimant’s tax payable for the year, and the claimant receives any amount by which the credit exceeds its tax payable. Except for the Clean Electricity and Electric Vehicle Supply Chain credits, these clean economy credits are now effective and can already be claimed by taxpayers.
As multiple ITCs can be claimed in respect to the same project though not in respect of the same expense, Canadian middle market taxpayers will want to understand their eligibility and the rate attached to each credit to assess how they can maximize credits.
Taxpayers should additionally note:
- Credit rates will be reduced by 10% if the claimant does not comply with labour requirements related to wages and use of apprentice labour. These requirements do not apply to the Clean Technology Manufacturing ITC or Electric Vehicle Supply Chain ITC.
- Though partnerships cannot claim the credits themselves, they can allocate to partners who are eligible claimants a proportionate share of the credits the partnership would have been able to claim had the partnership been a taxable Canadian corporation.
Carbon Capture, Utilization and Storage (CCUS) ITC
Eligible Claimants: Taxable Canadian corporations
Credit Rate and Relevant Years: The CCUS ITC can be claimed on up to 60% of eligible expenditures incurred between 2022 and 2030. The credit will then be phased out by 2041.
Eligible Expenditures**:**
Qualified carbon capture, transportation, storage and use expenditures related to:
- The storage of captured carbon in dedicated geological storage located in British Columbia, Saskatchewan, Alberta and other jurisdictions as designated and
- The use of captured carbon in producing concrete in Canada or the United States using a qualified concrete storage process are eligible for this credit.
Reporting:
- Project plan
- Annual credit claim
- Eligible use reporting*
- Climate risk disclosure*
- Knowledge sharing reports*
*This does not apply to all claimants.
Clean Technology ITC
Eligible Claimants: Taxable Canadian corporations and Real Estate Investment Trusts (REITS)
Credit Rate and Relevant Years: The Clean Technology ITC can be claimed at a rate of 30% of the capital cost of eligible property acquired and available for use between March 28, 2023 and 2033. The credit will then be phased out by 2035.
Eligible Property**:**
Generally, eligible property for the purpose of the Clean Technology ITC includes:
- Equipment used to generate electricity from solar, wind, water energy, electricity or heat from geothermal energy,
- Stationary electricity storage, active solar heating, concentrated solar energy equipment, small modular nuclear reactors, and air or ground source heat pumps, and;
- Non-road zero-emission vehicles and related charging and refueling equipment.
Reporting:
- Annual credit claim
- Recapture compliance
Clean Hydrogen ITC
Eligible Claimants: Taxable Canadian corporations
Credit Rate and Relevant Years: The Clean Hydrogen ITC can be claimed at a rate of 15%, 25% or 40% on the capital cost of eligible property acquired and available for use between March 28, 2023 and 2033. The relevant percentage depends on the assessed carbon intensity of the hydrogen produced. The credit will then be phased out by 2035.
Eligible Property**:**
Eligible property for the Clean Hydrogen ITC includes equipment related to the production of hydrogen or clean ammonia, and certain dual-use equipment. The equipment must be used in a qualified project that involves the production of hydrogen from electrolysis or reforming natural gas using carbon dioxide captured in a carbon capture, utilization and storage process.
Reporting:
- Project plan
- Annual credit claim
- Compliance report
- Operations report
- Recapture compliance
Clean Technology Manufacturing ITC
Eligible Claimants: Taxable Canadian corporations
Credit Rate and Relevant Years: The Clean Technology Manufacturing ITC will have a rate of 30% of the capital cost of eligible property acquired and available for use between 2024 and 2031. The credit will then be phased out by 2035.
Eligible Property**:**
Eligible property for the Clean Technology Manufacturing ITC is capital property falling under certain CCA classes in Schedule II of Canada’s Income Tax Regulations. At a high level, this includes machinery and equipment, building systems, non-road vehicles and automotive equipment used in:
- Manufacturing of zero-emission vehicles or technology to produce or store renewable energy, and/or:
- A qualifying mineral activity producing lithium, cobalt, nickel, copper, rare earth elements and/or graphite.
Budget 2024: Budget 2024 proposed amendments to this credit to better allow businesses engaged in polymetallic projects (i.e., projects engaged in the production of multiple metals) to claim this credit. Though these changes are not yet in force, they are expected to be effective for the entire claim period of the credit. These amendments include:
- Clarifying the value of qualifying materials that will be used to assess the extent to which property is used or is expected to be used for qualifying mineral activities,
- Expanding eligible expenditures to include investments in eligible property used in qualifying mineral activities that are expected to produce primarily qualifying materials at mine or well sites, and;
- Adjusting the calculation of recapture of the ITC to account for a five-year historical average mineral price to limit the impact of market volatility.
Reporting:
- Annual credit claim
- Recapture compliance
Electric Vehicle Supply Chain ITC
Budget 2024 proposed a new 10 per cent electric vehicle (EV) supply chain ITC on the cost of buildings involved in the EV supply chain. To claim the credit, the taxpayer (or a member of a group of related taxpayers) must claim the Clean Technology Manufacturing ITC across all three of the following supply chain segments:
- Electric vehicle assembly
- Electric vehicle battery production
- Cathode active material production
Alternately, the credit is available if the claimant:
- claimed the Clean Technology Manufacturing ITC in two of the three of the above segments, and;
- owns at least a qualifying minority interest in an unrelated corporation that claims the Clean Technology Manufacturing tax credit in the third segment.
The unrelated corporation can claim the credit as well.
The EV ITC will apply to property acquired and available for use on or after Jan. 1, 2024. The credit rate will be reduced to 5% for 2033 and 2034 and will no longer be in effect after 2034.
Clean Electricity ITC
Eligible Claimants: Taxable Canadian Corporations and certain other Canadian corporations (including eligible Crown corporations).
Credit Rate and Relevant Years: The credit rate for Clean Electricity is proposed to be 15% of the capital cost of eligible property acquired and available for use between April 16, 2024 and 2034.
Eligible Property or Expenditures**:**
Eligible property for the Clean Electricity ITC includes equipment used to generate electricity from green sources (e.g., solar, tidal, geothermal) to store energy without the use of fossil fuels, equipment that is part of eligible natural gas energy system or equipment that transmits electricity between provinces and territories. Qualifying expenditures could include capital expenditures to refurbish existing facilities.
Reporting:
- Annual credit claim
- Annual disclosure on improvements to ratepayers’ bills*
- Eligible natural gas energy system reporting*
*This does not apply to all claimants.