Written By Greg Johnson and Brendan Sigalet
On August 4, 2023, the Federal Government released proposed legislation for the Clean Technology Investment Tax Credit (Clean Tech ITC), as proposed by the 2022 Fall Economic Statement (the 2022 FES) and as modified by Budget 2023. The proposed legislation largely conforms to what was previously announced, as we previously discussed in our blog Canadian Investment Tax Credits for Clean Technologies and Clean Hydrogen Announced in 2022 Fall Economic Statement, following the original announcement of the Clean Tech ITC in the 2022 FES. The Federal Government also noted that it was opening consultations on the Clean Tech ITC, as well as the Carbon Capture, Utilization, and Storage tax credit (the CCUS Tax Credit), and the new labour requirements, for which it also released new proposed legislation (all such proposed legislation, the August Proposals).
Clean Tech ITC
The mechanism for the tax credit is similar to that used for other tax credits. It allows qualifying taxpayers to take a 30 percent tax credit on the capital cost of clean technology property or be entitled to a cash refund. The Clean Tech ITC will further be restricted to "qualifying taxpayers", which are defined as taxable Canadian corporations (although taxable Canadian corporations can still claim the Clean Tech ITC through partnerships, as discussed below). As was proposed, clean technology property is defined to include:
- Electricity Generation Systems, including solar photovoltaic, small modular nuclear reactors, concentrated solar energy equipment, wind and water (small hydro, run-of-river, wave and tidal) as described under subparagraphs d(ii), (iii.1), (v), (vi), and (xiv) of CCA Class 43.1.
- Stationary Electricity Storage Systems described under subparagraphs (d)(xviii) and (d)(xix) provided that they do not use fossil fuels in their operation (this includes: batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage and thermal energy storage).
- Low-Carbon Heat And Electricity Equipment, including active solar heating, air-source heat pumps and ground-source heat pumps that are described under subparagraph d(i) of Class 43.1, as well as small modular nuclear reactors and concentrated solar energy equipment.
- Industrial Zero-Emission Vehicles (i.e. non-road zero emission vehicles, described in Class 56, such as hydrogen or electric heavy duty equipment used in mining or construction) and Related Charging or Refueling Equipment primarily used for such vehicles, as described under subparagraph (d)(xxi) of Class 43.1 or subparagraph (b)(ii) of Class 43.2.
- Geothermal Energy Equipment, as described in subparagraph d(vii) of Class 43.1, provided that it is not part of a system that extracts fossil fuels for sale or use along with the geothermal energy.
In order to be eligible, any equipment must be situated in Canada, and intended for use exclusively in Canada. Further, the equipment can't have been used, or acquired for use or lease prior to acquisition by the taxpayer. There are also further restrictions where the property is acquired to be leased by the taxpayer (essentially, it must be leased to another qualifying taxpayer, and must be leased in the ordinary course of business, by a taxpayer whose principal business is in either banking, leasing property, or selling or servicing similar equipment).
Specifically excluded from the Clean Tech ITC are any auxiliary heating or electrical generating equipment that use fossil fuels, buildings or structures, distribution equipment, Class 10 equipment (generally, automotive and other like equipment) and class 17 equipment (excluding paragraph (a.1), generally consisting of telecommunication equipment).
Any government or non-government assistance received by the taxpayer will be excluded from the amount of the expenditure eligible for the Clean Tech ITC, unless the taxpayer has repaid these amounts. Further, the Clean Tech ITC cannot be claimed on property on which an amount was previously claimed under either the Clean Tech ITC, or the Carbon Capture, Utilization, and Storage Tax Credit was claimed.
Small modular nuclear reactors is a defined term, which requires the equipment to be used for the purpose of producing electricity or heat energy from nuclear fission, that is part of a system that has a generating capacity of less than 300 megawatts electric or heat equivalent of 1,000 megawatts thermal. Further, it must be part of a system the modules of which are pre-built. The Clean Tech ITC will also not apply to nuclear fission fuel, equipment for nuclear waste disposal or nuclear waste disposal sites, and transmission or distribution equipment (note that this equipment is expected to be covered by other announced ITCs).
