Expanding Alberta’s Energy and Digital Infrastructure: Select Tax Considerations for Major Projects

On May 15, 2026, Canada and Alberta entered into the Implementation Agreement that establishes the framework for implementing the Memorandum of Understanding (MOU) executed by the parties on November 27, 2025. The Implementation Agreement reflects the parties’ intention to pursue economic growth and investment, advance priority projects, increase Alberta’s oil, natural gas and electricity production to meet domestic and international demand, diversify energy exports, reduce emissions and support progress toward net-zero greenhouse gas emissions by 2050.

This update discusses select tax considerations for stakeholders in connection with the following components of the MOU: (i) the proposed oil pipeline to global markets (Oil Pipeline Project), (ii) the extension of the federal Carbon Capture, Utilization, and Storage Investment Tax Credit (CCUS ITC) to enhanced oil recovery (EOR), and (iii) Alberta's policy framework for artificial intelligence (AI) data centres.

Feasibility Expenses for Major Projects and the Oil Pipeline Project

Canada and Alberta have reaffirmed their commitment to the development and construction of the Oil Pipeline Project. Stakeholders evaluating potential participation in major projects, including the Oil Pipeline Project, should consider the availability of deductions under the Income Tax Act (Canada) regarding certain feasibility study expenditures.

The discussion below is provided in the context of the Oil Pipeline Project and in light of the recent decision of the Tax Court of Canada in ExxonMobil Canada Resources Company v. The King (ExxonMobil), and other applicable cases. Although directed to the Oil Pipeline Project, the principles arising from ExxonMobil may have broader application to taxpayers undertaking feasibility assessments and other pre-development activities in connection with other major energy and infrastructure projects.

1. Feasibility studies are an industry norm in major project developments. A potential pipeline owner undertakes feasibility studies to assess the commercial, environmental, regulatory and technical aspects of a pipeline project, including economic feasibility, return on investment, key performance indicators, alternative approaches and even initial consultations with Indigenous communities and other stakeholders. Such studies are a necessary step in evaluating and progressing the Oil Pipeline Project or other major projects, which are typically managed through a "stage-gate" or "decision-gate" process. In other words, before a company makes a final investment decision regarding the Oil Pipeline Project, it will incur expenditures in determining whether the project is feasible.
2. The purpose and intent of feasibility study expenses remain relevant. To ascertain the purpose or intention of an expense for tax purposes, a court must objectively determine the nature of the purpose, guided by both subjective and objective manifestations of that purpose. The court in ExxonMobil confirmed that the feasibility study expenses satisfied the following four indicia: (i) they are ordinarily allowed as a business expense by accountants, (ii) they would not be incurred by a person if that person were not engaged in the pursuit of business income, (iii) they are normally incurred by others in the same business, and (iv) there is no need for the expense apart from the business.
3. The economic return for a potential pipeline owner is well established in Canada. While certainty of profitability is not required under the legal test, Canadian pipelines generally generate predictable or regulated economic returns. Feasibility studies may also generate benefits beyond the specific pipeline project, as valuable information regarding pipeline construction, regulatory approvals and processes may be obtained, and such information can itself be used to generate income (e.g., the licensing of information).

Stakeholders are reminded to maintain relevant documentation in the event of a future tax audit. Project agreements should include carefully considered language that describes the objectives of the feasibility study (e.g., the evaluation and progression of a pipeline project) and such objectives should be consistently referenced and communicated in subsequent materials.

CCUS Investment Tax Credit and Enhanced Oil Recovery 

A common use of carbon dioxide in the oil and gas industry is EOR, a process in which carbon dioxide is injected into underground reservoirs to increase oil production. Under the current CCUS ITC rules, although a portion of the injected carbon dioxide remains permanently stored underground, the storage or use of captured carbon dioxide for EOR is expressly treated as an "ineligible use".

In the MOU, Canada committed to extending the CCUS ITC to include EOR. In fulfilling that commitment, and as highlighted in the Implementation Agreement, the federal 2026 Spring Economic Update announced that EOR would be designated as an "eligible use" for the purposes of the CCUS ITC.

If enacted, for the period from April 28, 2026, through to 2035, the credit rates for CCUS projects that use EOR would be as follows:

• 30% for direct air capture equipment
• 25% for all other eligible capture equipment
• 18.75% for transportation and storage/use equipment

Consistent with the sunsetting of the existing CCUS ITC, the effective credit rates will be reduced to one-half of the above amounts from 2036 through the end of 2040.

The EOR CCUS ITC rates are proposed to be one-half of the rates currently provided for dedicated geological storage and storage in concrete. The lower rates are intended to reflect the additional revenue stream available to CCUS projects that utilize EOR (i.e., revenues associated with increased oil production).

Eligible Equipment 

Capture and transportation equipment is proposed to be qualified CCUS expenditures along with equipment used to inject and store carbon dioxide, unless all or substantially all of its use is attributable to oil production.

Equipment used to capture or transport carbon dioxide as part of a qualified CCUS project that has multiple eligible uses, such as both producing concrete using a qualified concrete storage process and conducting EOR, is proposed to be eligible for the CCUS ITC on a weighted-average basis.

Details on equipment eligibility will be made available by Natural Resources Canada.

Storage Requirements

The Spring Economic Update indicates that the storage of captured carbon through EOR would contribute to a project's eligible use percentage only in jurisdictions with "sufficient regulations" to ensure the permanent storage of captured carbon. Alberta is expected to be an eligible jurisdiction as it currently regulates the capture and storage of carbon dioxide through EOR. The designation of eligible EOR jurisdictions remains subject to ministerial discretion and is proposed to follow the same process as that for dedicated geological storage under the existing CCUS ITC rules.

