2023 Federal Budget: Green-Energy Tax Incentives

Over the past few years, the Department of Finance Canada (Finance) has proposed a cluster of green-energy tax incentives aimed at encouraging both the development of Canada’s green economy and the reduction of Canada’s emissions from greenhouse gases.

On March 28, 2023 (Budget Day), Finance released the 2023 Budget and provided details on new and previously proposed investment tax credits, including:

• The Investment Tax Credit for Clean Hydrogen (Hydrogen Credit)

• The Investment Tax Credit for Clean Technology (Technology Credit)

• The Investment Tax Credit for Clean Electricity (Electricity Credit)

• The Investment Tax Credit for Clean Technology Manufacturing (Manufacturing Credit)

• The Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS Credit)

This bulletin provides a snapshot of the tax incentives proposed by Finance since 2021 and summarizes certain key features of each tax incentive. It also summarizes the labour requirements for obtaining the maximum amount of certain credits and the knowledge sharing and climate risk disclosure requirements for the CCUS Credit.

For information relating to other 2023 Budget measures, please see Your Guide to the 2023 Federal Budget.

TABLE OF CONTENTS:

OVERVIEW OF PROPOSALS

• Budget 2021

• Budget 2022

• Fall Economic Statement 2022

• Budget 2023

SUMMARY TABLE OF INVESTMENT TAX CREDITS

ADDITIONAL DETAILS AND CURRENT STATUS OF EACH GREEN-ENERGY TAX INCENTIVE

• Hydrogen Credit

• Technology Credit

• Electricity Credit

• Manufacturing Credit

• CCUS Credit

• Flow-Through Shares and CMETC

• Zero-Emission Technology Manufacturers

• CCA Classes 43.1 And 43.2

OVERLAP OF INVESTMENT TAX CREDITS

LABOUR REQUIREMENTS

CCUS CREDIT REQUIREMENTS: KNOWLEDGE SHARING AND CLIMATE RISK DISCLOSURE

• Knowledge Sharing Requirements

• Climate Risk Disclosure

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OVERVIEW OF PROPOSALS

The following provides a summary of the recent green-energy incentives proposed by Finance:

Budget 2021

• A temporary measure to reduce corporate income tax rates for eligible zero-emission technology manufacturing and processing activities

• An expansion to capital cost allowance (CCA) Class 43.1 and Class 43.2 to include certain equipment relating to hydroelectric storage, electricity generation attributable to flowing water, wave or tidal energy, solar heating systems, equipment used to produce solid and liquid fuels from specified waste material or CO₂, and certain hydrogen equipment

Budget 2022

• The CCUS Credit

• The phasing out of flow-through shares for oil, gas and coal activities

• The introduction of the 30% Critical Mineral Exploration Tax Credit (CMETC)

Fall Economic Statement 2022

• The Hydrogen Credit

• The Technology Credit

Budget 2023

• Further details on the Hydrogen Credit

• Further details on the Technology Credit and an expansion to include geothermal energy

• The Electricity Credit

• The Manufacturing Credit

• An expansion to the temporary measure to reduce corporate income tax rates for eligible zero-emission technology manufacturing and processing activities to include nuclear activities

• Further details on the CCUS Credit

• An expansion to the flow-through share regime to include lithium from brines as a mineral resource

• An expansion to the CMETC to include lithium from brines

SUMMARY TABLE OF INVESTMENT TAX CREDITS

Please click here to view the table.

ADDITIONAL DETAILS AND CURRENT STATUS OF EACH GREEN-ENERGY TAX INCENTIVE

Hydrogen Credit

Prior Announcement(s) by Finance

Budget 2022 proposed to establish an investment tax credit to support investments in clean hydrogen production.
Fall Economic Statement 2022 proposed an up-to 40% refundable Hydrogen Credit available to businesses investing in eligible equipment that becomes available for use on or after Budget Day.

Budget 2023

Budget 2023 provides that projects must produce only hydrogen (in all or substantially all form) from production processes involving either electrolysis or natural gas if CCUS is used to abate resulting emissions.

