Clean Economy Measures - Investment Tax Credit Announcements in Budget 2024

Budget 2024 continues the federal government's efforts to encourage investment in clean projects through the use of "major economic investment tax credits" (which were previously referred to as "clean economy investment tax credits" in prior budget materials). As of Budget 2024, there are now six announced investment tax credits (ITCs) in varying stages of implementation:

Notably, Budget 2024 did not include any further proposed amendments concerning the (i) CCUS ITC, (ii) Clean Technology ITC, or (iii) Clean Hydrogen ITC, nor did it include any further proposed amendments to the labour requirements associated with these ITCs (which are also pending enactment through Bill C-59, currently before Parliament).

Budget 2024 did, however, include promised details concerning the Clean Electricity ITC, proposed certain discrete updates to the Clean Technology Manufacturing ITC, and announced the introduction of the new EV Supply Chain ITC.

1. Clean Electricity ITC

Consistent with the original announcement in Budget 2023, the Clean Electricity ITC is a refundable tax credit available to "eligible corporations," equal to 15% of the capital cost of "eligible property." For these purposes, the capital cost of a property is generally the full cost of acquiring the particular property, subject to adjustments that may be set out in final legislation.

In order to benefit from the full 15% Clean Electricity ITC, a corporation (or partnership) that acquires eligible property is generally required to comply with certain labour requirements for projects involving that eligible property, as discussed further below.

While Budget 2024 includes details of the Clean Electricity ITC, draft legislative proposals are not expected to be released until later this year.

Types of properties eligible for the Clean Electricity ITC

The types of properties eligible for the Clean Electricity ITC overlap considerably with the properties eligible for the Clean Technology ITC (though important differences exist). Eligible properties for purposes of the Clean Electricity ITC generally include:

• zero-emission electricity generation technologies, such as solar, wind, hydro, concentrated solar energy, and nuclear fission;
• equipment used exclusively for generating electricity (or a combination of electricity and heat) solely from geothermal energy, but excluding any equipment that is part of a system that extracts fossil fuel for sale;
• equipment that is part of a system to generate electricity, or both electricity and heat, from specified waste materials; and
• electricity storage systems that do not use fossil fuels in their operations, such as batteries, flywheels, compressed air energy storage, pumped hydroelectric energy storage, gravity energy storage and thermal energy storage.

Notably, the Clean Electricity ITC does not impose any capacity limits for hydro or nuclear power, as is the case with the Clean Technology ITC (which generally applies only to "small hydro" or "small modular nuclear reactors"). Accordingly, the Clean Electricity ITC should be available for large-scale hydro or nuclear projects, particularly those that may be undertaken by provincial or territorial Crown corporations. Also in contrast to the Clean Technology ITC, the Clean Electricity ITC generally requires that property be used for generating electricity (or a combination of electricity and heat), rather than either electricity or heat.

In addition to those properties described above that generally overlap with the properties eligible for the Clean Technology ITC (with noted differences), eligible properties for the Clean Electricity ITC will also include:

• eligible natural gas energy systems (see below), and
• equipment and structures used for the transmission of electricity between provinces and territories (see below).

While certain properties may be eligible for both the Clean Electricity ITC and the Clean Technology ITC (or another of the "major economic investment" ITCs), eligible corporations will generally only be allowed to claim one of the ITCs.

Natural gas energy systems

Despite fossil fuel technology generally being ineligible for the various major economic investment ITCs, the Clean Electricity ITC is available for certain low-emitting natural gas energy systems that use natural gas to generate electricity, provided they include a carbon capture system to limit emissions to an intensity of no greater than 65 tonnes of carbon dioxide per gigawatt hour of energy produced (to be measured in accordance with a prescribed formula).

Provided the required carbon capture component is included and emissions meet required targets, equipment in a natural gas energy system that would be eligible for the Clean Electricity ITC is generally proposed to include (i) equipment that is used to generate electrical and heat energy, (ii) equipment that generates electricity from heat, or (iii) equipment that generates heat primarily used to generate electricity. Examples provided include gas turbine generators, heat recovery generators, and steam turbine generators. In addition, the carbon capture equipment included in the natural gas energy system would generally be eligible for the Clean Electricity ITC. Of note, an eligible corporation would not be entitled to claim the CCUS ITC for the carbon capture component of a natural gas energy system where it has claimed the Clean Electricity ITC for that same system.

