November 15, 2024 Canada | Update on clean technology and clean hydrogen investment tax credits
The Department of Finance released for public comment draft legislative proposals relating to the clean technology investment tax credit (ITC) and the clean hydrogen ITC on 12 August 2024. The clean technology ITC rules were enacted as part of Bill C-59, Fall Economic Statement Implementation Act, 2023, in June 2024.1 The draft legislative proposals include the expansion of the clean technology ITC to include certain equipment that is part of a system that generates electricity or heat (or both) from waste biomass, as first announced in the 2023 Fall Economic Statement.2 Various technical amendments are also included. The clean hydrogen ITC rules were enacted as part of Bill C-69, Budget Implementation Act, 2024, No. 1, in June 2024.3 The draft legislative proposals include various technical amendments to clarify and expand the clean hydrogen ITC, effective as of 28 March 2023. This Tax Alert highlights specific clean technology ITC and clean hydrogen ITC updates contained in the latest round of draft legislative proposals. The proposals described below may undergo further amendments before they are tabled in a bill. Clean technology investment tax credit Background The purpose of the clean technology ITC, as noted in subsection 127.45(19) of the Income Tax Act (the Act), is to encourage the investment of capital in the adoption and operation of clean technology property in Canada. The ITC is refundable and available to qualifying taxpayers that make eligible investments in clean technology property on or after 28 March 2023 and before 2035. As outlined below, the tax credit rate varies depending on the year in which the property is acquired and becomes available for use, and on whether certain labor requirements are met. The labor requirements are outlined in EY Global Tax Alert, Canada's new clean technology investment tax credit discussed, dated 23 February 2024.
The credit is available in respect of the capital cost of certain eligible equipment that qualifies as clean technology property.4 Eligible equipment includes certain property described in capital cost allowance (CCA) Classes 43.1, 43.2 and 56, which have 30%, 50% and 30% declining-balance-basis CCA rates, respectively. Eligible equipment included in these CCA classes is also eligible for enhanced first-year depreciation under the accelerated investment incentive if acquired and available for use before 2028. Preliminary work activity The proposed amendments include a new definition for preliminary work activity, which restricts certain expenditures from being included in the capital cost of clean technology property under subsection 127.45(5) of the Act for purposes of computing the clean technology ITC. It should be noted that expenditures related to preliminary work activities are also excluded from the capital cost of property for purposes of computing the clean electricity ITC. For more information on the clean electricity ITC, see EY Global Tax Alert, Canada issues proposed legislation for new clean electricity investment tax credit, dated 23 October 2024. Generally, these are costs related to an activity that is preliminary to the acquisition, construction, fabrication or installation by or on behalf of a taxpayer of eligible property. A preliminary activity includes:
These proposed amendments are deemed to have come into force on 28 March 2023 (the same date the credit became effective). Other adjustments in calculating the ITC base In addition to the above, the draft legislative proposals in subsection 127.45(5) provide further restrictions on eligible expenditures as they relate to the clean technology ITC, including technical amendments to:
These amendments are deemed to have come into force on 28 March 2023 (the same date the credit became effective). Proposed amendments from the 2023 Fall Economic Statement The August draft legislative proposals include several amendments to Section 127.45 to extend the availability of the clean technology ITC to certain equipment that supports the generation of electricity or heat (or both) from waste biomass, as announced as part of the 2023 Fall Economic Statement. To implement this expansion, "waste biomass electricity generation equipment" and "waste biomass heat generation equipment," as discussed below, are added to the list of property eligible for the clean technology ITC, effective 21 November 2023. As detailed below, consequential to the expansion of the clean technology ITC, additional definitions have also been added to subsection 127.45(1). The proposed definitions are deemed to have come into force on 21 November 2023. Waste biomass electricity generation equipment The draft legislative proposals define "waste biomass electricity generation equipment" in subsection 127.45(1) to set forth eligibility criteria for property that uses certain waste materials to generate electricity or heat (or both) and to describe eligible property. Certain property is specifically excluded from the definition, including a building (or other structure), heat rejection equipment, transmission equipment, distribution equipment, certain equipment used to export heat energy from a system, equipment for the handling or storage of feedstock or fuel, and property described in Classes 57 and 58. Eligibility criteria To qualify, the property must be part of a system that satisfies the following conditions:
Eligible property The following property within a system that meets the requirements listed above may qualify as waste biomass electricity generation equipment:
Waste biomass heat generation equipment The draft legislative proposals also define "waste biomass heat generation equipment" in subsection 127.45(1) to set forth eligibility criteria for property that uses certain waste materials to generate heat and to describe eligible property. Certain property is specifically excluded from the definition, including equipment used to produce heat energy to operate electrical generating equipment, a building (or other structure), heat rejection equipment, certain equipment used to export heat energy from the system, equipment for the handling or storage of feedstock or fuel, and property described Class 10, 17, 57 or 58. Eligibility criteria The system-level requirements of a system that generates heat are largely the same as for waste biomass electricity generation equipment discussed above, except that:
Eligible property The following property within a system that meets the requirements listed above may qualify as waste biomass heat generation equipment:
Environmental compliance and reasonable efforts To support the ITC's environmental objectives, proposed subsections 127.45(5.1) and (5.2) have been introduced, which prevent qualifying taxpayers from obtaining the ITC in cases of substantial non-compliance with environmental laws, by-laws and regulations applicable to the property at the time the property become available for use. The draft legislative proposals include temporary relief in certain circumstances where waste biomass electricity generation equipment or waste biomass heat generation equipment is part of a system that temporarily becomes used in a"non-clean technology use" (as defined in subsection 127.45(1)). Under the current legislation, such property would be subject to recapture under subsections 127.45(11) to (18); however, the proposed amendments would allow relief to qualifying taxpayers if all reasonable efforts to rectify the difficulty causing the deficiency are made within a reasonable period of time. For purposes of the relief, a system may include property of another person or partnership if the following conditions are met:
These proposed provisions are deemed to have come into force on 21 November 2023. Proposed amendments with respect to partnerships The draft legislative proposals include the following three new subsections with respect to partnerships.
