Tax Insights: Clean economy investment tax credits (August 2024 update)

Issue 2024-28

In brief

On August 12, 2024, the Department of Finance released draft legislative proposals to implement numerous 2024 federal budget and other measures. The proposals include:

• the first draft of legislation for the clean electricity (CE) investment tax credit (ITC)
• various amendments to the other clean economy ITCs¹ that were enacted in June 2024, the most notable being to effect the changes to the clean technology manufacturing (CTM) ITC relating to polymetallic mining that were announced in the 2024 federal budget

The CE ITC will provide a refundable ITC of up to 15% on eligible expenses incurred in respect of non‑emitting electricity generation, distribution and transmission equipment and related refurbishments that become available for use after April 15, 2024 and before 2035; eligible property acquired as part of a project that began construction after March 27, 2023 are eligible. Unlike the other clean economy ITCs, the CE ITC will be available to certain tax‑exempt entities (e.g. First Nations, provincial Crown corporations).

The proposed amendments to the CTM ITC may benefit certain polymetallic mining companies. The credit, as enacted, is restricted to property used in eligible extraction and processing activities that produce “all or substantially all” (i.e. 90% or more) specified critical minerals (i.e. lithium, cobalt, nickel, copper, rare earth elements and graphite). The amendments would ease this restriction to allow the eligibility of certain property used to produce “primarily” those minerals (i.e. more than 50%, based on the commercial value of all outputs).

This Tax Insights provides an overview of the draft legislation for the CE ITC and the various amendments to the other clean economy ITCs, including adding certain waste biomass equipment to the clean technology (CT) ITC and CE ITC.

In detail

Clean electricity ITC – Additional details

Overview  

The CE ITC, which was introduced in the 2023 federal budget (with details provided in the 2024 federal budget), is similar (in many technical aspects) to the CT ITC, except that the credit rate and certain eligible properties and eligible recipients are different. Most notably, the CE ITC can be claimed for certain refurbishments to property eligible for the credit and it is available to certain tax‑exempt entities. The CE ITC is available for property acquired as part of a project for which the construction did not commence before March 28, 2023. The rate, however, is capped at 15% (lower than the 30% rate for the CT ITC).

Pertinent details

The draft legislation confirms the overview provided in the 2024 federal budget² and adds some additional details:

• Eligible taxpayers – The CE ITC is not only available to taxable Canadian corporations, and real estate investment trusts (REITs) in certain cases, but it will also be available to certain tax-exempt entities, such as First Nations, pension investment corporations and Crown corporations. Combined with the amendments to the partnership allocations (discussed below), this would provide more flexibility to structure ventures with both taxable and tax‑exempt entities.
• Clean electricity property – Eligible property includes certain non‑emitting electricity generation, distribution and interprovincial transmission equipment, as well as additions that are part of a refurbishment. In general, eligible property includes investments in:
  • certain non‑emitting hydro, wind, concentrated solar, solar photo‑voltaic, wave, tidal, geothermal, waste biomass and nuclear systems
  • fixed electricity storage systems that do not use fossil fuels
  • certain low‑emitting natural gas equipment that is physically and functionally integrated with equipment used to capture and prepare or compress carbon dioxide for transportation
  • qualified interprovincial transmission equipment

The property must be situated in Canada, or in a relevant province if the claimant is a designated provincial Crown corporation, and must not have previously been used or acquired for use or lease.

• Compliance – Specified natural gas systems will be subject to a five‑year compliance period during which a recovery tax could apply if certain emissions thresholds are exceeded.
• Labour requirement – The CE ITC is subject to certain labour requirements (i.e. prevailing wages, apprenticeships); if these requirements are not met, the 15% rate is reduced to 5%.

Considerations

While the credit is available to several tax‑exempt entities, to be eligible for the CE ITC, many tax-exempt entities might need to make an election to be subject to certain provisions of the Income Tax Act (ITA) in respect of filing obligations and assessments, etc. In addition, those who operate eligible projects through a partnership will need to consider the partnership rules that are specific to the clean economy ITCs (section 127.47 of the ITA). Specifically, certain assistance received by a partner could limit the ability of the other partners to claim the credit. This provision may be particularly relevant for First Nations partners that receive government funding, including the use of certain loans to help with their investments; some public utilities are also starting to require First Nations equity participation when proposing for renewable power projects.

