Canadian investment tax credits for clean technology and clean hydrogen announced in fall 2022 Economy | Bennett Jones LLP


Highlights

  • Proposal for a 30% refundable tax credit for investment in clean technologies.
  • Proposed refundable tax credit for investment in clean hydrogen.
  • Further details and consultations are forthcoming.
  • Project promoters must comply with working conditions to receive full tax credits.
  • Availability is determined based on the release of the 2023 Federal Budget.

One of the defining aspects of the Government of Canada’s program Fall Economic Statement 2022 (the FES 2022) which was announced on November 3, 2022, is its response to the Inflation Reduction Act (IRA) in the United States. The IRA, signed into law by President Joe Biden on August 16, 2022, offers huge financial incentives to the clean energy industry in the transition to a net zero economy.

In order to establish a competitive tax environment with the United States, which makes it more attractive for businesses to invest in Canada, the Government of Canada has announced two new tax credits:

  1. a clean technology investment tax credit; and
  2. a tax credit for investing in clean hydrogen.

These aim to further encourage the adoption of clean energy technologies to help achieve Canada’s goal of a net-zero economy by 2050, as outlined in the federal government’s 2030 Emissions Reduction Plan, and to this end, are consistent with previously announced tax policy, such as the Carbon Capture, Use and Storage Tax Credit (the CCUS Tax Credit) established by the 2022 Canadian Federal Budget (Budget 2022).

Clean Technology Investment Tax Credit

The Clean Tech Investment Tax Credit (Clean Tech ITC) as proposed by FES 2022 will be a refundable tax credit equal to 30% of the capital cost of qualifying equipment. Equipment eligible for the credit will include:

  • Power generation systemsincluding solar photovoltaic, small modular nuclear reactors, concentrated solar power, wind and hydro (small hydro, run-of-river, wave and tidal) as described in subparagraphs d. (iii), (iii.1), (v), (vi) and (xiv) of ACC Category 43.1.
  • Stationary electricity storage systems described in subparagraphs (d)(xviii) and (d)(xix) provided that they do not use fossil fuels in their operation, which includes, but is not limited to: batteries, flywheels of inertia, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage and thermal energy storage.
  • Low carbon heating and electrical equipmentincluding active solar heating, air source heat pumps and ground source heat pumps which are described in subparagraph d(i) of Class 43.1, as well as small modular nuclear reactors and concentrated solar power equipment.
  • Zero-emission industrial vehicles (i.e. zero-emission off-road vehicles, described in Class 56, such as hydrogen or electric heavy equipment used in mining or construction) and related charging or refueling equipment primarily used for such vehicles, as described in subparagraph (d)(xxi) of Class 43.1 or subparagraph (b)(ii) of Class 43.2.

The Department of Finance will consult on whether there will be other qualifying clean technology equipment that will be eligible for the clean technology ITC. FES 2022 specifically mentions large-scale nuclear and large-scale hydro projects as potential additions.

Availablity

It is proposed that the Clean Technology ITC will be available for assets acquired and put into service on or after Budget 2023 release day. It will be phased out starting in 2032 and will no longer be in force after 2034. Ownership. available for the first time in 2032 will be eligible for a tax credit of up to 20%, the property available for the first time in 2033 will be eligible for a tax credit of up to 10% and the property available for the first time in 2034 will benefit from a tax credit of up to 5 percent.

Clean Hydrogen Investment Tax Credit

The Government of Canada is also proposing to introduce a refundable tax credit for investing in clean hydrogen (CII for clean hydrogen), but many details on its final form have yet to be developed. FES 2022 notes that the Ministry of Finance will consult on how best to implement an IIC for clean hydrogen based on the life cycle carbon intensity of the hydrogen produced, and that these consultations will focus on:

  • the appropriate carbon-intensity based system in a Canadian context; and
  • the level of support needed for the different production streams in Canada.

FES 2022 specifically cites the IRA, which includes carbon intensity levels, to guide the level of support provided to clean hydrogen projects. This may indicate that the Clean Hydrogen ITC will follow a similar tiered approach.

No threshold has been given as to what those lifecycle carbon emission levels will look like, but FES 2022 notes that in the IRA, support starts at 4.0kg CO2e or less per kg of hydrogen, with the highest level of support. provided when emissions are 0.45 kg CO2 or less, which may indicate that this is the starting point that the Department of Finance will use to assess Canada’s levels.

FES 2022 notes that the Clean Hydrogen ITC will provide a refundable tax credit of at least 40% for the lowest carbon intensity level.

Availablity

The Clean Hydrogen ITC will be available for investments from Budget Day 2023 and will be phased out after 2030.

Extension of the hydrogen strategy?

This announcement follows the signing of a Joint Statement of Intent on August 23, 2022 by the Governments of Canada and Germany to form a Canada-Germany Hydrogen Alliance, which signals the Government of Canada’s intent to start exporting hydrogen to Germany by 2025.

This is also consistent with and builds on previous tax policy enacted by Budget 2022 to encourage hydrogen production, such as expanding Class 43.1 to include equipment used to produce hydrogen by electrolysis. water, which allows for accelerated CCA deductions of qualifying equipment, as well as the implementation of the Qualified Zero-Emission Technology Manufacturing Deduction, which allows a tax deduction for hydrogen manufacturers using a water electrolysis production method.

It will be interesting to watch how the Clean Hydrogen ITC will interact with the CCUS tax credit, as many hydrogen production pathways involve carbon capture in an effort to reduce the carbon intensity of projects.

Working conditions

ITC Clean Tech and ITC Clean Hydrogen will be subject to working conditions that must be met by project sponsors in order to be eligible for the full tax credit. For promoters who do not respect these working conditions, the tax credit will be reduced by 10%.

These working conditions will include paying prevailing wages based on local labor market conditions and ensuring that apprenticeship training opportunities are created. The Department of Finance will consult with a broad group of stakeholders, including labor unions, to determine how best to link these working conditions to the proposed tax credits.

Conclusion

Many details remain up in the air, particularly for the Clean Hydrogen ITC, and a bill implementing these proposals is pending and will come into effect to enforce qualifying expenditures incurred on or after Budget Day 2023. The Clean Hydrogen JTI and the Clean Technology JTI represent opportunities for electricity and hydrogen producers, and have the potential to impact a wide range of industries. The hope is that this begins to level the playing field with the IRA in the United States and creates significant incentives for significant investment in these industries in Canada.

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