Concentrated solar energy equipment is also defined, as equipment used all or substantially all to generate heat, electricity, or a combination of the two, exclusively from concentrated sunlight. Expressly included by the legislation are: reflectors and related solar tracking systems, thermal receivers, thermal energy storage equipment, electrical generating equipment, heat transfer fluid systems, electrical energy storage equipment, transmission equipment, equipment for the distribution of heat energy, structures whose sole function is to support or house concentrated solar energy equipment, and ancillary instrumentation and controls, including weather monitoring systems.
Claiming the Clean Tech ITC
Qualifying taxpayers will not be able to claim the Clean Tech ITC until the equipment is available for use. The qualifying taxpayer must also file a prescribed form with the Minister of National Revenue, which contains the information that will be prescribed. The information to be included is still pending. The taxpayer must file the form within one year of the taxpayer's filing-due date for the year. Similar to other tax credits, the amount of Clean Tech ITC claimed reduces the UCC of the property. To the extent that the UCC is not decreased by the amount of Clean Tech ITC claimed, the amount is included in the taxpayer's income under paragraph 12(1)(t) of the Income Tax Act (Canada) (the ITA).
The Clean Tech ITC will apply to partnerships similarly to other tax credits under section 127 of the ITA, and should be determined in accordance with subsections 127(8) to 127(8.5) of the ITA. Therefore essentially, the tax credit may be deducted by (or refundable to) the partners of a partnership in proportion to their investment in the partnership. For limited partners, this is further limited to the at-risk amount of the limited partner.
Where a taxpayer has converted clean technology property to a non-clean technology use, exported the property from Canada, or disposed of the property, and the taxpayer had previously in either that taxation year or in the 20 taxation years preceding that year, acquired Clean Technology property and become entitled to the Clean Tech ITC in respect of the property, then the Clean Tech ITC can be subject to recapture.
The amount of recapture is the lesser of the amount of the Clean Tech ITC claimed on the property and the amount determined by a formula provided in the proposed legislation. For an arm's length disposition, it is the product of the amount of Clean Tech ITC claimed on the property, multiplied by the proceeds of disposition divided by the capital cost of the property on which the Clean Tech ITC was deducted. In all other cases, the second amount is the product of the amount of Clean Tech ITC claimed on the property, multiplied by the fair market value of the property divided by the capital cost of the property.
This recapture amount is added to the tax liability of the taxpayer for the taxation year in which the disposition, conversion, or export occurred.
There are different rules which may apply to the recapture in certain circumstances, including on a non-arm's length transfer and where a taxpayer has claimed the Clean Tech ITC through a partnership.
The Clean Tech ITC is proposed to be available for property that is acquired and becomes available for use on or after the day the 2023 Budget is released. The Clean Tech ITC will be reduced to 15 percent for property that becomes available for use in 2034 and will no longer be in effect after 2034.
Labour Requirements and CCUS Tax Credit
The draft legislation for the labour requirements and the CCUS Tax Credit will be discussed in a future article by the authors.
As mentioned, the draft legislation for the Clean Tech ITC largely implements the government's previous proposals in the manner expected. The Clean Tech ITC represents a significant opportunity for energy producers across Canada and the release of the proposed legislation is a promising step forward for the availability of the Clean Tech ITC.
Bennett Jones has experience in energy and infrastructure project development including in power, renewables, clean technology and hydrogen, and developing strategies for industries to capitalize on current and upcoming initiatives of a low-carbon economy.
To discuss the potential opportunities and implications of the Clean Tech ITC or the CCUS Tax Credit or labour requirements released in the August proposals, please contact any member of the Bennett Jones Tax or Energy practice groups.