On August 4, 2023, the federal government released proposed legislation for the Clean Technology Investment Tax Credit (Clean Tech ITC), as proposed by the 2022 Fall Economic Statement (2022 FES) and amended by Budget 2023. The proposed legislation is largely consistent with what was previously announced, as we previously discussed in our blog, Canadians for Clean Technologies and Clean Hydrogen in the 2022 Fall Economic Statement, following the original announcement of the Clean Tech ITC at the 2022 FES. Investment tax credit was announced. The federal government also noted that it is launching a consultation on the Clean Tech ITC, as well as the Carbon Capture, Utilization and Storage Tax Credit (CCUS tax credit), and new labor requirements, for which it has also released new proposed legislation . (All such proposed legislation, August proposal).

Clean Tech ITC

The mechanism for the tax credit is similar to that used for other tax credits. It allows eligible taxpayers to take a 30 percent tax credit on the capital cost of the clean technology asset or be entitled to a cash refund. The clean tech ITC will further be restricted to “qualified taxpayers”, which are defined as taxable Canadian corporations (although taxable Canadian corporations may still claim the clean tech ITC through partnerships, as discussed below). As proposed, clean technology assets are defined to include:

  • Electricity generation systems, including solar photovoltaics, small modular nuclear reactors, concentrated solar power equipment, wind and water (small hydropower, river flow, wave and tidal), as defined in sub-paragraphs D(ii), (iii.1) ) as described under. (v), (vi), and (xiv) of CCA Class 43.1.
  • Stationary electrical storage systems described under sub-paragraphs (d) (xviii) and (d) (xix) provided that they do not use fossil fuels in their operation (includes: batteries, flywheels, supercapacitors, magnetic energy storage , compressed air storage, pumped water storage, gravity energy storage and thermal energy storage).
  • Low-carbon heat and power equipment, including active solar heat, air-source heat pumps, and ground-source heat pumps as described under subsection D(i) of Class 43.1, as well as small modular nuclear reactors and Concentrated solar power equipment is also included.
  • Industrial zero-emission vehicles (ie non-road zero-emission vehicles, described in class 56, such as hydrogen or electric heavy duty equipment used in mining or construction) and associated charging or refueling equipment primarily for such vehicles are used, as described under subsection (d)(xxi) of Section 43.1 or subsection (b)(ii) of Section 43.2.
  • Geothermal energy equipment, as described in subsection d(vii) of Class 43.1, provided that it is not part of a system that extracts geothermal energy as well as fossil fuels for sale or use.

To be eligible, any equipment must be located in Canada, and must be exclusively for use in Canada. In addition, the equipment cannot be used by the taxpayer prior to its acquisition, or acquired for use or lease. There are further restrictions where the asset is acquired by the taxpayer to be leased out (essentially, it must be leased out to another qualifying taxpayer, and must be leased out in the ordinary course of business by that taxpayer to whom The principal business is in any banking, leasing of property, or selling or servicing similar equipment).

Specifically excluded from the clean tech ITC is any auxiliary heating or power generation equipment that uses fossil fuels, buildings or structures, distribution equipment, Class 10 equipment (generally, automotive and other similar equipment) and Class 17 equipment (paragraph (a.1) ), generally consisting of telecommunications equipment).

Any Government or non-Government assistance received by the taxpayer will be excluded from the amount of expenditure eligible for clean tech ITC, unless the taxpayer has paid these amounts. In addition, the Clean Tech ITC cannot be claimed on property on which an amount under the Clean Tech ITC was previously claimed, or the Carbon Capture, Utilization and Storage Tax Credit was claimed.

Small modular nuclear reactor is a defined term that requires equipment used for the purpose of producing electricity or heat energy from nuclear fission, which is part of a system that has an output capacity of less than 300 MW of electricity or equals heat. 1,000 MW Thermal. Furthermore, it must be part of a system with modules already built in. The clean tech ITC will also not apply to nuclear fission fuel, equipment for nuclear waste disposal or nuclear waste disposal sites, and transmission or distribution equipment (note that this equipment is expected to be covered by other declared ITC).

Concentrator solar power equipment is also defined as equipment that produces heat, electricity, or a combination of both, either wholly or substantially, especially from concentrated sunlight. The law specifically includes: reflectors and related solar tracking systems, thermal receivers, thermal energy storage devices, power generation equipment, heat transfer fluid systems, electrical energy storage equipment, transmission equipment, equipment for the distribution of heat energy, structures whose Its sole function is to support or contain auxiliary equipment and controls, including concentrated solar power equipment, and weather monitoring systems.

Clean Tech ITC Claim

Eligible taxpayers will not be able to claim clean tech ITC until the equipment is available for use. The eligible taxpayer must also file a prescribed form with the Minister of National Revenue, including such information as may be prescribed. The information to be included is still pending. The taxpayer must file the form within one year of the taxpayer’s filing-due date for the year. Similar to other tax credits, the amount of clean tech ITC claimed reduces the UCC of the property. To the extent that UCC is not reduced by the amount of clean tech ITC claimed, this amount is included in the income of the taxpayer under section 12(1)

partnership

Clean tech ITC will be applicable to partnership in the same manner as other tax credit under section 127 of the ITA, and should be set off in accordance with sub-sections 127(8) to 127(8.5) of the ITA. So essentially, the tax credit can be deducted (or refunded) by the partners of a partnership in proportion to their investment in the partnership. For limited partners, this is further limited to the amount at risk of the limited partner.

recapture

Where a taxpayer has converted a clean technology asset to a non-clean technology use, exported the asset from Canada, or disposed of the asset, and the taxpayer has previously paid in that taxation year or 20 taxation years prior to that year Over the years, Clean Tech ITC may be subject to recapture if Clean Tech had acquired technology assets and become entitled to Clean Tech ITC in respect of assets.

The amount of recapture is less of the amount of clean take ITC claimed on the asset and the amount determined by the formula given in the proposed law. For an arm’s length disposition, it is the product of the amount of clean take ITC claimed on the asset, multiplied by the income of the disposition divided by the capital cost of the asset on which the clean take ITC was deducted. In all other cases, the second amount is the product of the amount of clean take ITC claimed on the asset, multiplied by the fair market value of the asset divided by the capital cost of the asset.

This recapture amount is added to the tax liability of the taxpayer for the taxation year in which the disposal, conversion or export took place.

There are different rules that may apply to recapture in certain circumstances, including non-arm’s-length transfers and where the taxpayer has claimed clean take ITC through a partnership.

availability

Clean tech ITC is proposed to be made available for assets that are acquired and become available for use on or after the day the Budget 2023 is released. Clean tech ITC will be reduced to 15 per cent for assets that become available for use in 2034 and will not be effective after 2034.

Labor Requirements and the CCUS Tax Credit

The labor requirements and the draft legislation for the CCUS tax credit will be discussed in a future article by the authors.

conclusion

As mentioned, the draft law for clean tech ITC largely follows the government’s previous proposals in an expected manner. The Clean Tech ITC represents a significant opportunity for energy producers across Canada and the release of the proposed legislation is a promising step forward in the availability of the Clean Tech ITC.


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