Tax Insights: Clean economy investment tax credits (Fall 2023 update)

Issue 2023-36

In brief

On November 21, 2023, the federal government presented its Fall Economic Statement (FES), which included delivery timelines for the five “clean economy” refundable investment tax credits (ITCs). In addition, the FES:

• provided additional details on the Clean Hydrogen ITC relating to the eligibility of renewable natural gas for use in qualifying projects, the 15% ITC available for clean ammonia production, and carbon intensity reporting/verification/recapture mechanisms
• proposed to expand the Clean Technology ITC and Clean Electricity ITC to include waste biomass for heat or electricity generation

The FES was followed by the tabling of Bill C-59¹ in Parliament on November 30, 2023. Bill C-59 includes legislation that implements the Clean Technology ITC and the Carbon Capture, Utilization and Storage (CCUS) ITC, as well as the labour requirements that must be met to qualify for the full rates for these two credits. (This legislation updates the draft legislative proposals² that were released on August 4, 2023).

Finally, the Alberta government announced at the COP28 UN Climate Change Conference in Dubai on November 28, 2023 that the province will introduce the Alberta Carbon Capture Incentive Program (ACCIP). The ACCIP will provide a grant of 12% for new eligible CCUS capital costs in hard‑to‑abate industries, and will be payable in three installments over three years starting after the first year of operations.

In detail

Federal Fall Economic Statement (FES)

Overview

The FES summarizes the expected delivery timelines for the five “clean economy” ITCs. 

Considerations

• Timing – The Clean Technology ITC and CCUS ITC are moving ahead (Bill C‑59 contains the legislation to implement these ITCs); however, it is still uncertain when application policies and guidelines will be released. Although the effective date for eligible expenditures is retroactive to March 28, 2023 and January 1, 2022, respectively, the inability to apply for the credits is impacting investment decisions. For the Clean Hydrogen ITC and Clean Technology Manufacturing ITC, draft legislation and public consultations are expected before the end of 2023; however, because these credits are also available from March 28, 2023 and January 1, 2024, respectively, the lack of legislation creates uncertainty for businesses that may be eligible to claim these ITCs. The timing of all ITC refunds needs to be clarified to facilitate more accurate cash flow modelling.
• Taxable and non-taxable entities – The FES did not address an outstanding question relating to ventures with participants that include both taxable and non‑taxable entities. This could have implications for structuring agreements and affect decision making until there is more clarity on this fundamental issue.

Clean Hydrogen ITC – Additional details

The FES provided additional details on the Clean Hydrogen ITC, as follows:

• Clean ammonia – The taxpayer must use its own hydrogen feedstock, which also needs to be eligible for the Clean Hydrogen ITC. Dual‑use equipment in an integrated hydrogen/ammonia facility will be pro‑rated by the relative use between hydrogen and ammonia production. A similar weighted calculation will be used for hydrogen carbon intensity (CI) where pure hydrogen is not produced as an intermediate product.
• Power purchase agreements (PPAs) – PPAs for renewable energy purchased for operating a clean hydrogen project are eligible for the CI calculation in place of using the grid’s CI, if the PPA will be in place for the first 20 years of operation.
• Renewable natural gas (RNG) for hydrogen production – RNG may help decrease the CI in place of fossil‑derived natural gas. The RNG must be produced by a supplier subject to the Clean Fuel Regulations. Hydrogen producers must also demonstrate that the RNG is being purchased for operating a clean hydrogen project.
• Project CI assessment and validation using a fuel life cycle assessment model
  • The initial project CI assessment must be validated by a third-party Canadian engineering firm that is licensed to practice and has appropriate insurance. The report must be submitted with other required documentation to Natural Resources Canada (NRCan).
  • The Canada Revenue Agency will administer this ITC.
  • A one‑time verification will occur based on a five‑year compliance period. An annual computation and reporting of the effective hydrogen CI is required, followed by an end-of-period weighted average CI based on the amount of hydrogen produced each year.
  • The compliance report must be verified by a different Canadian engineering firm than the one who verified the initial project CI.
• Recovery mechanism based on change in CI
  • If the verified CI < 0.25 kg CO₂e/kg H₂ over the original validated CI, there will be no recovery of the ITC, even if the verified CI exceeds the upper bound of the originally assessed CI tier. If the verified CI is:
    • < 0.75 kg CO₂e/kg H₂ — the ITC rate is 40%
    • ≥ 0.75 kg CO₂e/kg H₂ to < 2 kg — the ITC rate is 25%
    • ≥ 2 kg CO₂e/kg H₂ to < 4 kg — the ITC rate is 15%
    • ≥ 4 kg CO₂e/kg H₂ — no ITC is available
  • The recovery amount will be calculated up to the full amount of the ITC received if the change in CI > 4 kg CO₂e/kg H₂, plus applicable interest.
  • No additional ITC will be provided if the change in CI outperforms to a lower CI tier (e.g. if the original CI was 0.80 kg CO₂e/kg H₂ for a 25% ITC, and the verified CI is 0.70 kg CO₂e/kg H₂, the claimant will not receive a 40% ITC retroactively).

