On August 4, 2023, the Department of Finance of Canada released significant legislative proposals relating to the federal government’s proposed measures to grow Canada’s clean economy. The release includes the draft legislation for the previously announced Clean Technology Investment Tax Credit, as well as labour requirements related to certain ITCs.
The Legislative Proposals also includes draft legislation for the Carbon Capture, Utilization and Storage Investment Tax Credit (“CCUS ITC”) the enhancement of the reduced tax rates for zero-emission technology manufacturers; and the flow-through shares and the Critical Mineral Exploration Tax Credit – Lithium from Brines. However, the Legislative Proposals do not cover the clean hydrogen ITC (“CH ITC”) and the clean electricity ITC (“CE ITC”) (nor the interaction of the latter with the CT ITC).
Canadians and stakeholders are invited to share their feedback and make their submissions on the Legislative Proposals by September 8, 2023.
In this post, we summarize the main elements of (i) the CT ITC; and (ii) the Labour Requirements that are proposed to apply in relation to the new CCUS ITC, CT ITC, CH ITC and CE ITC, as announced in Budget 2023.
Clean Technology ITC
The CT ITC is intended to encourage the investment of capital in the adoption and operation of clean technology property in Canada. As such, it provides a fully-refundable tax credit of a maximum rate of 30% of clean technology property.
Qualifying taxpayers
The CT ITC is only available to taxable Canadian corporations, including taxable Canadian corporations that are members of partnerships that acquire “clean technology property” (as defined below). Consequently, individuals, including trusts, and tax-exempt entities could not claim the CT ITC.
The CT ITC is also not available with respect to clean technology property (or an interest in a person or partnership with a direct or indirect interest in such property) that is a tax shelter investment under section 143.2 of the Income Tax Act (Canada) (the “ITA”).
For partnerships, the proposed legislation for the CT ITC is similar to the existing rules applicable to ITCs under the ITA. More specifically, the ITCs are calculated by the partnership, but are then allocated to its partners, who claim it to the extent of their pro rata share. The CT ITC will be thus claimed and deducted by the partners, not the partnership, in the income tax return of each partner.
However, if the partner is a limited partner of the partnership, the ITCs (including the CT ITC) of the partnership that can be allocated to this partner by the partnership are limited to the lesser of the partner’s “at-risk amount” in the partnership and the partner’s “expenditure base” (the “Limited Partner ITC Limitations”). Both expressions are defined in the ITA: essentially, the amount of ITCs that can be allocated to a limited partner is limited to the lower of (i) the cost of its interest in the partnership at the end of the fiscal period of the partnership and (ii) the portion of the ITC of the partnership that results from the partner’s investment in the partnership.
The thrust of these rules is to ensure that the amount of the ITCs that can be allocated to a limited partner does not exceed the portion of the ITCs that is attributable to expenditures of the partnership funded by the limited partner. Accordingly, a limited partnership cannot allocate to its limited partners the portion of the ITCs on expenditures that are funded by debt incurred by the partnership. However, the excess of the CT ITCs of the limited partnership over the CT ITCs allocated to limited partners can be allocated to the general partner and deducted by it. The proposed new subsection 103(3) of the ITA would also apply to change any allocation to a particular partner of the partnership that is not reasonable in the circumstances having regard to the capital invested in or work performed by the partner. Finally, it is worth noting that partners who are tax-exempt cannot benefit from the CT ITC.
Qualifying property: clean technology property
The CT ITC is available in respect of the capital cost of “clean technology property”, an expression that refers, in general, to property that:
- is situated in Canada and is intended for use exclusively in Canada;
- has not previously been acquired for use or lease before it was acquired by the taxpayer, thus ensuring that the credit is only available for new equipment; and
- if the property is leased by the taxpayer to another person, that person must be a “qualifying taxpayer” (as defined above). It also requires that the property be leased in the ordinary course of carrying on a business in Canada by the taxpayer whose principal business is one of the activities specifically provided for in the Legislative Proposals, or any combination thereof.
In addition to these requirements, in order to qualify as “clean technology property”, property must fall within one of the specified types of equipment listed in the Legislative Proposals, which includes:
- equipment used to generate electricity from solar, wind and water energy;
- stationary electricity storage equipment;
- active solar heating equipment, air-source heat pumps and ground-source heat pumps;
- a non-road zero-emission vehicle and charging or refuelling equipment that in each case is used primarily for such vehicles;
- equipment used exclusively for the purpose of generating electrical energy or heat energy, or a combination of electrical energy and heat energy, solely from geothermal energy, but excluding any equipment that is part of a system that extracts both heat from a geothermal fluid and fossil fuel for sale or use;
- concentrated solar energy equipment; and
- small modular nuclear reactors.
