Make the most of Canada’s clean economy tax credits

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6 minute read

Investment tax credits of 30%–60% can spur growth—but contain novel complexities

The Canadian government is helping companies finance their decarbonization investments, creating large opportunities for businesses to meet their own environmental targets and unlock new sources of growth.

New refundable investment tax credits aim to incentivize the development and adoption of clean technologies and energy, helping Canada meet its greenhouse gas emissions reduction targets and advance its Critical Minerals Strategy. In many cases, these credits are worth up to 30% to 60% of eligible capital expenses. The credits may be applied directly against income tax otherwise owing or paid out in cash where there is no income tax owing. This offers substantial benefits to companies investing in renewable energy, carbon capture and storage, hydrogen, biofuels and critical minerals.

In some cases, companies can combine these credits with other benefits, such as regional development credits, research and development incentives and accelerated depreciation allowances. This helps organizations attract financing for projects at a time when investors are taking a closer look at renewable energy, among other opportunities, as demand for clean electricity grows along Canada’s journey to achieving net-zero emissions by 2050.

Accessing the full value of these incentives is not as easy as it may seem. These credits contain complex requirements to meet specific labour standards and detailed rules on what expenses can be claimed and by whom. It’s easy to invest in projects with incorrect assumptions or partnership structures that might reduce the value of these credits and, subsequently, an investment’s rate of return.

Conversely, businesses that accurately model the benefits can move more quickly to create and take advantage of new revenue streams while enhancing their overall sustainability performance.

At a glance: Refundable clean economy tax credits in Canada

Clean Hydrogen Investment Tax Credit

Clean Technology Investment Tax Credit
Carbon Capture, Utilization and Storage Investment Tax Credit

Clean Electricity Investment Tax Credit

Clean Technology Manufacturing Investment Tax Credit

Read more about what investments are eligible—and what these credits can be worth.

Use tax incentives to accelerate your reinvention

These tax incentives come at a critical time for companies, particularly those in the energy, utilities, mining and forestry sectors and higher-emitting industries such as chemicals, cement and steel. These businesses face pressure from investors, regulators, customers and other stakeholders to develop credible strategy-led plans to achieve their decarbonization targets.

They’re also confronting a growing reinvention imperative as global megatrends disrupt established business models. Consider this finding from our latest Global CEO Survey: 35% of Canadian energy, utilities, mining and industrial manufacturing respondents don’t think their organization will be viable after ten years if they continue on their current path.

Radically transforming how your organization creates, delivers and captures value helps it adapt and thrive. For example, natural gas producers may see opportunities to open new revenue streams by shifting to hydrogen production. Similarly, we’re also seeing traditional mining companies create value in new ways, such as by recycling minerals at scale.

Tax is a critical component of any business model reinvention. The refundable nature of these credits is particularly powerful. It helps companies and investors entering the clean economy fund their initial capital costs. And it makes reinvention investments more viable for companies facing decreasing sector-wide revenues or escalating compliance costs.

Qualify. Quantify. Document. Claim. Sustain.
Learn how you can capture the full value of Canada’s clean economy tax credits.

Common pitfalls that reduce the value of your tax credits

Tax credits help finance projects by providing a refund on capital costs. They can directly impact an investment’s financial return and the decision to proceed with a project. But it’s not a straightforward process for investors to see a direct return on investment. Project sponsors and investors would do well to thoroughly validate the assumptions underpinning the cash flow projections within project financial models. The value of tax credits included in such models can easily be misstated, such as by claiming mutually exclusive credits. This can result in project sponsors misevaluating their financing needs or having the thoroughness of their planning called into question. It can also lead to investors incurring unforeseen risks.

Companies also face risks, including impacts to their cash flow, if their tax credit application is denied, disputed or delayed. This can require companies to contribute additional equity to a project, obtain further financing from lenders or delay—and even cancel—construction.

Overcoming these complexities requires a holistic approach that brings together tax, deal modelling, technology and industry-specific process expertise. Here are three easily overlooked pitfalls that can ensnare companies—and what’s needed to achieve compliance and avoid missing out on the full benefit of these incentives:

The eligibility for these tax credits hinges on the nature and structure of the entity that undertakes the project. These eligibility rules are more restrictive than other Canadian investment tax credits. For example, certain types of entities, including tax-exempt organizations such as pension funds and First Nations, may not be able to fully benefit from these credits.