These proposed provisions are deemed to have come into force on 21 November 2023. Clean hydrogen investment tax credit Background The purpose of the clean hydrogen ITC, as provided for in subsection 127.48(31), is to encourage the investment of capital in the production of clean hydrogen and clean ammonia in Canada. The ITC is refundable and available to qualifying taxpayers that make investments in eligible clean hydrogen property on or after 28 March 2023 and before 2035. As outlined below, the tax credit rate varies depending on the expected carbon intensity of the production process,7 the year in which the property is acquired and becomes available for use, and whether certain labor requirements are met. The labor requirements are outlined in EY Global Tax Alert, Canada's proposed clean hydrogen investment tax credit discussed, dated 3 April 2024.
The credit is available in respect of the capital cost of certain eligible equipment that qualifies as clean hydrogen property.8 Eligible equipment includes certain property used to produce hydrogen through electrolysis of water or from eligible hydrocarbons, as well as clean ammonia equipment, dual-use electricity and heat equipment, and dual-use hydrogen and ammonia equipment. Eligible equipment also includes various supporting equipment and infrastructure costs, along with control, monitoring or safety systems in support of the equipment. Eligible equipment is also eligible for enhanced first-year depreciation under the accelerated investment incentive if acquired and available for use before 2028. Draft amendments to clarify and expand the clean hydrogen ITC The draft legislative proposals include changes to several definitions that help determine a taxpayer's clean hydrogen ITC, including:
All the proposed changes to the definition are deemed to have come into force on 28 March 2023 (the same date the credit became effective). Capital cost of clean hydrogen property The August draft legislative proposals include amendments to the rules in subsection 127.48(10) relating to the determination of the capital cost of eligible clean hydrogen property for the purpose of the ITC, including amendments to:
Furthermore, certain amendments to subsection 127.48(6) have also been added. This provision specifies various rules that apply for the purposes of calculating the actual and expected carbon intensities of hydrogen produced and to be produced by a clean hydrogen project of a taxpayer. The proposed amendments are deemed to have come into force on 28 March 2023 (the same date the credit became effective). Clean hydrogen project determination and rules Under the current legislation, the Minister of Natural Resources may request any necessary documentation or information to confirm the taxpayer's clean hydrogen project plan (or a revised plan), pursuant to paragraph 127.48(9)(e) of the Act. The requested information must be provided by the taxpayer within 180 days of the request. The draft legislative proposals provide updated deadlines where requested information is not available within 180 days of the request or the information only becomes available after a project is confirmed by the Minister of Natural Resources (e.g., a finalized and legally binding power purchase agreement). Under the proposed amendments, a qualifying taxpayer would be required to submit the information requested by the later of the day that is 180 days after the information was requested and 60 days after the information becomes available. If the taxpayer fails to provide the requested information, the Minister of Natural Resources may refuse to confirm the clean hydrogen project plan (or revised plan); general penalties under the Act in respect of the failure may also apply. Property deemed in respect of qualified project The August draft legislative proposals provide some relief where a clean hydrogen project plan has not yet been accepted. Specifically, proposed subsection 127.48(13.1) prevents certain property from being excluded from the clean hydrogen ITC where the Minister of Natural Resources has not yet accepted the clean hydrogen project plan. If the project becomes a qualified clean hydrogen project in due course, then the property will be deemed to have been acquired in respect of a qualified clean hydrogen project. Proposed amendments with respect to partnerships The draft legislative proposals include the following amendments with respect to partnerships:
Multiple tax credits Section 127.47 of the Act 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. The draft legislative proposals released on 12 August 2024 include proposed subsection 127.47(4.1) of the Act, 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. If property is eligible for more than one clean economy ITC, a qualifying taxpayer is generally limited to one of the tax credits on the cost of the property. 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. For more information on proposed subsection 127.47(4.1), refer to EY Global Tax Alert, Canada issues proposed legislation for new clean electricity investment tax credit, dated 23 October 2024.
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