In Budget 2024, the Government of Canada continued their drive
to implement government incentives aimed at decarbonizing the
economy through providing further clarification and design details
for the Clean Electricity investment tax credit (the Clean
Electricity ITC), and through providing an additional tax credit
for electric vehicle manufacturers in the form of the EV Supply
Chain ITC (the EV ITC). The Government of Canada additionally
announced an update to the clean technology manufacturing
investment tax credit (the CTM ITC), which responds to
consultations with industry as to the practicality of the proposed
draft legislation of the CTM ITC that was released on December 20,
2023 for critical mineral producers in Canada (see our previous
blog on this draft legislation, Government of Canada Releases Proposed
Legislation for Clean Hydrogen ITC and Clean Manufacturing
ITC).
The Clean Electricity ITC
The Government of Canada provided additional design details for
the Clean Electricity ITC, the last of the major clean economy
investment tax credits (by which we are referring to the carbon
capture, utilization and storage investment tax credit (the CCUS
Tax Credit), the clean technology investment tax credit (the Clean
Tech ITC), the clean hydrogen investment tax credit (the Clean
Hydrogen ITC), the CTM ITC, and the Clean Electricity ITC,
collectively, the Clean Economy ITCs) to be announced by the
Government of Canada since 2022. As previously provided, the Clean
Electricity ITC will be a 15 percent refundable investment tax
credit.
Eligible Canadian Corporations
Budget 2023 had provided that the Clean Electricity ITC will
apply to both tax exempt and taxable Canadian entities. Further
clarification on this point was provided by Budget 2024, which
announced that the Clean Electricity ITC will be restricted to be
claimed by certain eligible Canadian corporations. These eligible
Canadian corporations will include:
- taxable Canadian corporations;
- provincial and territorial Crown corporations (Crown
Corporations), subject to certain requirements; - corporations owned by municipalities;
- Indigenous community owned corporations; and
- pension investment corporations.
For the tax-exempt or tax-immune entities above (i.e., the
latter four categories of eligible Canadian corporations), the
corporation must agree to be subject to the provisions of the
Income Tax Act (Canada) (the Act) relating to the Clean
Electricity ITC, including the provisions in the Act relating to
audit, penalties, and collections, and agree to not assert any
immunity or exemption in respect of the Clean Electricity ITC being
claimed by the corporation.
Provincial and Territorial Crown
Corporations
Budget 2023 had stated that the Clean Electricity ITC would only
be available in provinces or territories in which a “competent
authority” within the province has made a commitment to the
Government of Canada that the federal funding will be used to lower
electricity bills within the jurisdiction and has committed to a
net-zero electricity sector by 2035.
Budget 2024 clarifies this requirement and provides that this
requirement will only apply to Crown Corporations within that
jurisdiction. Therefore, Budget 2024 proposes that the Clean
Electricity ITC will only be available to Crown Corporations in
“designated jurisdictions”. The Minister of Finance will
have the authority to designate jurisdictions where they are
satisfied that the provincial or territorial government has
publicly committed:
- to work towards a net-zero electricity grid by 2035; and
- that Crown Corporations in that jurisdiction will pass through
the value of the Clean Electricity ITC to reduce the electricity
bills of electricity ratepayers in that jurisdiction.
In connection with this latter requirement, the Minister must
further be satisfied that the provincial or territorial government
has directed the Crown Corporations that claim the Clean
Electricity ITC in that jurisdiction to provide a public report
annually on how the Clean Electricity ITC has improved the
electricity bills of its ratepayers. Where a Crown Corporation
fails to produce this report, a penalty will be charged to the
Crown Corporation.
The Department of Finance provided that it will consult with the
provinces and territories on the details of these conditions.
Partnerships
Similar to the other Clean Economy ITCs, an eligible Canadian
corporation can still claim the Clean Electricity ITC through a
partnership. With respect to partnerships between taxable Canadian
corporations and tax-exempt entities where the project will qualify
for both the Clean Electricity ITC and the Clean Tech ITC, Budget
2024 provides that the tax-exempt entity can claim their
proportionate share of the Clean Electricity ITC on the same
property on which the taxable Canadian corporation claims its
proportionate share of the Clean Tech ITC.
