An overview of the Clean Technology Investment Tax Credit as contained in draft legislation released by the Department of Finance (Canada) on August 4, 2023

The Department of Finance (Canada) has released draft legislative proposals to enact the clean technology investment tax credit (the Clean Tech ITC) that was first announced in the 2022 Fall Economic Statement (and subsequently included in the 2023 federal budget). 

The Clean Tech ITC is intended to “encourage investment of capital in the adoption and operation of clean technology property in Canada” such as wind and solar equipment, and is one of five new federal “clean investment” tax incentives being introduced, along with the “carbon capture, utilization, and storage investment tax credit,” the “clean electricity investment tax credit,” the “clean technology manufacturing tax credit,” and the “clean hydrogen investment tax credit.”

The following overview of the Clean Tech ITC is based on the draft legislative proposals released on August 4, 2023. 

The Clean Tech ITC

Consistent with the 2023 federal budget, the Clean Tech ITC is a refundable investment tax credit of up to 30% of the capital cost of “clean technology property” acquired by taxable Canadian corporations (or by partnerships in which a taxable Canadian corporation is a partner). For these purposes, the capital cost of a property is generally the full cost of acquiring the particular property. 

In order to benefit from the full Clean Tech ITC, a person or partnership that acquires clean technology property is generally required to comply with certain labour requirements in respect of projects involving that clean technology property, as discussed further below. 

Clean technology property

Clean technology property eligible for the Clean Tech ITC is generally defined to include the following:

• zero-emission electricity generation technologies, such as solar, wind, small hydro, concentrated solar energy and small modular nuclear reactors;
• electricity storage systems that do not use fossil fuels in their operations, like batteries, flywheels, compressed air energy storage, pumped hydroelectric energy storage, gravity energy storage and thermal energy storage;
• certain active solar heating equipment, air-source heat pumps and ground-source heat pumps;
• equipment used exclusively for generating electrical energy or heat (or a combination) solely from geothermal energy, but excluding any equipment that is part of a system that extracts both heat from geothermal fluid and fossil fuel for sale or use; and
• non-road zero-emission vehicles that are fully electric or powered by hydrogen, and charging or refueling equipment primarily used to support such vehicles.

In order to qualify for the Clean Tech ITC, clean technology property must be new equipment that is situated in Canada and intended for use exclusively in Canada. 

Timing

The Clean Tech ITC is available in respect of clean technology property acquired on or after March 28, 2023. The draft legislation does not contain any guidance concerning when property is considered to have been acquired (except as noted below concerning the available for use rules) and reliance will need to be had on the ordinary meaning of "acquired" under general legal principles, which generally refers to the time at which ownership and possession of the property has transferred to the purchaser. 

Regardless of when a taxpayer is considered to have acquired a clean technology property under general legal principles, a taxpayer is deemed not to have acquired the clean technology property for the purposes of the Clean Tech ITC until such time as the property becomes "available for use," as determined for capital cost allowance purposes (without reference to the rules that accelerate available for use status on disposition of the property or, in the case of a building, on completion of construction). The Clean Tech ITC becomes available in the taxation year in which the clean technology property is deemed to be acquired, being the year in which it becomes available for use. 

Property acquired prior to March 28, 2023, under general legal principles is not eligible for the Clean Tech ITC regardless of whether such property becomes available for use before or after March 28, 2023.

The Clean Tech ITC will be phased out after 2034, with the investment tax credit rate being reduced to 15% for 2034 and nil thereafter.

Who can claim the Clean Tech ITC

The Clean Tech ITC may only be claimed by taxable Canadian corporations that acquire clean technology property or by taxable Canadian corporations that are partners in partnerships that acquire clean technology property. Of note, tax exempt entities and trusts will not be entitled to benefit from the Clean Tech ITC.

Special rules concerning partnerships

In the case of clean technology properties acquired by a partnership, the Clean Tech ITC is computed as if the partnership were a taxable Canadian corporation and is then allocated to the partners, with the result that the Clean Tech ITC may be deducted by (or refundable to) the partners who are taxable Canadian corporations. 

Of important note, specific rules applicable to limited partnerships may restrict the amount of the Clean Tech ITC that would otherwise be allocated to and claimed by a limited partner. These specific rules (which are also generally applicable in respect of other investment tax credits) generally restrict a limited partner’s entitlement to the Clean Tech ITC to the lesser of its “at-risk amount,” or the portion of the Clean Tech ITC that is reasonably attributable to the limited partner’s “expenditure base,” which very generally reflect the amount of capital invested by the limited partner in the limited partnership. These restrictions may apply where, for instance, a limited partnership has financed the acquisition of clean technology property through debt incurred at the partnership level, in which case the limited partners may not have sufficient at-risk amount or expenditure base to claim the Clean Tech ITC that would otherwise be allocated to them.

Also of note is that the Clean Tech ITC is not available where the clean technology property, or an interest in a person or partnership that has an interest in that property, is a tax shelter investment. 