Eligible Equipment

• For electrolysis of water: electrolysers, rectifiers and other ancillary electrical equipment, water treatment and conditioning equipment and equipment used for hydrogen compression and on-site storage

• For natural gas with emissions abated by CCUS: auto-thermal reformers, steam methane reformers, pre-heating equipment, shift reactors, purifiers, water treatment and conditioning equipment and equipment used for hydrogen compression and on-site storage (excluding equipment described in Class 57 or Class 58, which is eligible for the CCUS Credit)

Technology Credit

Prior Announcement(s) by Finance

Budget 2022 proposed to establish an investment tax credit to support investments in clean technologies, with a focus on net-zero technologies, battery storage solutions, and clean hydrogen.

Fall Economic Statement 2022 proposed a 30% refundable Technology Credit available to businesses investing in eligible property that becomes available for use on or after Budget Day.

Budget 2023

Budget 2023 proposes to expand eligibility of the Technology Credit to include geothermal energy systems that are eligible for CCA Class 43.1.

Eligible Equipment

• Electricity generation systems, including solar photovoltaic, small modular nuclear reactors, concentrated solar, wind and water (small hydro, run-of-river, wave and tidal)

• Stationary electricity storage systems that do not use fossil fuels in their operation, including but not limited to batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage and thermal energy storage

• Low-carbon heat equipment, including active solar heating, air-source heat pumps and ground-source heat pumps

• Industrial zero-emission vehicles and related charging or refueling equipment, such as hydrogen or electric heavy-duty equipment used in mining or construction

• Eligible geothermal properties include equipment used primarily for the purpose of generating electrical energy or heat energy, or both, solely from geothermal energy; may include piping, pumps, heat exchangers, steam separators and electrical generating equipment

Electricity Credit

Budget 2023

Budget 2023 proposes a 15% refundable Electricity Credit for eligible investments in non-emitting electricity generation systems, abated natural gas electricity-fired electricity generation, stationary electricity storage systems and equipment for the transmission of electricity between provinces and territories.

Taxable and non-taxable entities, such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities and pension funds would be eligible for the Electricity Credit.

Eligible Investments

Both new projects and the refurbishment of existing facilities will be eligible.

• Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal and nuclear (including large-scale and small modular reactors)

• Abated natural gas-fired electricity generation (subject to an emissions intensity threshold compatible with a net-zero grid by 2035)

• Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage and compressed air storage

• Equipment for the transmission of electricity between provinces and territories

Manufacturing Credit

Budget 2023

Budget 2023 proposes a refundable Manufacturing Credit equal to 30% of the capital cost of eligible property associated with eligible activities.
Eligible property generally includes machinery and equipment, including certain industrial vehicles, used in manufacturing, processing or critical mineral extraction, as well as related control systems.

Eligible Activities

Eligible activities are expected to include the processing or recycling of nuclear fuels and heavy water and the manufacturing of certain renewable energy equipment, nuclear energy equipment, nuclear fuel rods, certain electrical energy storage equipment, equipment for air-source and ground-source heat-pump systems, zero-emission vehicles, batteries, fuel cells and recharging systems, hydrogen refueling systems for zero-emission vehicles, equipment used to produce hydrogen from electrolysis and the processing of certain upstream components and sub-assemblies.

CCUS Credit

Prior Announcement(s) by Finance

Budget 2021 proposed to introduce an investment tax credit to support the adoption of carbon capture, utilization and storage technologies, available for certain direct air capture projects and not intended to be applicable to enhanced oil recovery projects.

Budget 2022 introduced the refundable CCUS Credit for eligible expenses incurred beginning on January 1, 2022, through 2040.
Generally, the CCUS Credit is available in respect of the acquisition and installation of “eligible equipment” used in an “eligible CCUS project” and where the captured CO₂ is used for an “eligible use.”

Budget 2023

1. Dual use equipment that produces heat and/or power or uses water, and that is used for CCUS with another process, is eligible for the CCUS Credit.