Clean technology manufacturing ITC – Expansion for polymetallic mining

The 2024 federal budget announced that the CTM ITC would be amended to account for polymetallic mining operations that produce primarily critical minerals. The draft legislation implements this change as follows:

• CTM use – The definition of CTM use will be amended to effect the change. The CTM ITC is only available for eligible property acquired for a CTM use, which currently includes the use of property in a qualifying mineral activity producing all or substantially all (i.e. 90% or more) qualifying minerals. The draft legislation would amend CTM use to also include property used in eligible extraction and processing activities at a mine or well site that produce primarily (i.e. more than 50%) qualifying materials (based on value), thus making them eligible for the credit. Property used in off‑site processing or other relevant activities will still need to satisfy the all or substantially all test.
• Valuation of outputs – Proposed amendments introduce various valuation rules that are meant to determine whether a property is used to produce primarily or all or substantially all qualified materials. A taxpayer can elect in its income tax return in which the initial credit is claimed to determine the commercial value of all outputs based on:
  • the fair market value of either the expected or actual output from the property, or
  • the applicable safe harbour price, using the five‑year historical spot price
• Independent certification – For eligible property used at the mine or well site, an independent engineer or geoscientist would be required to certify the property to claim the credit. This certification would attest to the use of the property on site and its accordance with a plan to primarily target qualifying materials. Absent this certification, the credit in respect of the otherwise eligible property is deemed to be nil.

Considerations

The draft legislation offers some relief to polymetallic mining companies. However, to ensure that the credit is available to these companies, a detailed analysis of the anticipated value of non‑qualifying materials must be performed and certified, which could be problematic due to its complexity. In addition, the proposals introduce a distinction between on‑site and off‑site processing properties, for which taxpayers might require further guidance if their processing activities are located near, but not directly abutting, the mine site.

Other proposed amendments

The other proposed amendments to the existing clean economy ITCs are mostly clarifying in nature. Key amendments include:

Clean technology ITC

• Waste biomass – The draft legislation includes the 2023 Fall Economic Statement³ proposal  that adds certain equipment that supports the generation of electricity and/or heat from waste biomass as eligible for the CT ITC (as well as for the CE ITC). The draft legislation expands the definition to include other subsections of capital cost allowance (CCA) class 43.1 in Schedule II of the Income Tax Regulations, with certain requirements specific to the ITCs.
• Preliminary work – The CT ITC would be amended to exclude the cost of certain preliminary work, including front‑end design or engineering work or clearing land. This generally aligns with the activities that qualify for Canadian renewable and conservation expenses (CRCE) according to the Natural Resources Canada/Canmet Energy Technical Guide (2012).
• Environmental compliance – The draft legislation would require taxpayers that claim the CT ITC to continue complying with applicable environmental laws, by‑laws and regulations that apply to the property. This requirement currently exists for property included in CCA class 43.1 and class 43.2, but the compliance test must only be satisfied at the time the property becomes available for use. This will be modified to ensure continued compliance.

Clean hydrogen ITC

• Dual-use equipment – The definition of dual‑use hydrogen and ammonia equipment is to be repealed and replaced with an expanded category of equipment that includes oxygen and nitrogen production equipment used in hydrogen and ammonia production.
• Eligible power purchase agreements (PPAs) – Certain PPAs are taken into account in determining the relevant rate of the clean hydrogen ITC. The definition of eligible PPA would be expanded to include PPAs that provide electricity to a project by way of a direct connection, not only through the grid of a province or territory (as previously required).
• New technical guidance – The Canada Revenue Agency updated its website on August 27, 2024 by publishing four guidance documents: (1) technical and equipment eligibility, (2) validation and verification, (3) carbon intensity modelling, and (4) carbon intensity modelling workbook.

General amendments that apply to the ITCs

• Deemed acquisition when available for use – The definitions of “specified percentage” in a number of the ITCs would be amended to clarify that the cost of property acquired before the first eligible date is not eligible for the credit. Previously, it was unclear whether the deeming rules, which deem property to have been acquired when it first becomes available for use, would apply to allow a taxpayer to claim a credit for property acquired before the relevant claim period.
• Choice of ITC for partners – The proposals clarify the claiming of different credits by different members of a partnership. Previously, it was unclear whether all partners would have to claim the same credit for the same property. This is particularly relevant with the introduction of the CE ITC, which is available to certain tax‑exempt entities. Due to the overlap of this credit with the CT ITC, it may be preferrable for taxable entities to claim the higher percentage CT ITC while still allowing certain tax‑exempt partners to claim the lower CE ITC. The explanatory notes that were included with the draft legislation provide some useful examples.
• Joint and several liability of current and former partners – A number of the recovery and recapture provisions would be amended to provide that the partners, both current and former, will be liable for credits not recovered from other partners.

^{1. For information on the other clean economy ITCs (clean technology ITC, carbon capture, utilization and storage [CCUS] ITC, clean hydrogen ITC and CTM ITC), see our Tax Insights:
  • “Clean economy investment tax credits (Fall 2023 update)”
  • “Finance releases draft legislation for the clean hydrogen and clean technology manufacturing investment tax credits” (June 5, 2024 update)}

^{2. For details of the CE ITC that were announced in the 2024 federal budget, see our Tax Insights “2024 Federal budget: Supporting housing, raising taxes.”}

^{3. For information on the waste biomass expansion, see our Tax Insights “Clean economy investment tax credits (Fall 2023 update).”}