Reduction of eligible expenditures

For purposes of computing the Clean Tech ITC, the capital cost of clean technology property (being the amount used to compute the Clean Tech ITC) is subject to certain adjustments, including:

• the capital cost of clean technology property is reduced by any governmental or non-governmental assistance that can reasonably be considered to be in respect of the property that, at the time of filing the tax return for the year in which the property is acquired, the taxpayer has received, is entitled to receive or can reasonably be expected to receive. There is a mechanism for restoring the capital cost relevant for computing the Clean Tech ITC in the event the taxpayer repays the assistance or is no longer entitled to the assistance;
• the capital cost of clean technology property will not include the amount of capitalized interest or other financing expense;
• where the clean technology property is acquired from a non-arm’s length vendor, the capital cost of the property is limited to the lesser of the cost to the purchaser and the cost to the vendor; and
• if any portion of what would otherwise be the capital cost of the clean technology property is unpaid 180 days after the end of the taxation year in which the Clean Tech ITC would otherwise be available, that unpaid portion is excluded from the capital cost until it is paid.

Recapture of the Clean Tech ITC

The Clean Tech ITC is subject to recapture if, within 20 calendar years of the acquisition of the clean technology property, the property (i) is converted to a non-clean technology use, (ii) is exported from Canada or (iii) is otherwise disposed of by the taxpayer. Note that the Clean Tech ITC is subject to recapture when the property is sold (subject only to certain non-arm’s length transfers as noted below). The draft legislation does not contemplate recapture of the Clean Tech ITC in the event of a disposition of the shares of the corporation (or an interest in the partnership) that acquired the clean technology property.

The amount of recapture is equal to the lesser of (i) the amount of the Clean Tech ITC claimed in respect of the clean technology property and (ii) the amount determined by the following formulas:

• For an arm's length disposition of clean technology property, the product of the amount of the 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; and
• In all other cases, the product of the amount of the Clean Tech ITC claimed on the clean technology property, multiplied by the fair market value of the property divided by the capital cost of the eligible property.

The recapture amount cannot exceed the amount of the Clean Tech ITC claimed in respect of the clean technology property.

In the case of a taxable Canadian corporation, the recapture amount is added to the corporation’s tax liability for the year in which the disposition, conversion or export occurs. In the case of a partnership, the recapture amount is first applied to reduce the partnership’s Clean Tech ITC otherwise determined for the year (before allocation to its partners) and any excess is allocated to the partners and included in the partners’ tax liability for that year.

Related party exception

The recapture rules do not apply where the disposition is between related persons and the property would be eligible property to the related party purchaser (without regard to the new property requirement). However, the recapture that would have otherwise applied to the transferor of the clean technology property may be included in the income of the transferee in the event the transferee subsequently converts the property to a non-clean technology use, exports the property from Canada or otherwise disposes of the property (unless such disposition is to a related person that would also benefit from continued deferral).

Labour requirements

Notwithstanding that the full rate of the Clean Tech ITC is 30% (or 15% in 2034), the rate of the Clean Tech ITC will generally be reduced from 30% to 20% (or from 15% to 5% in 2034) unless the person or partnership acquiring clean technology property that would give rise to the Clean Tech ITC files an election to comply with certain labour requirements also included in the draft legislative proposals (other than in the case of off-road zero-emission vehicles or the acquisition and installation of low carbon heat equipment, which are not subject to the labour requirements). 

Accordingly, if a taxpayer wishes to benefit from the full rate of the Clean Tech ITC, it (or a partnership in which it is a member) must generally make this election. Responsibility for satisfying the labour requirements falls on the "incentive claimant," which is defined in the draft legislation to be the person claiming the credit or a partnership where at least one partner is claiming the Clean Tech ITC.

The labour requirements, and the requirement to make the election, are proposed to be effective in respect of clean technology property prepared or installed after September 30, 2023. It is important to note that the application of the labour requirements to a particular property is not based on when the property is acquired (as is the case for determining when the Clean Tech ITC may be claimed); rather the application of the labour requirements is based on the date when the property is prepared or installed. As a result, property that is prepared and installed on or after October 1, 2023, is generally subject to the labour requirements, even if the property was acquired before that date.

General requirements

The labour requirements contained in the draft legislation largely align with what had been included in the 2023 federal budget and require that an incentive claimant satisfy both (A) “prevailing wage requirements” and (B) “apprenticeship requirements”:

