On August 4, 2023, the Department of Finance Canada (Finance) released draft legislation and explanatory notes (August Legislation) in respect of various green-energy tax incentives. The August Legislation includes draft proposals to the federal Income Tax Act (Act) regarding:
the clean technology investment tax credit (Clean Technology Credit);
the carbon capture, utilization and storage (CCUS) investment tax credit (CCUS Tax Credit);
a corporate tax rate reduction for zero-emission technology manufacturers; and
the extension of the flow-through share and critical mineral exploration tax credit (CMETC) regime to lithium from brines.
Finance also released draft legislation on labour requirements for obtaining the maximum rate of certain tax credits.
For a history of the various proposals going back to Budget 2021, see our Blakes Bulletin: 2023 Federal Budget: Green-Energy Tax Incentives.
A. Clean Technology Credit
The Clean Technology Credit is a refundable tax credit available to a “taxable Canadian corporation” investing in “clean technology property.”
The August Legislation proposes that:
section 127.45 be added to provide for the refundable Clean Technology Credit for certain “clean technology property” acquired and becoming available for use on or after March 28, 2023;
certain labour requirements be satisfied to qualify for the maximum available Clean Technology Credit; and
the Clean Technology Credit be excluded from the definition of “government assistance” in subsection 127(9) to ensure that it is not reduced by virtue of other tax credits available under section 127.
“Clean Technology Property”
Under proposed subsection 127.45(1), there are four requirements that must be satisfied for property to qualify as “clean technology property”:
1) the property must be situated in Canada and intended for use exclusively in Canada;
2) the property must not have previously been acquired for use or lease before it was acquired by the taxpayer;
3) if the property is leased by the taxpayer to another person, that person must be a taxable Canadian corporation and the lease must be in the ordinary course of carrying on business in Canada by the taxpayer whose principal business is of a specified type; and
4) the property must be eligible property, as discussed below.
The list of eligible property for the Clean Technology Credit is provided under paragraph (d) of the definition of “clean technology property” and includes:
equipment used to generate electricity from solar, wind and water energy that is described in subparagraph (d)(ii), (iii.1), (v), (vi) or (xiv) of Class 43.1 in Schedule II to the Income Tax Regulations;
stationary electricity storage equipment that is described in subparagraph (d)(xviii) or (xix) of Class 43.1 in Schedule II to the Income Tax Regulations, but excluding equipment that uses any fossil fuel in operation;
active solar heating equipment, air-source heat pumps and ground-source heat pumps that are described in subparagraph (d)(i) of Class 43.1 in Schedule II to the Income Tax Regulations;
a non-road zero-emission vehicle described in Class 56 in Schedule II to the Income Tax Regulations and charging or refuelling equipment described in subparagraph (d)(xxi) of Class 43.1 in Schedule II to the Income Tax Regulations or subparagraph (b)(ii) of Class 43.2 in Schedule II to the Income Tax Regulations 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, that is described in subparagraph (d)(vii) of Class 43.1 in Schedule II to the Income Tax Regulations, 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 (as defined in proposed subsection 127.45(1)); or
a small modular nuclear reactor (as defined in proposed subsection 127.45(1)).
Where clean technology property is acquired by a taxable Canadian corporation, the available tax credit is based on the following “specified percentages”:
before March 28, 2023, nil;
on or after March 28, 2023, and before January 1, 2034, 30%;
after December 31, 2033, and before January 1, 2035, 15%; and
after December 31, 2034, nil.
Pursuant to proposed subsection 127.45(1), “clean technology property” is deemed not to have been acquired by a taxpayer before the property is considered to have become available for use by the taxpayer.
The Clean Technology Credit is available to taxable Canadian corporations, including those that are members of partnerships that acquire clean technology property. The Clean Technology Credit is calculated as if the partnership were a taxable Canadian corporation and allocated to the partners based on the portion of the capital costs that can be reasonably attributed to them.
Timeframe for Application
Proposed subsection 127.45(3) requires that a taxpayer file a prescribed form containing prescribed information about the amount of the Clean Technology Credit on or before the day that is one year after the taxpayer’s filing due date for the year. This timeframe is not subject to the Minister’s discretion to waive this requirement.
Where a taxpayer claims the Clean Technology Credit but subsequently fails to meet certain criteria up to 20 years after the acquisition of the property, the draft legislation provides for recapture rules that effectively add back amounts to the taxpayer’s tax payable. These rules apply to taxpayers who, for example, convert the previously eligible property to a “non-clean technology use” or export the property from Canada.