To qualify, EOR projects would be required to implement processes designed to ensure the permanent storage of at least 95% of the carbon dioxide intended for EOR storage. The projected storage rate would be required to form part of the CCUS project plan and would be subject to review and assessment by the Minister of Natural Resources.

Recovery of Tax Credit

Under the existing CCUS ITC framework, projects are subject to assessment at five-year intervals (over a 20-year period), and a recovery tax may apply where the "actual eligible use percentage" is less than the "projected eligible use percentage".

The proposed rules provide that carbon dioxide from EOR operations released into the atmosphere in excess of a 5% allowance would be considered an ineligible use.

A CCUS ITC claimant may be subject to a recovery tax if the portion of carbon dioxide directed to EOR results in a decrease in the project's eligible use percentage that exceeds the portion set out in the initial project plan by more than 5% for that period.

Alberta's AI Data Centre Strategy

Under the MOU, a stated objective is to create electricity and energy policies that address consumer affordability, electricity grid stability, economic competitiveness and long-term competitive certainty, thereby attracting Canadian and foreign sources of private-sector capital investment, including through the construction and operation of data centres.

Alberta released its AI Data Centre Strategy in December 2024 to showcase why Alberta is "North America's destination of choice for AI-enabled data centre investment." Among other advantages, Alberta offers:

• an abundant supply of natural resources to power data centres
• a favourable climate that helps reduce cooling costs
• the lowest corporate income tax rate in Canada, together with the absence of a provincial sales tax

The Implementation Agreement reaffirmed Canada and Alberta's commitment to collaborate on finalizing Alberta's policy framework to incentivize large investments in data centres by July 1, 2026.

Pending the release of the final policy framework, Alberta continues to develop its strategy to attract new investment in data centres, including by seeking to balance the province's competitiveness in the sector with ensuring that Albertans benefit from large-scale investments.

Current and prospective investors and operators of data centres in Alberta should be aware of Alberta's recently enacted data centre levy and the potential to immediately expense certain costs associated with "productivity-enhancing assets" under the federal income tax regime.

A. Alberta Data Centre Levy

As of January 1, 2026, the Alberta Corporate Tax Act (ACTA) imposes a data centre levy and associated corporate income tax credit on grid-connected data centres in Alberta with an electricity capacity of 75 megawatts or more, whether operated as standalone facilities or as part of co-locations. The levy is payable annually by "operators," defined as persons in lawful possession of computing equipment.

Amounts paid under the levy are creditable against Alberta corporate income tax otherwise payable, as the levy is not intended to impose an additional financial burden on data centre operators in Alberta. However, a refund of taxes cannot be triggered by claiming the tax credit.

Amount of Levy 

The levy is calculated based on the "cost of computing equipment" that is available for use at the end of the calendar year. The levy rate ranges from 1% to 2%, depending on the proportion of electricity drawn from the Alberta power grid. Greater reliance on grid electricity increases the applicable rate, while the use of self-generation or new power capacity agreements reduces the applicable rate.

The levy generally does not apply to data centres that are completely powered off-grid or that are below the nameplate capacity of 75 megawatts.

Computing equipment is broadly defined to include servers, racks, routers and cooling systems, as well as other hardware used to process, store or transmit digital information for data centres that rely exclusively on the Alberta grid for power. If computing equipment has been used by another party before being acquired by an operator, the cost of such equipment may be reduced under a formula in the ACTA that accounts for the age of the equipment.

Filing and Compliance

Operators are required to file returns annually and remit the levy within 14 months following the end of the applicable calendar year. Failure to comply may result in penalties and interest.

Ministerial Discretion

The Provincial Minister may enter into agreements with operators (or prospective operators) for terms of up to 25 years to:

1. modify the amount of the levy payable
2. alter the time on or before which a return must be filed and levy paid to the Provincial Minister

Where agreements are entered into to modify the amount of the levy payable or the timing of payment, the amounts payable under such agreement must not be less than the total levy that would have been paid if computed under the ACTA for all calendar years to which the agreement relates.

B. Immediate Expensing for Productivity-Enhancing Assets 

Immediate expensing in respect of certain "productivity-enhancing assets" has been implemented by the federal government. This immediate expensing may apply to the following categories of assets, depending on when such assets are acquired and become available for use:

• Class 44, which includes patents or the rights to use patented information for a limited or unlimited period
• Class 46, which includes data network infrastructure equipment and related systems software
• Class 50, which includes general-purpose electronic data-processing equipment and systems software

After 2026, costs associated with acquiring property that would otherwise have qualified for this immediate expensing measure will instead be deductible under the regular capital cost allowance regime, which provides for prescribed rates of 25%, 30% and 55% respectively for the classes listed above.

Concluding Thoughts

The Implementation Agreement is another step in the coordinated federal-provincial effort to expand Alberta's energy and digital infrastructure. Each of the three initiatives discussed above carries tax considerations: the potential deductibility of feasibility expenses for major pipeline development, the expanded CCUS ITC for projects incorporating EOR, and the levy and potential accelerated-deduction regimes applicable to data centre investments in Alberta. Interested stakeholders should reach out to the Blakes Tax group to discuss how these developments may affect your projects.

For more information or to discuss your particular circumstances, please contact the authors or any other member of our Tax group.