• Prevailing wage requirement: In order to satisfy the prevailing wage requirement, “covered workers” (as defined) must generally be paid in accordance with an "eligible collective agreement" or in an amount at least equal to the amount of wages and benefits (i.e., vacation, pension, health and welfare benefits) specified in the "eligible collective agreement" most closely aligned with the worker’s experience level, tasks and location calculated on a per-hour or similar basis. For these purposes:
  • Other than with respect to Quebec, an "eligible collective agreement" is defined to generally mean either:
    • the most recent multi-employer collective bargaining agreement that may reasonably be considered the industry standard for a given trade, in a region, province or territory between a group of employers and a trade union, who are accredited to bargain together and to be bound by the same agreement, or
    • a project labour agreement that covers the work associated with the investments eligible for the Clean Tech ITC and that is based on agreements described above.
  • In Quebec, an "eligible collective agreement" is defined to mean a collective agreement negotiated under applicable provincial law.
  • The incentive claimant must cause to be communicated, either in a poster or notice, in a manner readily visible to and accessible by covered workers at the designated work site or by electronic means, a notice confirming that the work site is subject to prevailing wage requirements for covered workers, including a plain language explanation of what that means and information regarding how to report non-compliance.
• Apprenticeship requirement: In order to satisfy the apprenticeship requirement, registered apprentices in a Red Seal trade must work at least 10% of the total labour hours that would be performed by a covered worker in a Red Seal trade on the preparation or installation of the clean technology property at a “designated work site.” If there is a restriction under an applicable labour or collective agreement that prevents the incentive claimant from meeting the 10% threshold, the incentive claimant must make reasonable efforts to ensure that the highest possible percentage of the total labour hours performed during the year by Red Seal workers on the preparation and installation of eligible property is performed by apprentices registered in a Red Seal trade while respecting the applicable labour laws or collective agreement.

The labour requirements must be complied with during each taxation year where preparation or installation work is completed with respect to clean technology property. The draft legislation does not provide any guidance on what would constitute "reasonable steps" or "reasonable efforts" to ensure compliance with the labour requirements.

Covered workers and designated work sites

The prevailing wage requirement and the apprenticeship requirements generally apply in respect of “covered workers” at “designated worksites,” which are defined as follows:

• A "covered worker" is defined to mean an individual who is engaged in the preparation or installation of clean technology property at a “designated work site” and whose work is primarily manual or physical in nature. Covered workers do not include administrative, clerical or executive employees or business visitors to Canada but do specifically include employees of the incentive claimant or those of any other person or partnership (such as contractors or subcontractors) who are engaged in the preparation or installation of eligible property.
• A "designated work site" is defined to mean a work site where eligible property of the incentive claimant is located during the year. The draft legislation does not require the work site to belong to the incentive claimant or be under its control.

Attestation

An incentive claimant is required to attest (in prescribed form and manner) that:

• it has met the prevailing wage requirement for its own employees who are covered workers and (ii) has taken reasonable steps to ensure that any covered workers who are employed by any other persons or partnerships (such as contractors or subcontractors) are being compensated in accordance with the prevailing wage requirements; and
• it has met the apprenticeship requirement.

Consequences of non-compliance with labour requirements

Where an incentive claimant has elected to comply with the labour requirements and claimed the higher credit rate, the draft legislation contemplates the imposition of penalties for subsequent non-compliance:

• Non-compliance with the prevailing wage requirement: If a covered worker was not compensated in accordance with the prevailing wage requirements for one or more days in a taxation year in respect of which the Clean Tech ITC is claimed at the higher rate, the incentive claimant is liable to pay an additional tax of $20 per day for each day in that taxation year that the covered worker was not paid the prevailing wage.
• Top-up wage payments to meet prevailing wage requirement: Except in cases of gross negligence, an incentive claimant may, within one year after receipt of notification from the Minister of National Revenue (or such longer period as is acceptable to the Minister of National Revenue) of its non-compliance with the prevailing wage requirement, cause each covered worker to be paid a top-up amount to resolve the non-compliance. The top-up amount is generally equal to the difference between the prevailing wages that were required to have been paid and the amount the covered worker was actually paid. The top-up amount will be deemed to be salary and wages to the worker in the year received and will be deductible by the incentive claimant in computing income for the year in which it is paid. The top-up amount will not constitute an expenditure that qualifies for the Clean Tech ITC. If the top-up amount is not paid, the incentive claimant will be liable to pay a penalty equal to 120% of the top-up amount in respect of each worker who was not paid the top-up amount. The draft legislation is not clear whether the payment of the top-up amount eliminates the $20 per diem penalty noted above.
• Non-compliance with apprenticeship requirements: If the apprenticeship requirement is not met at a particular work site during a taxation year in respect of which the Clean Tech ITC is being claimed at the higher rate, the incentive claimant is liable to pay an additional tax equal to $100 multiplied by the difference between the number of hours that were required to have been performed by apprentices and the number of hours of labour that were actually performed by apprentices.
• Misconduct or gross negligence: If an incentive claimant’s failure to meet any of the labour requirements was done knowingly or under circumstances amounting to gross negligence, the incentive claimant is (i) disentitled to the regular Clean Tech ITC credit rate and is only entitled to the reduced Clean Tech ITC rate; and (ii) liable to pay a penalty equal to 50% of the difference between the amount of the Clean Tech ITC claimed and the amount that the incentive claimant would have been entitled to under the reduced rate. In such cases, the per diem prevailing wage and apprenticeship penalties (described above) are not applicable and the claimant is not entitled to make a top-up payment in respect of the prevailing wage requirement. It is not clear whether the incentive claimant would otherwise be subject to the 120% penalty on the top-up amount.

While the Clean Tech ITC will be welcomed by taxpayers seeking to develop wind, solar and other clean technology projects in Canada, there are a number of technical requirements that will need to be carefully considered to ensure the full benefit of the Clean Tech ITC is realized. We are available to assist with an assessment of whether and how the Clean Tech ITC may benefit you.