B. Carbon Capture, Utilization and Storage
The August Legislation provides the most comprehensive legislative framework regarding the CCUS Tax Credit since draft legislation was first released on August 9, 2022.
The CCUS Tax Credit is a refundable tax credit available to certain taxpayers who incur qualified CCUS expenditures after 2021 and before 2041. For a comprehensive discussion of the general design of the CCUS Tax Credit as released in Budget 2022, see our Blakes Bulletin: 2022 Federal Budget: Selected Tax Measures.
Budget 2023 Implementation
The August Legislation reflects certain changes to the design features of the CCUS Tax Credit and incorporates proposals contained in Budget 2023 including:
rules to accommodate eligibility of dual use equipment that produces heat and/or electrical power or uses water, and that is used for a CCUS project with another process;
separation of the CCUS Tax Credit based on when expenditures are incurred. The cumulative CCUS development tax credit encompasses expenditures incurred before the start of commercial operations of a CCUS project whereas the CCUS refurbishment tax credit encompasses expenditures incurred during project operations;
clarification of the interaction of the CCUS Tax Credit with other government assistance including the Clean Technology Credit;
changes to validation of storage in concrete by a professional or organization that meets certain accreditation requirements; and
the addition of British Columbia as an eligible jurisdiction along with new rules to facilitate the designation of additional jurisdictions and revocation of a designated jurisdiction.
The CCUS Tax Credit is limited to taxable Canadian corporations; however, as acknowledged by the explanatory notes, partnerships are commonly used entities in the resource and renewable sector and, accordingly, the proposed legislation includes rules to accommodate their use. Examples include a look-through rule allowing access to the tax credit for a member of a partnership that is a taxable Canadian corporation, limitations on the allocation of the CCUS Tax Credit to a limited partner utilizing current subsections 127(8.1) to (8.5) and limitations on the availability of the CCUS Tax Credit if property used in a CCUS project is a tax shelter investment.
The inclusion of partnerships will facilitate commercial transactions as many CCUS projects are likely to be undertaken by two or more corporations.
Recovery and Recapture Tax Mechanisms
A significant aspect of the August Legislation is Part XII.7, which encompasses the recovery and recapture tax mechanisms and reporting requirements (i.e., the climate risk disclosure and knowledge sharing rules). Generally, taxpayers may be subject to a recovery tax where the actual eligible use percentage of a CCUS project falls below 10% or where the difference between projected eligible use and actual eligible use is greater than 5%. Alleviating rules have been provided where the actual eligible use is significantly reduced due to extraordinary circumstances, for bona fide reasons outside of the taxpayer’s control. A taxpayer who disposes of a property or exports it from Canada also may be subject to a recapture mechanism pursuant to subsections 211.92(9) and (10).
Dispositions of CCUS Projects
Part XII.7 includes provisions to account for dispositions of a CCUS project. Pursuant to proposed subsection 211.92(11), where a vendor disposes of all or substantially all of its property that is part of a qualified CCUS project to another taxable Canadian corporation and a joint election is filed, the purchaser effectively steps into the shoes of the vendor. The purchaser will be deemed to have made the vendor’s qualifying expenditures, claimed the tax credits that the vendor could have claimed and filed any project plans that the vendor prepared or filed. Where subsection 211.92(11) applies, the recapture mechanisms in subsections 211.92(9) and (10) should not apply. This provision is welcome relief as a taxpayer may need to dispose of a CCUS project for a variety of bona fide commercial reasons.
We will discuss the CCUS Tax Credit more comprehensively in a separate bulletin. Notably, the August Legislation did not include specific details regarding the CCUS project evaluation process by the Minister of Natural Resources.
C. Labour Requirements
Newly proposed section 127.46 introduces labour requirements designed to apply to the CCUS Tax Credit, Clean Technology Credit, the investment tax credit for clean hydrogen (Hydrogen Credit) and the investment tax credit for clean electricity (Electricity Credit). The current draft legislation specifies the labour requirements for “specified tax credits,” which is defined as the CCUS Tax Credit and the Clean Technology Credit.
Where a taxpayer claims one of the tax credits but does not elect to meet the labour requirements discussed below, the taxpayer may claim the specified tax credit at a reduced rate.
