Written By David Macaulay, Greg Johnson and Brendan Sigalet
One of the defining aspects of the Government of Canada's 2022 Fall Economic Statement (the 2022 FES) that 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 enormous financial incentives to the clean energy industry in the transition to a net-zero economy.
In an effort to establish a competitive tax environment with the United States, making it more attractive for businesses to invest in Canada, the Government of Canada has announced two new tax credits:
- a Clean Technology Investment Tax Credit; and
- a Clean Hydrogen Investment Tax Credit.
These are intended to further incentivize the adoption of clean energy technology to assist in achieving 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 in keeping with previously announced tax policy, such as the Carbon Capture, Utilization and Storage tax credit (the CCUS Tax Credit) established by the 2022 Canadian Federal Budget (Budget 2022).
Clean Technology Investment Tax Credit
The Clean Technology Investment Tax Credit (Clean Tech ITC) as proposed by the 2022 FES will be a refundable tax credit equal to 30 percent of the capital cost of eligible equipment. The equipment eligible for the credit will include:
- Electricity Generation Systems, including solar photovoltaic, small modular nuclear reactors, concentrated solar, wind and water (small hydro, run-of-river, wave and tidal) as described under subparagraphs d(iii), (iii.1), (v), (vi), and (xiv) of CCA Class 43.1.
- Stationary Electricity Storage Systems described under subparagraphs (d)(xviii) and (d)(xix) provided that they that do not use fossil fuels in their operation, which includes but is not limited to: batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage and thermal energy storage.
- Low-Carbon Heat And Electricity Equipment, including active solar heating, air-source heat pumps and ground-source heat pumps that are described under subparagraph d(i) of Class 43.1, as well as small modular nuclear reactors and concentrated solar energy equipment.
- Industrial Zero-Emission Vehicles (i.e. non-road zero emission vehicles, described in Class 56, such as hydrogen or electric heavy duty equipment used in mining or construction) and Related Charging or Refueling Equipment primarily used for such vehicles, as described under 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 any additional eligible equipment related to clean technologies that will be eligible for the Clean Tech ITC. The 2022 FES specifically mentions large scale-nuclear and large-scale hydroelectric projects as potential additions.
The Clean Tech ITC is proposed to be available for property that is acquired and becomes available for use on or after the day the 2023 Budget is released—it will be gradually phased out beginning in 2032 and will no longer be in effect after 2034. Property first available for use in 2032 will qualify for a tax credit of up to 20 percent, property first available for use in 2033 will qualify for a tax credit of up to 10 percent, and property first available for use in 2034 will qualify for a tax credit of up to 5 percent.
Clean Hydrogen Investment Tax Credit
The Government of Canada further proposes to introduce a refundable Clean Hydrogen Investment Tax Credit (Clean Hydrogen ITC), however many details on its ultimate form are to be developed. The 2022 FES notes that the Department of Finance will consult on how best to implement a Clean Hydrogen ITC based on the lifecycle carbon intensity of the hydrogen produced, and that these consultations will primarily focus on:
- the appropriate carbon intensity based system in a Canadian context; and
- the level of support needed for different production pathways in Canada.
The 2022 FES specifically cites the IRA, which includes carbon intensity tiers, 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 thresholds have been indicated with respect to what these lifecycle carbon emissions tiers will look like, however the 2022 FES does note that in the IRA, support begins at 4.0 kg of CO2 equivalents or less per kg of Hydrogen, with the highest level of support provided when emissions are 0.45 kg of CO2 or less, which may be an indication that this is the starting point that the Department of Finance will use in considering Canada's own tiers.
The 2022 FES notes that the Clean Hydrogen ITC will provide a refundable tax credit of at least 40 percent for the lowest carbon intensity tier.
The Clean Hydrogen ITC will be available for investments made as of Budget day 2023, and will be phased out after 2030.
Expansion of Hydrogen Strategy?
This announcement follows the signing of a joint declaration 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 intention to begin exporting hydrogen to Germany by 2025.
This also accords with and builds on previous tax policy enacted by Budget 2022 aimed at encouraging hydrogen production, such as the expansion of Class 43.1 to include equipment used to produce hydrogen through electrolysis of water, which allows accelerated CCA deductions of eligible equipment, as well as the implementation of the Qualified Zero-Emission Technology Manufacturing Deduction, which allows a tax deduction for manufacturers of hydrogen using a water electrolysis production method.
It will be interesting to monitor how the Clean Hydrogen ITC will interact with the CCUS Tax Credit, as many hydrogen production pathways feature carbon capture in an attempt to reduce the carbon intensity of the projects.
Both the Clean Tech ITC and Clean Hydrogen ITC will be subject to labour conditions which will have to be adhered to by project proponents in order to be eligible for the full tax credit. For those proponents that do not adhere to these labour conditions, the tax credit will be reduced by 10 percent.
These labour conditions will include paying prevailing wages based on local labour market conditions, and ensuring that apprenticeship training opportunities are being created. The Department of Finance will consult with a broad group of stakeholders, particularly unions, in order to determine how best to attach these labour conditions to the proposed tax credits.
Many details remain outstanding, particularly for the Clean Hydrogen ITC, and draft legislation implementing these proposals is pending and will come into force to apply for eligible expenses incurred on or after Budget day 2023. Both the Clean Hydrogen ITC and the Clean Tech ITC represent significant opportunities for electricity and hydrogen producers, and can potentially have an impact across 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 strong investment in these industries within Canada.
Bennett Jones has experience in energy and infrastructure project development including in power, renewables, clean technology and hydrogen and developing strategies for industries to capitalize on current and upcoming initiatives of a low-carbon economy.
To discuss the potential opportunities and implications of the Clean Tech ITC or the Clean Hydrogen ITC in Canada's 2022 FES, please contact any member of the Bennett Jones Tax or Energy practice groups.