04 November 2024 Canada enacts and updates investment tax credit for carbon capture, utilization and storage
This Tax Alert highlights certain updates contained in Bill C-59, Fall Economic Statement Implementation Act, 2023, Bill C-69, Budget Implementation Act, 2024, No. 1, and in the latest round of draft legislative proposals released on 12 August 2024 with respect to the investment tax credit (ITC) for carbon capture, utilization and storage (CCUS). The CCUS ITC was first announced in the 2021 federal budget and subsequently updated in the 2022 and 2023 federal budgets. The amendments included in Bill C-59 were generally consistent with previous announcements and most notably incorporated the latest changes proposed in the 2023 federal budget. The evolution of the draft legislative proposals has been summarized in these EY Global Tax Alerts, Canada | Status of proposed federal investment tax credit for carbon capture, utilization and storage, dated 19 May 2022; Canada | Update on proposed federal investment tax credit for carbon capture, utilization and storage, dated 14 October 2022; Canada Federal budget 2023/24: A made-in-Canada plan, dated 4 April 2023; and Canada | Legislative update for the CCUS investment tax credit, dated 24 August 2023. In addition, Bill C-69, which was also enacted in June 2024, included some technical amendments to the CCUS ITC. The CCUS ITC in section 127.44 and Part XII.7 of the Income Tax Act (the Act) is refundable and available to businesses that incur qualified CCUS expenditures after 2021 and before 2041. Qualified CCUS expenditures include the cost of acquiring eligible equipment used in qualified CCUS projects. Eligible equipment, as described in our previous Tax Alerts noted above, includes equipment that is situated in Canada and used solely to capture, transport, store or use carbon dioxide (CO2) as part of a qualified CCUS project. This equipment is included in new capital cost allowance (CCA) Classes 57 and 58, which have 8% and 20% declining-balance-basis CCA rates, respectively, and is eligible for enhanced first-year depreciation under the accelerated investment incentive. For qualified CCUS expenditures incurred after 2021 and before 2031, credit rates are 60% for qualified carbon capture expenditures used to capture carbon directly from ambient air, 50% for other qualified carbon capture expenditures and 37.5% for qualified carbon transportation, storage or use expenditures. These credit rates are reduced by half for eligible expenses incurred after 2030 and before 2041. Also, the credit rates are reduced by 10 percentage points if certain labor conditions are not met. For general information on the labor conditions, refer to EY Global Tax Alert, Canada | Legislative update for the CCUS investment tax credit, dated 24 August 2023. Also, see EY Tax Alert 2024 Issue No. 6, Canada's new clean technology investment tax credit discussed, dated 23 February 2024, for details on the amendments implemented by Bill C-59. The tax credit may be claimed for the tax year in which qualified CCUS expenditures are incurred, regardless of when the related equipment becomes available for use. The extent to which the tax credit is available is also dependent on the projected eligible-use percentage of the CO2 being captured. Part XII.7 recovery taxes may be imposed to recoup any excess tax credits claimed where the projected eligible-use percentage is not met at the end of each of the four project periods. Various changes announced in the 2023 federal budget, including the separation of the credit into a cumulative CCUS development tax credit (for qualified CCUS expenditures incurred before the first day of commercial operations of a CCUS project) and a CCUS refurbishment tax credit (for qualified CCUS expenditures incurred during the total CCUS project review period) as well as various technical amendments are included in Bill C-59, Bill C-69 and the August 2024 draft legislative amendments. A portion of expenditures related to dual-use equipment may qualify for the CCUS ITC in certain circumstances. The definition of dual-use equipment in subsection 127.44(1) includes certain property, other than property described in Class 57 or 58, that is part of a CCUS project of the taxpayer and that is not used for natural gas processing or acid gas injection. Broadly speaking, the definition includes four categories of equipment:
The definition of dual-use equipment also includes integrated ancillary equipment. The ancillary equipment must be physically and functionally integrated with the equipment categories described above. It must also be solely used to support such equipment within the CCUS process as part of a supporting subsystem. The supporting subsystems include an electrical system, fuel supply system, liquid delivery and distribution system, cooling system, process material storage and handling and distribution system, process venting system, process waste management system, or utility air or nitrogen distribution system. However, the integrated ancillary equipment excludes construction equipment, furniture, office equipment and vehicles. Dual-use equipment also includes the following components that are solely used in support of the equipment noted above:
