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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Canada | Publication | September 18, 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.
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 eligible for the Clean Tech ITC is generally defined to include the following:
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.
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.
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.
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 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:
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).
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”:
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:
Attestation
An incentive claimant is required to attest (in prescribed form and manner) that:
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:
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.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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