Eligible Property
Budget 2024 provides that the following property will be
eligible for the Clean Electricity ITC:
- equipment used to generate electricity from solar, wind or
water energy described in subparagraphs (d)(ii), (iii.1), (v),
(vi), or (xiv) of CCA Class 43.1, with the caveat that
hydroelectric installations will not be subject to the capacity
limitations included in Class 43.1 (and so will include large-scale
hydroelectric projects); - concentrated solar energy equipment as defined in the Clean
Tech ITC proposed legislation, but limited to such equipment that
is used to generate electricity; - nuclear energy equipment as described in the Clean Tech ITC
proposed legislation, but including large scale nuclear
installations (i.e., no capacity limitations or requirement that
equipment be factory-assembled and pre-built modular nuclear
reactors); - geothermal energy equipment used to produce electricity, or
both heat and electricity as described in Class 43.1(d)(vii), but
excluding equipment that is part of a system that extracts fossil
fuel for sale; - equipment that is part of a system used to generate electricity
or electricity and heat from specified waste materials as was
provided by the 2023 Fall Economic Statement; - stationary electricity storage equipment that is described
under subparagraph (d)(xviii) of Class 43.1 and equipment used for
pumped hydroelectric energy storage that is described under
subparagraph (d)(xix) of Class 43.1, but excluding equipment that
uses any fossil fuel in operation; - equipment that is part of an eligible natural gas energy
system; and - interprovincial electricity transmission systems.
Eligible Natural Gas Energy Systems
Budget 2024 provides that in order to qualify for the Clean
Electricity ITC, that natural gas energy systems must use all or
substantially all natural gas solely to generate electricity, or
both heat and electricity, and use a carbon capture system to limit
the resulting emissions. The emissions intensity of the system must
be 65 tonnes of carbon dioxide per gigawatt hour of energy
produced, which will be calculated using a modified form of the
formula used in the Regulations Limiting Carbon Dioxide
Emissions from Natural Gas-fired Generation of Electricity
under the Canadian Environmental Protection Act. The
modifications to the formula will include:
- adding emissions attributable to the combustion of biomass to
the total emissions calculation; and - removing emissions that are captured and stored in dedicated
geological storage from the total emissions calculation.
This formula generally operates to determine the emissions
intensity of the system by dividing the total carbon dioxide
released into the atmosphere by the total energy produced (in the
form of electricity and useful heat) over a fixed period of
time.
In order to be removed from the total emissions calculation,
carbon dioxide that is captured must be stored in dedicated
geological storage, the requirements for which will be
“aligned” with those required for the “CCUS Tax
Credit”. The Budget specifically mentions that currently
dedicated geological storage is restricted to Alberta, Saskatchewan
and British Columbia, and that captured carbon used for enhanced
oil recovery or other storage, or use will not be removed from the
calculation. This suggests that these requirements will likely use
the definition of “designated geological storage”
contained in the proposed legislation for the CCUS Tax Credit.
Eligible equipment that will be included in the Clean
Electricity ITC for eligible natural gas systems will include:
- equipment that generates both electrical and heat energy (i.e.,
gas turbine generators); - heat recovery equipment (i.e., heat recovery steam
generators); - electrical generating equipment (i.e., steam turbine
generators); - heat generating equipment used primarily for the purpose of
producing heat energy to operate the electrical generating
equipment (i.e., steam boilers used to produce steam to operate
steam turbine generators); and - carbon capture equipment, including equipment that prepares or
compresses captured carbon for transportation.
Expressly excluded from eligible equipment is buildings or other
structures, heat rejection equipment (i.e., cooling towers),
electrical transmission and distribution equipment, fuel handling
equipment, or equipment used for carbon dioxide transportation,
storage or use.
Recapture
Budget 2024 states that the recapture requirements for the Clean
Electricity ITC will be similar to those for the Clean Tech ITC.
Generally, this means that where an incentive claimant has
converted property qualifying for the Clean Electricity ITC to an
ineligible use, exported the property from Canada, or disposed of
the property within 10 years of acquiring the property and becoming
entitled to the Clean Electricity ITC in respect of the property,
then the Clean Electricity ITC can be subject to recapture.
Budget 2024 states that the amount of recapture will be in
proportion to the fair market value of the particular property when
it is subject to recapture.
For reference, for the Clean Tech ITC, 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.
For eligible natural gas systems, the recapture period is 20
years, and as described below, additional compliance obligations
exist in respect of the property.
Compliance & Recovery
Eligible natural gas systems will be subject to a one-time
verification of emissions intensity after a five-year compliance
period. During this compliance period, the taxpayer will need to
submit an annual third-party emissions intensity verification
report to Natural Resources Canada. Similar to the “qualified
verification firm” definition in the proposed legislation for
the Clean Hydrogen ITC, this third-party will need to be a Canadian
engineering firm with an engineering certificate of authorization,
appropriate insurance coverage, and expertise in auditing
continuous emissions monitoring systems.