2. British Columbia is added to the list of eligible provinces (being only Alberta and Saskatchewan) for dedicated geological storage.

3. Rather than obtaining approvals from the government that the process for using and storing CO₂ in concrete meets the mineralization and other conditions for the process to constitute an “eligible use,” businesses will now need to have their technology validated by a qualified third party.

4. CCUS Credits related to eligible refurbishment costs incurred after the project is operational are to be calculated based on the average of expected eligible use ratio for each five-year period in which they are incurred during the first 20 years of the project only.

Budget 2023 also includes draft legislative proposals related to knowledge sharing and climate risk disclosure.

Eligible Equipment/CCUS Project/Use

Eligible equipment is equipment used solely to capture, transport, store or use CO₂ as part of an eligible CCUS project, and only if the equipment is put to use in Canada.

Non-eligible equipment is equipment required for hydrogen production, natural gas processing and acid gas injection or equipment that does not support CCUS.

Eligible CCUS project is a new project that captures CO₂ in Canada that would otherwise be released into the atmosphere or from the ambient air, prepares the capture CO₂ for compression, compresses and transports the captured CO₂ and stores or uses the captured CO₂.

The initial list of eligible uses includes dedicated geological storage and storage in concrete.

Four new CCA classes:

1. Class 57 – General CCUS Equipment – 8%

2. Class 58 – Industrial Production – 20%

3. Class 59 – Exploration Costs – 100%

4. Class 60 – Permanent Storage Wells – 30%

Flow-Through Shares and CMETC

Prior Announcement(s) by Finance

Budget 2022 proposed to eliminate the flow-through share regime for oil, gas and coal activities for flow-through share agreements entered into after March 31, 2023.

Budget 2022 proposed the introduction of a new 30% CMETC for critical mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The CMETC applies to certain exploration expenditures targeted at nickel, lithium, cobalt, graphite, copper, rare earths elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals or uranium, and renounced as part of a flow-through share agreement entered into after Budget Day and on or before March 31, 2027.

Budget 2023

Budget 2023 proposes 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. Eligible expenses related to lithium from brines made after Budget Day would qualify as Canadian exploration expenses and Canadian development expenses.

Budget 2023 also proposes to expand the eligibility of the CMETC, which provides for an enhanced 30% non-refundable tax credit, to lithium from brines. The expansion of the eligibility for the CMETC to lithium from brines would apply to flow-through share agreements entered into after Budget Day and before April 2027.

Zero-Emission Technology Manufacturers

Prior Announcement(s) by Finance

Budget 2021 proposed to temporarily reduce corporate income tax rates by one-half for qualifying zero-emission technology manufacturers, as follows:

• 7.5%, where income would otherwise be taxed at the 15% general corporate rate

• 4.5%, where that income would otherwise be taxed at the 9% small business tax rate

This measure applies in respect of income from a list of eligible activities associated with reduced emissions (including the manufacture of solar and wind energy, water conversion and geothermal energy, electrical energy storage equipment and batteries, zero-emission vehicles, charging stations, and equipment used for hydrogen production).

Budget 2023

Budget 2023 proposes to expand the eligible activities to include the manufacturing of nuclear energy equipment, processing or recycling of nuclear fuels and heavy water and the manufacturing of nuclear fuel rods. This expansion of eligible activities will apply for taxation years beginning after 2023.
Planned phase-out will start in taxation years that begin in 2032 and becomes unavailable for taxation years that begin after 2034.

CCA Classes 43.1 And 43.2

Prior Announcement(s) by Finance

Budget 2021 proposed to expand Classes 43.1 and 43.2 to include items relating to hydroelectric storage equipment, electricity generation equipment that uses physical barriers to harness the kinetic energy of water, solar and geothermal energy systems, equipment used to produce solid and liquid fuels from specified waste material or CO₂, and equipment used in the production and distribution of hydrogen.
To ensure the incentives provided by Classes 43.1 and 43.2 are consistent with the government’s current environmental objectives, Budget 2021 proposed to change the eligibility criteria for certain fossil fuel and waste fuel equipment.