Budget 2024 notes that Natural Resources Canada will be required to review project plans to determine eligibility before a claim can be made for the Clean Electricity ITC for a natural gas system.

Transmission systems

As noted above, the Clean Electricity ITC is available for property used to transmit electricity between provinces and territories. Such equipment may be located exclusively in one province, provided it is primarily used to transmit electricity that primarily originates in, or is destined for, another province or territory. Examples provided in Budget 2024 include cables and switches, towers, and related equipment such as transformers and control equipment.

Interestingly, there does not appear to be any requirement that the electricity being transmitted be from a low-emission source.

Refurbishment of existing property

Significantly, the Clean Electricity ITC is also proposed to be available for capital expenditures incurred to refurbish existing facilities, in contrast to the Clean Technology ITC that is only available for new equipment and property. Details concerning what refurbishment expenditures will be accepted are not yet available.

Who can claim the Clean Electricity ITC

The Clean Electricity ITC is generally available to "eligible corporations," which are proposed to include:

• taxable Canadian corporations;
• provincial and territorial Crown corporations (subject to certain conditions being met, discussed below);
• corporations owned by municipalities;
• corporations owned by Indigenous communities; and
• pension investment corporations.

Unlike other major economic investment ITCs, such as the Clean Technology ITC and the CCUS ITC, the Clean Electricity ITC is not restricted to taxable entities. Rather, the Clean Electricity ITC explicitly contemplates being available to provincially, territorially and municipally owned corporations, Indigenous-owned corporations, and pension corporations, all of which would generally be tax-exempt and not otherwise eligible for those other ITCs. However, such corporations that are tax-exempt (or are considered immune from income tax) would be required to agree to be subject to certain provisions of the Income Tax Act (Canada), such as audit, penalties and collections provisions, in order to receive the Clean Electricity ITC. Details of this agreement are not yet available.

Special rules concerning partnerships

Similar to the Clean Technology ITC and CCUS ITC, the Clean Electricity ITC is proposed to be available to corporations that are members of a partnership that acquires eligible properties. It is expected that the allocation of Clean Electricity ITCs from a partnership to its members will function in the same way as those other ITCs, with similar restrictions owing to "at-risk amounts" and requirements for reasonable allocations. Interestingly, Budget 2024 notes that where a particular property acquired by a partnership would be eligible for either the Clean Technology ITC or the Clean Electricity ITC, the partners of that partnership may individually determine which ITC they wish to claim. Accordingly, a partnership that acquires wind turbines, for example, may allocate associated credits to a partner that is taxable Canadian corporation (to claim the 30% Clean Technology ITC), and credits to another partner that is a tax-exempt Indigenous-owned corporation (to claim the 15% Clean Electricity ITC).

Special rules concerning provincial and territorial Crown corporations

Provincial and territorial Crown corporations will only be entitled to the Clean Electricity ITC for property situated in a "designated jurisdiction" (as determined by the minister of finance (Canada)). For these purposes, a province or territory will be a designated jurisdiction only where it has publicly committed to:

• work toward a net-zero electricity grid by 2035, and
• cause the benefit of the Clean Electricity ITC to be passed on to electricity ratepayers in the jurisdiction, in the form of reduced ratepayer bills.

In addition, Crown corporations that receive the Clean Electricity ITC will be required to publicly report "how the tax credit has improved ratepayers' bills" on an annual basis.

Timing

The Clean Electricity ITC is proposed to be available for eligible property that is:

• acquired and available for use on or after April 16, 2024, and before 2035, and
• not part of a project that began construction before March 28, 2023.

Budget 2024 notes that for these purposes, preliminary steps such as permitting, regulatory approval, environmental assessments and consultations (and other similar activities) would not generally be considered construction. Pending the release of detailed rules, it may be difficult for some eligible corporations to define with certainty when a particular project began construction (and what the scope of one "project" is relative to another).

As with the Clean Technology ITC, there may be detailed rules concerning when eligible property is considered to be "acquired" for these purposes.

The Clean Electricity ITC will be phased out after 2034.

Special rules concerning provincial and territorial Crown corporations

The above timing will be applicable to provincial and territorial Crown corporations acquiring property situated in provinces or territories that are "designated jurisdictions" on or before March 31, 2025 (as discussed above). Property acquired by a provincial and territorial Crown corporation that is situated in a province or territory that is not a "designated jurisdiction" by March 31, 2025, will only be eligible for the Clean Electricity ITC where it is acquired and available for use on or after the date the applicable province or territory becomes a designated jurisdiction.