At the end of the five-year compliance period, the project’s
compliance will be assessed based on the weighted average emissions
intensity over the entire compliance period. Each year’s annual
emissions intensity will be weighted in this calculation based on
the electricity and useful heat produced in that year.
Where the average emissions intensity of the eligible natural
gas system is greater than 5 percent above the limit of 65 tonnes
of carbon dioxide per gigawatt hour of energy produced, there will
be a full recovery of the Clean Electricity ITC claimed by the
taxpayer.
After the end of this initial five-year compliance period,
annual reports will still need to be provided to Natural Resources
Canada for the next 15 years. Where the annual emissions intensity
of the eligible natural gas system is above the emissions limit,
this will be considered an ineligible use of the property in
question, and it will result in recapture as described above. It is
not clear whether the 5 percent de minimus exception
provided in the initial compliance period will extend to this later
compliance period.
Current rules for certain properties described in Class 43.1 or
43.2 require that all the conditions for inclusion must be met on
an annual basis. There is a limited exception to this requirement
under Regulation 1104(14) for certain property that is part of an
eligible system where the property was previously operated in the
manner required by Class 43.1 or 43.2, and where the failure or
shutdown of the system was beyond the control of the taxpayer, and
the taxpayer makes all reasonable efforts to rectify the
circumstances within a reasonable time. The 2023 Fall Economic
Statement provided that similar rules would apply in respect of
waste biomass systems (for both the Clean Tech ITC and the Clean
Electricity ITC), and Budget 2024 proposes to further extend this
treatment to eligible natural gas energy systems. This appears
similar to the exceptions contained for clawback in the CCUS Tax
Credit for extraordinary circumstances in Part XII.7 of the
Act.
Interprovincial Electricity Transmission
Equipment
Eligible interprovincial and territorial electrical transmission
property is property that is used to transmit or manage electricity
that primarily originates in one province or territory that is
primarily destined for another province or territory. This may
include property located exclusively in one province, provided that
it is used primarily for interprovincial transmission (i.e., if it
was primarily used to export electricity to another province after
the completion of connected transmission property that crosses the
provincial border).
Eligible property will include:
- electrical transmission equipment (i.e., cables and
switches); - electrical transmission structures (i.e., towers and lattices);
and - related equipment used for managing traded electricity (i.e.,
transformers, electric power conditioning equipment, and control
equipment).
Expressly excluded from eligible property will be buildings,
electrical distribution equipment, or electrical transmission
equipment rated for voltages less than 69 kilovolts.
Labour Requirements
Budget 2024 confirms that in order to qualify for the full 15
percent Clean Electricity ITC, the proposed labour requirements
included in Bill C-59 will need to be complied with. Consistent
with other Clean Economy ITCs, a 5 percent Clean Electricity ITC
will be available where these requirements are not met.
Interaction with other Clean Economy ITCs
As previously provided, eligible corporations can only claim one
of the Clean Economy ITCs or the EV ITC (together, the ITCs) in
respect of a particular expenditure where that expenditure
qualifies for more than one ITC. Multiple ITCs may be claimed in
respect of the same project, to the extent that a project qualifies
for multiple ITCs. Notably, Budget 2024 provides that for eligible
natural gas systems, a project cannot claim the Clean Electricity
ITC and the CCUS Tax Credit in respect of the same project. Further
clarification should be provided from the Department of Finance to
confirm where the line will be drawn in respect of where a Clean
Electricity ITC project ends, and where a CCUS Tax Credit project
begins.
Coming into Force
The Clean Electricity ITC will apply to eligible property
acquired and that becomes available for use on or after Budget Day
2024 and before 2035, provided it has not been used for any purpose
before its acquisition; and provided that it was not part of a
project that began construction before March 28, 2023 (i.e., Budget
Day 2023). The Government of Canada provided further clarification
that the phrase “began construction” would not include
obtaining permits or regulatory approval, conducting environmental
assessments, community consultations or impact assessments studies,
or similar activities.
The same rules will apply in respect of Crown Corporations, if
the provincial or territorial government has satisfied all the
conditions above by March 31, 2025, and subsequently been
designated by the Minister of Finance.
If the provincial or territorial government in question has not
satisfied all the conditions by March 31, 2025, then Crown
Corporations investing in that jurisdiction would not be able to
access the Clean Electricity ITC until the province or territory in
question is designated. Once the province or territorial government
has been designated, the Clean Electricity ITC will be available
for property that is acquired and available for use from the date
the province or territory is designated, for projects that did not
begin construction before March 28, 2023.