Clean Technology ITC and Clean Electricity ITC expansion – Equipment using waste biomass

The FES proposed to expand the Clean Technology ITC and the Clean Electricity ITC to support the generation of electricity, heat, or both from waste biomass. Additional details follow:

• Waste biomass – This material, either in its raw form or when processed to produce a more energy‑dense fuel, can be combusted to generate heat, electricity, or some combination thereof. Types of specified biomass waste are only those materials outlined in capital cost allowance (CCA) classes 43.1 and 43.2.
• Integrated system requirement – Only waste biomass produced from an integrated system is eligible.
• Ineligible property – Buildings or other structures, heat rejection equipment, electrical transmission and distribution equipment, fuel or feedstock storage/handling equipment, district energy equipment or equipment for CCUS are excluded.
• Electricity generation and cogeneration from waste biomass – The system must use specified waste materials solely to generate electricity or both electricity and heat (cogeneration). Systems that use a fuel that is not produced as an integrated part of the system, even if produced from specified waste material, will not be eligible. Eligible systems cannot exceed a heat rate threshold of 11,000 BTU/kWh and must use specified biomass waste materials.
• Heat generation from waste biomass – Eligible systems must use specified waste materials solely to generate heat energy, using all or substantially all of the feedstock energy content. Spent pulping liquor as a feedstock is not eligible.
• Ongoing eligibility compliance – All conditions normally need to be satisfied on an annual basis for inclusion in CCA classes 43.1 and 43.2, and similar rules will apply to the Clean Technology ITC and Clean Electricity ITC with respect to waste biomass.

Considerations

• Combustion of waste biomass – Combustion appears to be the only eligible use of specified waste biomass. Also, processing equipment to increase energy density is a qualifying expenditure. It is unclear how processes that generate saleable byproducts would be treated (such as fertilizer from anaerobic bio-digester solids), if systems must “solely” generate heat and/or electricity on an all‑or‑substantially‑all energy content basis. Similar ambiguity could exist for heat pumps that use waste biomass as an energy source without combusting the biomass itself; this biomass may also not meet the definition of geothermal, which implies a subterranean installation.  

Comparing Bill C‑59 to the August 4, 2023 draft legislative proposals

Bill C‑59 contains the legislation for the Clean Technology ITC, the CCUS ITC and the labour requirements that must be met to qualify for the full rates for these credits; the labour requirements will also apply for the Clean Hydrogen ITC and Clean Electricity ITC. Noteworthy changes in Bill C‑59 from the draft legislative proposals released on August 4, 2023 follow:

Clean Technology ITC

• Clean technology property – The definition has been revised to include geothermal energy.
• Qualifying taxpayer – The revised definition includes a taxable Canadian corporation or a mutual fund trust that is a real estate investment trust (REIT).

CCUS ITC

• CCUS ITC dual-use equipment – The revised definition specifically excludes natural gas processing and acid gas injection and paragraphs (a) to (c) include significant new details relating to equipment eligibility.
• First day of commercial operations – This is now defined as 120 days after captured carbon dioxide is first delivered for ongoing storage or use.
• Preliminary CCUS expenditures – The new wording may allow front-end engineering and design costs associated with CCA classes 57 and 58 property. These costs were previously not eligible.
• Variable A in carbon capture expenditure for dual-use equipment – The legislation in Bill C‑59 clarifies the pro-rating of costs in Variable A for dual-use equipment in an eligible carbon capture project; however, further technical guidelines are still needed from NRCan to perform the computation.

Labour requirements

• Eligible collective agreement – The revised definition specifies that a trade union needs to be an affiliate of Canada’s Building Trades Unions.
• Deemed reasonable efforts – The legislation includes new information with respect to hours of labour at a designated work site and the conditions that are required to satisfy the labour requirements.

Partnerships

• Comprehensive partnership rules – These rules are included to address allocations of the clean economy ITCs to limited partners and through multi-tiered partnerships. An anti-avoidance rule is also provided to ensure that partnership ITC allocations are reasonable in the circumstances.

Alberta Carbon Capture Incentive Program (ACCIP)

The ACCIP is intended to support and accelerate the development of new CCUS infrastructure by providing incentives for facilities located in Alberta to incorporate this technology into their operations. It is modelled after the existing Alberta Petrochemicals Incentive Program.

• ACCIP benefit – The program will provide a grant of 12% on new eligible CCUS capital expenditures in hard‑to‑abate industries. The grant will be payable to operators in three installments over three years, following the first year of operations.
• Funding – The provincial funding will be available once the federal government legislates the CCUS ITC and related supports such as carbon contracts for difference. The program is expected to provide $3.2 to $3.5 billion of support over the next decade, of which a portion will be from the Technology Innovation and Emission Reduction regulation that large industrial carbon emitters pay into.
• Projects – To date, Alberta has selected 25 projects to develop carbon storage hubs for the exploration of safe, permanent geological sequestration. The province is now accepting applications for small‑scale and remote storage projects.

The takeaway

The federal government has tabled legislation to implement two of the five “clean economy” ITCs: the Clean Technology ITC and the CCUS ITC. In addition, the FES provided delivery and implementation timelines for the other three clean economy ITCs (Clean Hydrogen ITC, Clean Technology Manufacturing ITC and Clean Electricity ITC). The FES also indicates that draft legislation for the Clean Hydrogen and Clean Technology Manufacturing ITCs is expected by the end of 2023. In this competitive environment, where numerous governments are offering incentives, Canada’s clean economy ITCs are a positive step to help encourage investment.

<sup>1. Bill C-59, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023 (first reading: November 30, 2023)
2. For details of draft legislative proposals released on August 4, 2023, see our Tax Insights “Finance releases draft legislation for the clean technology and CCUS investment tax credits.”</sup>