The CT ITC rate
In general, the CT ITC would be equal to the capital cost to the taxpayer of clean technology property acquired by the taxpayer in the year multiplied by the applicable credit rate, subject to the below adjustments.
The applicable credit rate of the CT ITC would vary based on when the qualifying property is acquired. For such purposes, such property would be deemed not to have been acquired until it is “available for use”.
Specifically, the applicable credit rates are as follows:
- 0% for property that is acquired before March 28, 2023, whether or not it becomes available for use on or after that day.
- 30% for property acquired on or after March 28, 2023 and before 2034.
- 15% for property acquired in 2034.
- 0% for property acquired after 2034.
Thus, to be eligible for the full CT ITC of 30%, the qualifying property would need to be acquired and become available between March 28, 2023 and before January 1, 2034.
Finally, for property that is prepared or installed on or after October 1, 2023, the above-noted rates would be reduced by 10% unless the claimant elects to meet the Labour Requirements, as further described below.
Reductions to capital cost of qualifying property
The Legislative Proposals provide certain restrictions on claims for the CT ITC.
As previously announced, one of these important restrictions is that the CT ITC is unavailable for property in respect of which a CT ITC or a CCUS ITC was previously claimed. When the draft legislation for the CE ITC and the CH ITC is released, it is expected that similar restrictions will apply with respect to those new ITCs.
Another restriction in the computation of the CT ITC is that, just like for ITCs under section 127 of the ITA, the capital cost of property eligible for the CT ITC is reduced by any government assistance and non-government assistance in respect of property. Any amount of assistance repaid afterward could become eligible for the clean technology ITC.
In addition, interest and financing expenses added to the capital cost of property pursuant to section 21 of the ITA may not be included in the capital cost of a clean technology property for purposes of the CT ITC.
Where any part of the capital cost of a taxpayer’s clean technology property is unpaid 180 days after the end of the taxation year in which it was acquired, that part of the cost is excluded from the capital cost of the property in the year and is instead added to the capital cost of that property at the time it is paid for.
Finally, the adjustments provided for purposes of ITC relating to the cost of property transferred between non-arm’s length parties were imported and adapted for the purpose of the CT ITC.
Prescribed form and deadlines
The CT ITC would be claimed on the prescribed form and filed with the taxpayer’s income tax return for the year in which the qualifying property is acquired.
As currently drafted, the prescribed form claiming the clean technology investment tax credit would need to be filed on or before the day that is one year after the taxpayer’s filing-due date for the year. This strict deadline would preclude the Minister from any discretion to waive this requirement.
Recapture
The CT ITC would generally be subject to recapture where a clean technology property for which a taxpayer has claimed a CT ITC is converted to a non-clean technology use, exported from Canada or is disposed of in the 20 calendar years following the acquisition of the property. Such recapture would be calculated by multiplying the CT ITC claimed on the property being converted, exported or disposed with the proportion between the proceeds (or fair market value in case of transactions between non-arm’s length persons) and the taxpayer’s capital cost of the property.
Recapture could however be deferred where the property is disposed of to a related person.
For qualifying taxpayers that are corporations, the amount of recapture would be added to the corporation’s tax liability for the year in which the conversion, exportation or disposition occurs.
As for partnerships, recapture would be determined in a similar manner to the recapture rules for SR&ED ITCs.
Labour Requirements
There are two main aspects of the labour requirements: the prevailing wage and the apprenticeship requirements (together referred to as “Labour Requirements”).
In general, in order qualify for the “regular tax credit rate” of either the relevant ITC, a taxpayer would need to elect in the prescribed form and manner to meet the Labour Requirements for each taxation year during which preparation or installation of property subsidised by the relevant ITC occurs. Accordingly, the Labour Requirements would only apply to taxation years during which preparation or installation of property subsidized by the relevant ITC occurs. Where a taxpayer does not make such election, the applicable credit rate would be 10% less than the rate that would otherwise be available in respect of those credits. Where a taxpayer elects to meet the Labour Requirements but fails to do so, the taxpayer would generally maintain its entitlement to the credit at the regular tax credit rate but would be required to pay related penalties and to take corrective measures (as further described below). A taxpayer would however lose its entitlement to a credit at the regular tax credit rate if it failed to meet the Labour Requirements knowingly or in circumstances amounting to gross negligence.