Updates to the CTM ITC
All or Substantially All Qualifying
Materials
Budget 2024 additionally provides some updates to the CTM ITC,
partially resulting from feedback from industry. The draft
legislation provides for the CTM ITC provided that it would include
the extraction of critical minerals as eligible activities in the
CTM ITC, however it required that, to be eligible CTM property in
respect of critical mineral extraction, the property must be used
in qualifying mineral activities, producing all or substantially
all qualifying materials (defined as including lithium, copper,
nickel, cobalt, graphite, and rare earth minerals). The Prospectors
& Developers Association of Canada (PDAC) noted in their
comment to the Government of Canada on the draft legislation that
this requirement to produce “all or substantially all
qualifying materials” would make the CTM ITC inaccessible for
“nearly every domestic known deposit”.
Budget 2024 responded to this consultation by providing updates
to the CTM ITC in order to make it workable for Canadian critical
mineral miners. First, they have clarified that the value of the
qualifying materials produced will be used as the appropriate
output metric in determining the extent to which property is used
or expected to be used for qualifying mineral activities producing
qualifying materials. Second, they have adopted PDAC’s
recommendation to change the test from “producing all or
substantially all qualifying materials”, which the CRA views
as being 90 percent or more, to “producing primarily
qualifying materials”, which is 50 percent or more. Therefore,
the new test will be whether the property is question will be used
in qualifying mineral activities in which 50 percent or more of the
financial value of the output comes from qualifying materials.
Recapture & Safe Harbour Rule
The draft legislation for the CTM ITC provided that where CTM
property is acquired and the taxpayer becomes entitled to a CTM ITC
in respect of the property, and within a 10-year period that
property is converted to a non-qualifying activity (i.e., is no
longer used sufficiently in qualifying mineral activities producing
qualifying materials), the CTM ITC could be subject to recapture.
Budget 2024 provides an example of this potential recapture as
where the value of minerals extracted from a mine site is no longer
primarily from qualifying materials due to the fluctuation of
mineral prices.
Budget 2024 proposes that to mitigate the effects of mineral
price volatility on the potential recapture of the CTM ITC, that a
safe harbour rule will be applicable to the recapture rule. Under
this safe harbour rule, if the calculation of the expected
production from the eligible property when claiming the CTM ITC is
done using specified five-year historical average mineral prices,
these prices would also be used to calculate the value of the
qualifying materials produced over the 10-year recapture period.
The Department of Finance will provide further details with respect
to the design of this safe harbour rule at a later date. This safe
harbour rule would apply in respect of all qualifying mineral
activities.
The EV ITC
Budget 2024 announced that the EV ITC will be a 10 percent
investment tax credit that will be available for the cost of
buildings built in Canada that are used in certain segments of the
electric vehicle supply chain. The Government of Canada announced
that the EV ITC will be available for businesses that invest in
three different segments of the electric vehicle supply chain:
- electric vehicle assembly;
- electric vehicle battery production; and
- cathode active material production.
In order to claim the EV ITC, the taxpayer in question must
claim the CTM ITC in all three of these segments of the electric
vehicle supply chain, or claim the CTM ITC in two of the three
segments, and hold at least a “qualifying minority
interest” in an unrelated corporation that claims the CTM ITC
in the third segment. In this latter scenario, the unrelated
corporation would then also be able to claim the EV ITC for their
cost of buildings relating to this third segment.
The EV ITC is proposed to apply to property that is acquired and
become available for use on or after January 1, 2024. The EV ITC
will be reduced to 5 percent in 2033 and 2034, and will no longer
be available after 2034.
The Government of Canada further provided that the EV ITC will
incorporate elements of the CTM ITC where applicable. It is unclear
whether the EV ITC will be a refundable tax credit, and many other
details remain outstanding. The Government of Canada stated that
they would provide additional design and implementation details for
the EV ITC in the 2024 Fall Economic Statement.
Conclusion
Many details remain outstanding and draft legislation
implementing these proposals has not been released. The Clean
Electricity ITC, the CTM ITC and the EV ITC represent significant
opportunities for electricity producers, critical mineral mining
companies and electric vehicle manufacturers to assist in providing
the electricity, minerals and electric vehicles necessary for a new
decarbonized economy.
Bennett Jones has experience in energy, infrastructure, mining
and manufacturing project development, including in power,
renewables, clean technology (including EV and stationary storage
batteries) and developing strategies for industries to capitalize
on current and upcoming initiatives of a low-carbon economy.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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