The definition of "first day of commercial operations" was added by Bill C-59, and the term is defined as the day that occurs 120 days after the day on which captured carbon dioxide is first delivered — on an ongoing operational basis — to a carbon transportation, carbon storage or carbon use system for storage or use. Delivering a small amount of captured carbon as a part of preliminary testing is not considered to be the start of commercial operations. The phrase "120 days after" is intended to provide a grace period with respect to any expenditures that might overlap with the commencement of commercial operations. The definition is important to establish when project expenditures cease to qualify for the CCUS development tax credit and may begin to qualify for the CCUS refurbishment tax credit. This determination is significant because refurbishment expenditures of a qualified CCUS project are limited to 10% of the total qualified CCUS expenditures incurred prior to the first day of commercial operations. It is also relevant for determining when the first project period begins for purposes of the compliance and reporting obligations in Part XII.7 of the Act. Further, new subsection 211.92(1) provides various definitions relevant for the purpose of determining the CCUS tax credit recovery liability and for the reporting requirements in new section 211.93 of the Act. The definitions apply for the purposes of Part XII.7 and section 127.44, which contain the main provisions for the CCUS tax credit rules. For purposes of section 211.92, Bill C-59 introduced the definition of "project start-up date," which is defined as the day that is 120 days before the first day of commercial operations. This definition is relevant for the purposes of determining certain reporting requirements in respect of knowledge sharing. Non-government assistance is defined in subsection 127(9) of the Act. Bill C-59 amended the definition to exclude amounts received directly from a government, municipality or other public authority from non-government assistance. This amendment has an impact on the CCUS ITC since eligible expenditures are only reduced by non-government assistance and not by government assistance. As a result, the receipt of funding from a government, municipality or other public authority should not effectively reduce the CCUS ITC. This amendment came into force on 20 June 2024. Subsection 127.44(11) of the Act, which was enacted in Bill C-59, applies if a qualifying taxpayer is a member of a partnership and a CCUS tax credit would be determined in respect of the partnership if the partnership were a taxable Canadian corporation (and its fiscal period were its tax year). Subsection 127.44(11) contains a rule that effectively flows the portion of a CCUS tax credit that can reasonably be considered to be a member's share of the credit to the member, which is similar to the rule in subsection 127(8). New subsection 127.44(11) is subject to section 127.47, which provides rules that apply to partnerships with respect to certain clean economy ITCs, including rules regarding the allocation of ITCs from a partnership to its members. In particular, subsection 127.47(3) restricts a partnership from allocating to a limited partner a share of the CCUS ITCs that exceeds the limited partner's "at-risk" amount in respect of the partnership, as defined in subsection 96(2.2) of the Act. Furthermore, the ITC amount allocated to each partner must be based on a reasonable pro-rata methodology having regard to the capital invested in or work performed for the partnership by each member. In addition, the draft legislative proposals released on 12 August 2024 include proposed subsection 127.47(4.1), which provides rules to clarify the amount that a taxpayer who is a member of a partnership is deemed to have paid on account of its tax payable under Part I of the Act under each of the clean economy tax credits. A qualifying taxpayer is generally restricted to claiming only one of the clean economy tax credits if the property is eligible for more than one clean economy tax credit. Proposed subsection 127.47(4.1) generally provides that where property is owned at the partnership level, each member of the partnership may generally claim any one — but not more than one — credit that they have been allocated by a partnership. The rules provide an exception to ensure that the dual-use equipment rules in the CCUS and clean hydrogen ITC context still allow each portion of the property to support a credit claim. New paragraph 127.44(9)(e) introduced as part of Bill C-59 addresses circumstances in which an expenditure is incurred in relation to a property before the property is acquired by the taxpayer. For example, this situation could occur if the expenditure is incurred in one tax year, but the property is not acquired until a subsequent tax year due to a delivery delay. In such situations, both incurring the expenditure and acquiring the property is deemed to occur in the later of the two tax years. It is also possible that new subsection 127.44(12) could apply to deem an expenditure to be incurred when it is paid. More specifically, subsection 127.44(12) provides that if an expenditure remains unpaid after 180 days from the end of the tax year in which the expenditure was incurred, the expenditure is deemed to have been incurred in the year in which it is paid. Paragraph 127.44(9) is not overridden, meaning that subsection 127.44(12) will be applied first to determine when an affected expenditure (involving unpaid amounts) is initially deemed to have been incurred. Such expenditure could be further delayed under paragraph 127.44(9)(e) if the property is not acquired until a subsequent year. Bill C-59 and Bill C-69 introduced some restrictions related to the Minister of National Revenue's discretion under new subsection 127.44(8). Specifically, the Minister of National Revenue (in consultation with the Minister of Natural Resources) can only exercise its discretion to redesignate a CCUS project as a single project or multiple projects at the following times:
New subsection 127.44(6) was introduced in Bill C-59 to require a taxpayer to submit a revised project plan to the Minister of Natural Resources in certain circumstances. A revised project plan is required if the Minister of Natural Resources determines that there has been a material change to the project or if certain captured carbon thresholds are not reached compared to the most recent project plan. In addition, subsection 127.44(7) provides that if a taxpayer files a revised project plan in accordance with subsection 127.44(6), the Minister of Natural Resources is required to issue a revised project evaluation with all due dispatch.
Document ID: 2024-2020 | ||||||