Credits earned through partnership structures are subject to additional complex rules, such as limiting the value of the credit to the at-risk amount of relevant limited partners. The actions of one partner, such as receiving certain government or non-government financial assistance, can affect another partner’s entitlement to a credit.

Each credit also has its unique legislative restrictions. Consider, for example, the Clean Technology Manufacturing Investment Tax Credit. It encourages clean technology manufacturing and processing and critical mineral extraction and processing. But it excludes any property used to produce battery cells or modules if the production is supported by a federal government contribution.

These sorts of interactions increase the importance of establishing the right teams and processes during the diligence phases to pinpoint potential eligibility issues and fully understand the structure of each partner involved in a project.

Not all capital expenditures incurred on a project may qualify for a tax credit. This can lead to unforeseen exclusions or limitations for certain capital items essential for the project.

Consider, for example, an electricity generator constructing a biomass-fuelled power plant. The bins and conveyor belts that store and transport biomass to a boiler may not be eligible for the clean technology and clean electricity investment tax credits, even though the boiler itself is. There are also eligibility limitations based on the energy output of the system.

Many high-level models overestimate or oversimplify the value of these incentives by assuming companies will receive the full value of the tax credits against their total capital investment. More sophisticated modelling, combined with analysis by a multidisciplinary team including scientists and process specialists, helps avoid surprises through a case-specific examination of capital costs that pinpoints eligible components, as well as the appropriate credit percentage that applies to them.

Companies cannot collect the full value of certain credits without electing into and meeting various labour requirements, such as paying prevailing wages to employees, contractors and subcontractors, including the engineering and construction companies building decarbonization facilities and equipment. Contractors must meet these labour requirements for their clients to claim the full value of the tax credits.

Unlike in the United States, the Canadian government has not published guidelines on prevailing wage requirements. Companies applying for these Canadian credits must research the wages of comparable workers in comparable locations to determine a prevailing wage and complete the attestation required when seeking the enhanced credit percentages.

With that benchmark in hand, organizations must then develop systems and processes to collect and monitor wage data and other administrative requirements around the posting of available jobs, for example. The right technology solutions and data-gathering systems help companies collect the necessary labour information from their own organization and their contractors, assess and monitor compliance and compile appropriate documentation.

Protecting this sensitive information is a business imperative. Companies build and maintain trust with their employees, contractors and other stakeholders by incorporating privacy controls and information security measures throughout the data lifecycle.

The need to act quickly

Correctly navigating these pitfalls helps companies receive the full value of these tax credits and use them as a strategic advantage to finance their decarbonization and business model reinvention efforts.

But seizing this opportunity requires companies to act now. This is by design. Many of these credits are scheduled to decrease in value before disappearing entirely within a decade. Capital projects with long lead times that are currently in the early planning stages need to factor regulatory and environmental approvals, among other variables, into development timelines to attract the highest tax credits rates.

Organizations that act decisively to take advantage of these incentives, while successfully navigating their complexities, can achieve new sustainable avenues of growth. By taking full advantage of these tax credits, they can also be at the forefront of developing a cleaner economy for Canada and the world.

Make the most of Canada’s clean economy tax incentives.
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An overview of Canada’s clean economy tax credits

What it’s worth:
15%–40% (refundable)

What’s eligible:
Hydrogen production from electrolysis or natural gas pathway with carbon capture, utilization and storage abatement.

What it’s worth:
30% (refundable)

What’s eligible:
Non-fossil-fuel electricity generation and storage equipment, zero-emission vehicles, refuelling and recharging equipment and waste biomass for heat or power.

What it’s worth:
37.5%–60% (refundable)

What’s eligible:
Geological sequestration in British Columbia, Alberta and Saskatchewan.

What it’s worth:
15% (refundable)

What’s eligible:
Non-emitting electricity generation, distribution and interprovincial transmission.

What it’s worth:
30% (refundable)

What’s eligible:
Zero-emission technology manufacturing or qualifying mineral activities involving extraction, processing, or recycling critical minerals.

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