Canada: Clean Energy ITCs: Clean Technology And CCUS Draft Legislation Released

The federal government recently released draft legislation to implement certain tax measures previously announced in the 2023 Federal Budget and th e2022 fall economic statement. Released August 4, 2023, the package includes eagerly awaited draft legislation regarding the Clean Technology Investment Tax Credit (Clean Technology ITC); Carbon Capture, Utilization, and Storage Investment Tax Credit (CCUS ITC); and various other clean energy initiatives.

Although the full picture surrounding the announced clean energy investment tax credits (ITCs) is still developing, these legislative announcements provide certain details that are helpful for taxpayers with proposed projects in these spaces. The draft legislation does not include proposed legislation with respect to the announced Clean Hydrogen, Clean ElectricityA, or Clean Technology Manufacturing ITCs¹.

What you need to know

• Labour requirements were set out in more detail, including the election procedure and potential penalties.
• The draft legislation does not include proposed legislation on several other high-profile tax credits-notably the Clean Hydrogen, Clean Electricity, or Clean Technology Manufacturing ITCs.

Clean Technology ITC

The Clean Technology ITC is a 30% refundable investment tax credit available in respect of the capital cost of "clean technology property" acquired by the taxpayer in the year. Property will only qualify for the credit if it meets certain conditions, including that it must generally be new property situated in Canada that is intended for use exclusively in Canada. There are a number of different enumerated types of property that will qualify, including: certain zero-emission power generation technologies; electricity storage equipment (provided the equipment does not use any fossil fuel in its operation); active solar heating equipment and heat pumps; non-road zero-emission vehicles and charging or refueling equipment used primarily to charge such vehicles; geothermal energy systems; concentrated solar energy equipment; and small modular nuclear reactors.

The Clean Technology ITC is available in respect of clean technology property that is acquired on or after Budget Day 2023 (March 28, 2023). The ITC will be reduced to 15% for 2034 and won't be available in 2035 and subsequent taxation years.

The Clean Technology ITC will be able to be claimed by "taxable Canadian corporations" and taxable Canadian corporations that are members of a partnership that acquire clean technology property. If such property is acquired by a partnership, the credit is calculated as if the partnership were a taxable Canadian corporation, and then the partner's share is allocated to the partner².

The ITC is structured as a deemed overpayment of tax in an amount equal to a taxpayer's Clean Technology ITC, which allows taxpayers to receive a refund of such overpayment (similar to the mechanism used for certain COVID-related government payments). There are certain recapture mechanisms that add back in a portion of the ITC if the clean technology property in respect of which an ITC has been issued (or another property that incorporates the particular property) is, within 20 calendar years of the acquisition: (a) converted to a non-clean technology use, (b) exported from Canada, or (c) is disposed of without having been previously converted to a non-clean technology use or exported³.

Labour requirements

The proposed legislation contains details regarding the announced labour requirements (a prevailing wage requirement and an apprenticeship requirement) that need to be met for a taxpayer to claim the full Clean Technology ITC, CCUS ITC, Clean Hydrogen ITC, or Clean Electricity ITC. The legislation is generally consistent with the announcement in Budget 2023, including the fact that the labour requirements are proposed to be in effect with respect to property prepared or installed after September 20, 2023.

Under the prevailing wage requirement, each covered worker must be paid in accordance with the terms of an eligible collective agreement that applies to the worker or in an amount that is at least equal to the amount of wages and benefits as specified in the eligible collective agreement that most closely aligns with the covered worker's experience level, tasks and location, calculated on a per-hour or similar basis. The apprenticeship requirement generally ensures that the claimant makes reasonable effort to ensure that a certain percentage of work is done by registered apprentices (generally 10%).

The labour requirements must be met in each "installation taxation year", being each taxation year during which preparation or installation of specified property occurs.

Election procedure

The details outlined in the proposed legislation include the compliance and penalty regime when applying for the full ITC. The regime is elective. If the taxpayer does not elect in, the ITC is claimed at the reduced rate (10% lower than the full ITC rate) and the potential penalties should not apply.

However, if a taxpayer elects into the full ITC rate, certain penalties apply if such taxpayer fails to meet the labour requirements. If the wage requirement is not met, the penalty is generally $20 for each day in the installation taxation year on which the covered worker was not paid the prevailing wage⁴. If the apprenticeship requirement is not met, the penalty is generally equal to $100 multiplied by the difference between the required hours by an apprentice and the hours actually performed by an apprentice. In addition, if the full ITC rate has been claimed and the taxpayer's failure to meet the labour requirements was done knowingly or in circumstances amounting to gross negligence, the taxpayer can be held liable for a penalty equal to 50% of the difference between the amount of the ITC claimed and the ITC it would have been entitled to under the reduced rate ITC.

CCUS ITC

The CCUS ITC is a refundable ITC in respect of eligible expenses incurred on or after January 1, 2022 and before December 31, 2040. The proposed legislation addresses a number of the questions that the previous announcements had not answered, such as the expansion of the eligible equipment definition to include certain dual-use equipment, the interaction of the CCUS ITC with other government assistance, the addition of British Columbia as an eligible jurisdiction, and the recovery of the ITC in circumstances of a sale or export.

The labour requirements discussed above must also be met for a taxpayer to claim the full CCUS ITC.

Footnotes

1. The government has stated that it will soon release details on the Clean Hydrogen Investment Tax Credit.

2. Note that such allocation must be reasonable. There are new anti-avoidance rules to consider when allocating unreasonable portions of the ITCs to partners. See proposed subsection 103(3). There are also certain proposed rules with respect to the allocation of ITCs to limited partners that rely on such partner's "at-risk amount" and "expenditure base".

3. Note that the recapture rules do not generally apply to a disposition to a related person, if the particular property would be clean technology property to the related acquiror.

4. Certain top-up payments can be made to each covered worker to avoid non-compliance and the associated penalty.

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.