Repayment of the Clean Electricity ITC

Similar to the Clean Technology ITC, an eligible corporation that claims the Clean Electricity ITC may be required to repay all or a portion of that ITC where the property is (i) converted to an ineligible use, (ii) exported from Canada, or (iii) otherwise disposed of, within a 10-year period from the date the property was first acquired (or within a 20-year period in the context of natural gas energy systems). While detailed rules are not yet available, it is anticipated that limited exceptions will be available for certain related-party transfers of property, as is the case with the Clean Technology ITC.

Special rules for natural gas energy systems

Furthermore, a one-time emissions test must be satisfied for natural gas energy systems based on average emission intensity measured annually over an initial five-year period. If the average emissions intensity over that period exceeds the allowed 65 tonnes of carbon dioxide per gigawatt hour of energy by more than 5%, the full Clean Electricity ITC would be required to be repaid. Following the first five-year period, annual emissions intensity tests would then be required for a further 15 years, and any emissions intensity exceeding the 65 tonnes limit would be considered an "ineligible use," triggering a proportionate repayment of the Clean Electricity ITC.

Labour Requirements

The Clean Electricity ITC is subject to the same labour requirements as the Clean Technology ITC, CCUS ITC, and Clean Hydrogen ITC. The labour requirements generally require that workers engaged in project elements subsidized by an applicable ITC must satisfy a “prevailing wage requirement” and an “apprenticeship requirement.” These conditions very generally require that for applicable workers, (i) wages meet or exceed what is determined to be a prevailing wage by reference to applicable collective agreements, and (ii) that a minimum level (10%) of labour hours is performed by registered apprentices. These labour requirements will generally apply to workers whose duties are primarily manual or physical, and would not apply to workers that are primarily administrative, clerical, supervisory or executive. If the labour requirements are not satisfied, the Clean Electricity ITC would be reduced from 15% to 5%.

The labour requirements applicable to the Clean Electricity ITC are included in Bill C-59, which is currently before Parliament. These requirements are technical and may be difficult for certain projects to satisfy, depending on the nature and location of the work being undertaken. They warrant a careful review to ensure maximum entitlement to the applicable ITCs.

2. Clean Technology Manufacturing ITC – Polymetallic extraction and processing

Draft legislative proposals concerning the Clean Technology Manufacturing ITC were released in December 2023. As set out in those proposals, the Clean Technology Manufacturing ITC would be available for expenses incurred for certain extraction and processing activities that produce all, or substantially all, "qualifying minerals" (generally, copper, nickel, cobalt, lithium, graphite and rare earth elements). As initially drafted, the Clean Technology Manufacturing ITC may not have applied for expenses incurred at projects involving multiple metals, some of which may be qualifying minerals, and some of which may not be (referred to as polymetallic projects).

Budget 2024 includes proposals to address this uncertainty and generally offers clarity concerning the Clean Technology Manufacturing ITC in the context of polymetallic projects.

First, Budget 2024 proposes to clarify that the financial value of qualifying minerals is to be used when determining the extent to which extraction or processing activities produce qualifying minerals.

Secondly, Budget 2024 proposes to modify the extent to which extraction and processing activities produce qualifying minerals, from "all, or substantially all" (generally understood to be 90% or more), to "primarily" (generally understood to be 50% or more).

Lastly, to minimize the instances where recapture of the Clean Technology Manufacturing ITC could be triggered as a result of fluctuating market values associated with minerals, Budget 2024 proposes to introduce a safe harbour rule. This safe harbour rule would allow the same specified prices used to assess whether a property produces "primarily" qualifying minerals at the time the Clean Technology Manufacturing ITC was first claimed, when determining whether the property continues to produce primarily qualifying minerals through the subsequent 10-year reporting period.

These proposed amendments to the Clean Technology Manufacturing ITC are to be effective as of January 1, 2024.

3. EV Supply Chain ITC

Budget 2024 announces a new ITC to support the electric vehicle supply chain in Canada. This new investment tax credit, referred to as the EV Supply Chain ITC, is proposed as a credit of up to 10% of the cost of buildings used in electric vehicle assembly, electric vehicle battery production, and cathode active material production. This ITC is proposed to be available for property acquired on or after January 1, 2024, and is to be phased out by 2035. Budget 2024 notes that the design and implementation details of the EV Supply Chain Investment Tax Credit will be provided in the 2024 Fall Economic Statement.