OVERLAP OF INVESTMENT TAX CREDITS

Budget 2023 indicates that businesses may only claim one of the Hydrogen Credit, Technology Credit, Electricity Credit and Manufacturing Credit if a particular property is eligible for more than one of those credits. However, businesses may benefit from one of the aforementioned credits and the existing Atlantic Investment Tax Credit.

LABOUR REQUIREMENTS

Each of the Hydrogen Credit, Technology Credit and Electricity Credit contains labour requirements that must be satisfied to obtain the full amount of the respective credit. These labour requirements are split into two categories:

1. Prevailing Wage Requirement. Requires that all covered workers are compensated at a level that meets or exceeds the relevant wage, plus the substantially similar monetary of benefits and pension contributions, as specified in an eligible collective agreement. It is anticipated that the calculation of a prevailing wage will cause interpretative uncertainty.

2. Apprenticeship Requirement. Requires that, in a given taxation year, not less than 10% of the total labour hours performed by covered workers be performed by registered apprentices.

The labour requirements will apply to workers engaged in projects that are subsidized by the respective investment tax credit and workers whose duties are primarily manual or physical in nature. The labour requirements will not apply to workers whose duties are primarily administrative, clerical, supervisory or executive in nature.

Certain exemptions to the labour requirements exist, including in respect of the acquisition of zero-emission vehicles and acquisitions and installations of low-carbon heat equipment.

CCUS CREDIT REQUIREMENTS: KNOWLEDGE SHARING AND CLIMATE RISK DISCLOSURE

With respect to the CCUS Credit, Budget 2023 includes draft legislative proposals related to knowledge sharing and climate risk disclosure.

Knowledge Sharing Requirements

The knowledge sharing requirement contemplates two reports: annual operations knowledge sharing reports and construction and completion knowledge sharing reports. These reports must be submitted to the Minster of Natural Resources before the prescribed due date if a CCUS project:

1. Is expected to incur qualified CCUS expenditures of C$250-million or more over the life of the project, or

2. Has incurred C$250-million or more of qualified CCUS expenditures before the first day of commercial operations of the CCUS project

Based on the proposed definitions of “reporting period” and “reporting due day,” construction and completion knowledge sharing reports are to be prepared for the period beginning the first day an expenditure is incurred for a qualified CCUS project until the first day of commercial operations. Annual operations knowledge reports must be prepared for the first five calendar years beginning in the year in which commercial operations begin.

The Department of Natural Resources will publish each of these reports on a government website after a taxpayer submits its reports.
A taxpayer that fails to provide a knowledge sharing report will be liable to a penalty of C$2-million payable the day after a particular knowledge sharing report is due.

Climate Risk Disclosure

Subject to certain exemptions if the CCUS project has incurred, or is expected to incur, expenditures of less than C$20-million, a corporation that has deducted a CCUS Credit must make available to the public a climate risk disclosure report. This report must describe the corporation’s climate-related risks and opportunities, in addition to how the corporation’s governance, strategies, policies and practices contribute to achieving Canada’s commitments under the 2015 Paris Agreement and 2050 goal of net-zero emissions. A climate risk disclosure report must be prepared for each taxation year beginning in the year in which a taxpayer claims the CCUS Credit and ending in the taxation year before the 21^st calendar year after the end of the taxation year, which includes the first day of commercial operations of the qualified CCUS project. 

A corporation that fails to make publicly available a climate risk disclosure report will be liable to a penalty in the amount that is the lesser of (1) 4% of the total of all CCUS Credits deducted by the corporation in the relevant taxation year, and (2) C$1-million.

For more information, or to discuss your particular circumstances in respect of Canada’s green-energy tax incentives, please contact:

Dan Jankovic                +1-403-260-9725
Monica Cheng             +1-403-260-9624
Ahmed Elsaghir           +1-403-260-9655

or any other member of our Tax group.