Doing Business in Canada: Renewable Energy

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Having reviewed Canada’s renewable energy policies and assessed its price stability, investors, developers and manufacturers from around the world are choosing to enter the Canadian renewable energy market. The process of developing renewable power generation in Canada takes into account the securing of land interests; the availability of grid connection; regulatory matters; investment structures; tax issues; government incentive programs; and immigration concerns.

Land Interests

In Canada, renewable energy developers often structure their land interests by an option to acquire a lease or an option for an easement to the relevant lands. Then, if the project proves viable, developers move forward and exercise the option to actually acquire the lease or easement in question. Option agreements are normally structured to grant the renewable energy developer a right to access the relevant lands to access their renewable energy characteristics and then to use those lands if the energy developer determines to proceed.

Such options allow the developer to register a notice of the option on the title to the prospective site in the applicable land registry office. Registration serves as notice of the developer’s rights under the option to third parties. Whether proceeding by means of an easement or a lease, the developer will need a comprehensive document that provides security of tenure (i.e., the undisturbed right to use the land) for the period required and that deals with (among other things) the payments due under the option and lease/easement.

Grid Connection

Interconnection requirements for renewable energy projects vary widely from jurisdiction to jurisdiction across Canada. Depending on the availability of grid connection, interconnection requirements may represent the most difficult aspect of renewable power development. Usually, approvals must be obtained from the local distribution company (LDC). The LDC seeks to ensure that each project meets the safety, design and operational requirements necessary to ensure the reliability of the transmission and distribution system.

Developers are generally asked to participate in a connection impact assessment (CIA) which is conducted by the LDC. If the assessment states that reliable connection is possible, a connection cost estimate is issued and a connection cost recovery agreement is entered into between the developer and the LDC. In addition to the grid connection requirements, all jurisdictions across Canada require electricity generators to obtain some form of generation licence.

Regulatory Matters

Under Canada’s constitutional division of powers, electricity generation, transmission and distribution are primarily governed at the sub-national or provincial/territorial level. As a result, significant differences exist amongst Canada’s provincial/territorial electricity markets. Some aspects are regulated federally. Such aspects include international and interprovincial power transmission, atomic energy and aspects of energy projects that overlap with areas of federal jurisdiction. Typically, these areas include federal lands, waterways, aviation and fisheries.

As stated above, most regulatory matters concerning renewable power development are the responsibility of the province/territory. In response to the growing needs of the renewable power development industry, one province – Ontario – passed the Green Energy and Green Economy Act (Ontario) to (among other things) create a single-window renewable energy approval (REA) process for renewable power projects located in the province.

In nearly every Canadian province/territory, municipal approvals are required for renewable power projects, including site plan approvals and building permits. In most regions, official plan amendments are also needed.

Generally, each renewable power project must address environmental issues at the federal, provincial and/or municipal levels, including:

a)   air and noise limits;

b)  threatened habitat or endangered species;

c)   wetlands and other protected areas;

d)  bat and bird species or habitat (wind power specific);

e)  archaeological or historical sites; and

f)   telecommunications and aviation.

Both the federal and provincial governments have a legal duty to consult and, if appropriate, accommodate aboriginal communities where their proposed conduct may impact on established or asserted aboriginal rights. This duty arises when approvals are sought for proposed projects that may impact aboriginal or treaty rights. Governments may (and very often do) delegate this duty to project proponents. Failure to fulfill this duty can result in delays, litigation, failure to obtain applicable approvals or even a court order quashing such approvals.

Investment Structures

Generally, entrants to Canada’s renewable power marketplace will establish a Canadian entity to make investments or engage in development activities. The three most common investment structures are outlined below.

Corporations

As a common law jurisdiction, Canada allows entities to establish limited liability share capital corporations federally or under any of Canada’s 10 provinces and three territories. Such corporations are relatively easy to establish. Initial decisions relate to share capital and ownership structure, registered office, name and selection of directors. Generally, a corporation is considered a separate entity from its shareholders and its subsidiaries under Canadian corporate and tax laws.

General Partnership

Two or more persons may form a general partnership to carry on business. A critical, and often fatal, feature of a general partnership is that the partners have unlimited liability for the acts of their partners in the partnership.

Limited Partnership

Limited partnerships are created pursuant to provincial statute. They consist of a general partner, who is responsible for conducting the business of the limited partnership (often a corporation with limited assets), and limited partners who invest in the business but do not make any of the decisions related to the conduct of the business. Provided that this is the case, limited partners are not liable for the debts and obligations of the partnership – only the general partner is.

Tax Matters

The Income Tax Act (Canada) provides accelerated capital cost allowance (tax depreciation) for certain capital assets (Class 43.2) acquired before 2020 and used in systems that convert energy, including solar, wind, water, certain waste fuels and waste heat to electricity or heat systems. The depreciation rate is 50 percent on a declining balance basis.

The Income Tax Act also provides for a current deduction for the Canadian Renewable and Conservation Expense. This expense is a defined class of pre-production development costs paid to arm’s length persons in connection with a project in which it is reasonable to expect that at least 50 percent of the capital cost of depreciable property will be described in Class 43.2.

Where the project proponent has decided to structure the project as a limited partnership, the tax deductions and losses that can be allocated to limited partners will be limited to the partners’ at-risk amount. This amount is generally the cost of the limited partners’ interest plus any income previously allocated, less distributions and losses/deductions previously allocated. Amounts that cannot be claimed in one year can be deducted in a subsequent year when the at-risk amount permits.

Government Incentive Programs

Generally, Canadian governments are very supportive of renewable power development. They have evidenced such support through a number of programs featuring grants, above-market power purchase rates, low-cost loans, rebates on production and tax incentives. Examples include the federal government’s Sustainable Development Tech Fund, which provides grants for late-stage clean power solutions. Another example is the province of Ontario’s Green Energy and Green Economy Act, which pays above-market rates to renewable energy developers based on fuel type. Opportunities of this nature can be significant.

Immigration Matters

In our experience, Canadian renewable power participants often use their own experienced labour pool. Whether these situations are temporary or permanent, renewable power developers need to be aware of the regulations concerning a foreign national working in Canada.

Conclusion

Canada is open for investment in the development of renewable power. Many leading developers, investors and manufacturers are taking note of Canada’s favourable renewable energy policies and price stability. Finding the right legal advisor who understands your project’s particular needs and challenges is critical to maximizing your success.

Bennett Jones’ Renewable Energy Group

Bennett Jones’ lawyers provide timely and expert advice on a wide range of issues important to the renewable energy market in Canada.  As Canada’s leading energy law firm, our lawyers have deep experience helping developers, investors and manufacturers in wind, solar, hydro, biomass, biowaste, biofuels and geothermal successfully commercialize projects.

Topics:  Foreign Nationals, General Partnerships, Green Energy, Income Taxes, Limited Partnerships, LLC, Power Grid

Published In: Business Organization Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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