The Labour Requirements are to be effective in respect of property subsidized by the relevant ITC that is prepared or installed on or after October 1, 2023.
Covered workers
The Labour Requirements would apply in respect of workers engaged in the preparation or installation of property that are subsidized by the respective ITC (which currently includes only the CCUS ITC and the CT ITC), whether they are engaged directly by the business or indirectly by a contractor or subcontractor.
The Labour Requirements would apply to workers whose duties are primarily manual or physical in nature (e.g., labourers and tradespeople). The Labour Requirements would not apply to workers who are administrative, clerical or executive employees or to any business visitors to Canada.
Designated work site
The Labour Requirements would only apply in respect of covered workers at a designated work site. A designated work site is a site where property subsidized by one of the relevant ITCs of the taxpayer is located.
Prevailing wage requirement
In general, the prevailing wage requirement is composed of three core elements.
First, all covered workers at a designated work site must be compensated in accordance with an eligible collective agreement, or in an amount at least equal to the amount of wages and benefits specified in the eligible agreement that most closely aligns to the worker’s experience level, tasks and location.
Second, the taxpayer would need to attest in prescribed form and manner that they have met the prevailing wage requirements for their own employees at the designated work site. They would also need to attest that they have taken reasonable steps to ensure that covered workers employed by others at the designated work site are so compensated.
The last requirement provides for the means of informing covered workers about the prevailing wage requirements applicable to the designated work site. This requirement is aimed at ensuring that covered workers, including workers who are not employed directly by the taxpayer, are aware that they should expect to be paid prevailing wages.
Apprenticeship requirement
For its part, the apprenticeship requirement would be composed of two core elements.
First, not less than 10% of the total labour hours performed by covered workers engaged in subsidized project elements must be performed by registered apprentices. To the extent that applicable labour laws, or a collective agreement that applies to the work being performed, sets restrictions as to the number of apprentices, such restrictions would be incorporated by reference in the apprenticeship requirement.
Second, the taxpayer would need to attest in prescribed form and manner that they have met the apprenticeship requirements in respect of covered workers at the designated work site.
Addition to tax
Where a taxpayer has claimed the regular rate tax credit rate but has failed to meet the prevailing wage requirements, then it would be liable to pay a special tax equal to $20 (indexed to inflation after 2023) per day for each covered worker paid at less than the prevailing wage.
Where a taxpayer has claimed the regular rate tax credit rate but has not achieved the 10% apprenticeship labour hours requirement (or other applicable rate), then the taxpayer would generally be liable to pay a special tax equal to $100 (indexed to inflation after 2023) multiplied by the difference between the number of hours that were required to have been performed by apprentices and the number of hours of labour that were actually performed by apprentices.
In both situations a taxpayer would generally not lose its entitlement to the credit at the regular tax credit rate.
However, these additional taxes would not apply in situations of intentional conduct or gross negligence where the consequences described below would apply instead.
Corrective measures: top-up amount
Where a taxpayer receives a notification from the Canada Revenue Agency (“CRA”) specifying that it did not meet the prevailing wage requirements for a designated work site for a taxation year, such taxpayer may, within one year after receiving such notice or such longer period as is acceptable to the CRA, cause each covered worker to be paid the “top-up” amount. The “top-up” amount generally corresponds to the difference between the prevailing wages that were required to have been paid to the covered worker for a taxation year and the amount that the covered worker was actually paid for the year.
Where a covered worker is not paid the top-up amount, the taxpayer would be liable to a penalty for each such covered worker equal to 120% of the top-up amount, in respect of each covered worker that was not paid such top-up amount.
Top-up amounts paid as a corrective measure would be deemed to be salary and wages of the worker for the year in which it is received. For the payor, the amount of the payment would be deductible for income tax purposes in the year it is paid, but would not qualify for any specified tax credit.
This corrective measure would however not be available in situations of intentional conduct or gross negligence.
Gross negligence
The Legislative Proposals provide two consequences in situations of intentional conduct or gross negligence of a taxpayer failing to meet the Labour Requirements.
First, such taxpayer would be disentitled to the regular tax credit rate that was claimed, and would be entitled only to the reduced tax credit rate (i.e., the regular rate less 10%).
Second, the taxpayer would need to pay a penalty equal to 50% of the difference between the amount of the tax credit they claimed, and the amount that they would have been entitled to claim at the reduced rate credit rate.
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