There are two main labour requirements to claim the maximum available tax credits:
Prevailing Wage Requirement: All “covered workers” must be paid according to an “eligible collective agreement” or in an amount at least equal to the amount of wages and benefits provided to similar workers under such an agreement. In addition, a claimant must attest that it has met the prevailing wage requirements and inform covered workers about the prevailing wage requirements in place at the designated work site.
Apprenticeship Requirement: In a given taxation year, no less than 10% of the total labour hours performed by workers in the Red Seal trades must be performed by registered apprentices. A claimant must make reasonable efforts to ensure that apprentices registered in a Red Seal trade work at least 10% of the total hours and attest that it has met the apprenticeship requirement.
Section 127.46 can be summarized as follows:
1) subsection 127.46(2) requires that a taxpayer make an election in prescribed form stating that the labour requirements will be met to claim the “regular tax credit rate,” which is the maximum tax credit available;
2) subsection 127.46(3) sets out the prevailing wage requirements discussed above;
3) subsection 127.46(5) sets out the apprenticeship requirements discussed above; and
4) subsections 127.46(6) to (12) set out the consequences for failing to meet the labour requirements, exceptions to the labour requirements and corrective measures that may be implemented where a taxpayer claims to meet the labour requirements but subsequently fails to do so.
The labour requirements will not apply to workers who are administrative, clerical or executive employees, or who are business visitors to Canada under section 187 of the Immigration and Refugee Protection Regulations.
Consequences for Electing and Failing to Meet the Labour Requirements
Where a claimant has elected to meet the labour requirements but subsequently fails to do so, such claimant may take corrective action to comply with the labour requirements or pay a penalty.
The penalties imposed under the Act depend on which labour requirement has not been satisfied and whether the error is due to intentional conduct or gross negligence on the part of the claimant. Where the error is not due to intentional conduct or gross negligence, the claimant may maintain its entitlement to the tax credit but must pay penalties as follows:
Prevailing Wage Requirement: C$20 per day for each covered worker paid at less than the prevailing wage.
Apprenticeship Requirement: C$100 multiplied by the difference between the number of hours that were required to have been performed by apprentices and the number of hours actually performed.
In circumstances of intentional conduct or gross negligence, the penalties above do not apply and subsection 127.46(9) governs the consequences. First, the claimant loses its right to the maximum credit and is only entitled to the reduced rate. Second, the claimant must pay 50% of the difference between the credit claimed and the amount that the incentive claimant would have been entitled to claim at the reduced credit rate.
D. Zero-Emission Technology Manufacturers
Following the Budget 2021 proposal, Finance ultimately implemented a temporary reduction in the corporate income tax rates for qualifying zero-emission technology manufacturers. Budget 2023 proposed to expand the list of eligible activities and the draft August Legislation specifically proposes that:
subsection 125.2(2) be amended by extending the availability of the corporate tax rate reduction to profits for taxation years beginning after 2021 and before 2035; and
section 5202 of the Income Tax Regulations be amended to expand the list of eligible property whose manufacturing or processing may constitute a “qualified zero-emission technology manufacturing activity.” The expanded list includes:
The above amendments are proposed for taxation years that begin after 2023.
E. Flow-Through Shares and Critical Mineral Exploration Tax Credit – Lithium From Brines
Budget 2023 proposed to include lithium from brines as a mineral resource, allowing principal-business corporations that undertake certain exploration and development activities to issue flow-through shares and renounce expenses to their investors. Additionally, Budget 2023 proposed to expand the eligibility of the CMETC to include lithium from brines.
In the draft August Legislation, Finance:
amended the definition of “principal-business corporation” under subsection 66(15) to expand the eligibility to certain corporations involved in the exploration and development of lithium; specifically the production and marketing of lithium and the manufacturing of products where the processing of lithium is involved;
added subsection 66(21) to introduce an interpretive rule that deems wells for the extraction of material from lithium brine deposits to be a mine for the purposes of paragraph (f) of Canadian exploration expense in subsection 66.1(6) and paragraphs (c.2) and (d) of the definition of Canadian development expense in subsection 66.2(5); and
amended the definition of “mineral resource” under subsection 248(1) to include lithium, which allows lithium extracted from brines to qualify as a mineral resource and removes the requirement for taxpayers to apply to the Minister of Natural Resources for mineral resource certification.
We expect that Finance will continue to release additional draft legislation regarding the various green-energy tax incentives previously announced (and as summarized in our Blakes Bulletin: 2023 Federal Budget: Green-Energy Tax Incentives).