Federal clean economy tax incentives: A guide to maximizing your green investments

Clean technology manufacturing investment tax credit

What is it?

The clean technology manufacturing credit applies to the cost of eligible investments in new machinery and equipment. This includes machinery and equipment used to manufacture or process key clean technologies, as well as those used to extract, process, or recycle key critical minerals. 

Who is eligible?

The ITC is available to taxable Canadian corporations, including those that are members of partnerships that acquire property eligible for this credit. 

Key dates:

The ITC applies to property that is acquired and becomes available for use on or after January 1, 2024. The credit will be phased out starting in 2032 and will be fully eliminated after 2034. 

ITC rate:

Up to 30 percent of the capital cost of eligible property. Lower rates apply after 2031 as the ITC is phased out. The rate is not dependent on labour requirements. 

Other eligibility details:

Property eligible for this ITC would generally include machinery and equipment — including certain industrial vehicles — used in manufacturing, processing, or critical mineral extraction, as well as related control systems. The property must be new and must be situated in and intended to be used exclusively in Canada. Certain property is specifically carved out from being eligible for the ITC. 

Additional annual compliance requirements: 

The August 2024 draft legislation introduced new certification requirement for taxpayers claiming this ITC for eligible property used at the mine or well site. They will be required to submit a certification in the prescribed form from an independent engineer or geoscientist. The independent engineer or geoscientist will have to attest that the property is used at a mine or well site and used in accordance with a plan that primarily targets qualifying materials. The certification must be submitted with this ITC claim form. 

How to claim:

The ITC is claimed through the taxpayer’s applicable corporate tax return. Partnerships that allocate the ITC to its members that are taxable Canadian corporations are also required to submit details of the ITC. The legislation requires a prescribed form to be filed within one year following the taxpayer’s filing due date for the year.  

The CRA is currently working to release prescribed forms for this ITC. In the meantime, guidance on what information to submit can be found here.

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Clean hydrogen investment tax credit

What is it?

The clean hydrogen ITC applies to investments in projects that produce hydrogen, with the projects that produce the cleanest hydrogen receiving the highest levels of support. Equipment needed to convert hydrogen into ammonia, in order to transport hydrogen, may also be eligible.

Who is eligible?

The ITC is available to taxable Canadian corporations, including those that are members of partnerships that acquire property eligible for this credit.

Key dates:

The ITC applies to property that is acquired and becomes available for use on or after March 28, 2023. The credit will be phased out starting in 2034 and will be fully eliminated in 2035.

ITC rate:

Up to 40 percent of the capital cost of eligible property. Lower rates apply after 2033 as the ITC is phased out. The ITC rate will depend on the expected carbon intensity of the hydrogen to be produced, the time the property is acquired, and whether the taxpayer has elected to meet certain labour requirements (see below).

Other eligibility details:

Qualifying clean hydrogen projects   require a project plan to be filed with the Minister of Natural Resources. The project plan must include specific information, including:

• A front-end engineering design (FEED) study or equivalent study for the project.
• The expected carbon intensity of the hydrogen to be produced, supported by a report prepared by a qualified validation firm.
• Additional information for projects intended to produce clean ammonia.
• Any other information required by the Minister of Natural Resources.

The taxpayer must have received written confirmation of certain details from the Minister of Natural Resources following the submission of the project plan. Like the ITCs discussed above, the property must be new and must be situated in and intended to be used exclusively in Canada. 

The CRA website was updated on August 27, 2024, to include four guidance documents on the Clean Hydrogen ITC.

Additional annual compliance requirements:

Taxpayers that deduct the clean hydrogen ITC during a taxation year are then required to file a prescribed form along with their tax return for that year that contains information on project operations.

In addition, a compliance report containing information on the average actual carbon intensity at the end of the period must be filed with the Minister of National Revenue and the Minister of Natural Resources within 180 days of the end of each operating year.

This report will be used to determine if the appropriate ITC rate was applied for that period. If a higher rate was deducted by the taxpayer than merited by the report, rules apply to require the taxpayer to repay a recovery tax. Penalties apply for failure to file any reports required by the reporting due dates.

How to claim:

The ITC is claimed through the taxpayer’s applicable corporate tax return. Partnerships that allocate the ITC to its corporate members are also required to submit details of the ITC. The legislation requires a prescribed form to be filed within one year following the taxpayer’s filing due date for the year.

The CRA is currently working to release prescribed forms for this ITC. In the meantime, guidance on what information to submit can be found here.  

Carbon capture, utilization and storage (CCUS) investment tax credit

What is it?

The CCUS ITC is related to the acquisition of property used to capture CO2 emissions from fuel combustion, industrial process, or directly from the air, as well as to transport the captured carbon and to store it or use it in industry. This ITC is available to a broad range of CCUS applications in different industrial subsectors such as concrete, plastics, and fuels.

Who is eligible?

The ITC is available to taxable Canadian corporations, including those that are members of partnerships that acquire property eligible for this credit.

Key dates:

The ITC applies to eligible expenditures incurred for a qualified CCUS project from January 1, 2022, to December 31, 2040.

ITC rate:

Up to 60 percent for expenditures incurred from 2022 to 2030 and up to 30 percent for those incurred from 2031 to 2040, depending on the type of expenditure. Taxpayers must elect to meet labour requirements to access the maximum ITC rate (see below).

Other eligibility details:

To claim this ITC, taxpayers must complete a FEED study, take the pre-screening questionnaire, and submit a project plan to Natural Resources Canada (NRCan). Taxpayers must have an NRCan-issued initial project evaluation for each qualified CCUS project. 

Additional annual compliance requirements:

Taxpayers that utilize this ITC must complete and submit an annual claim report to NRCan. The report template is available in NRCan’s applicant portal. Depending on the amount of qualified CCUS expenditures that the project is expected to incur, additional reports may be required to be submitted to NRCan and the CRA (e.g., knowledge sharing reports or annual climate risk disclosure report). Penalties apply for failure to submit or publish any reports required by the reporting due dates.

How to claim:

The ITC is claimed through the taxpayer’s applicable corporate tax return. Partnerships that allocate the ITC to its members are also required to submit details of the ITC.

The CRA is currently working to release prescribed forms for this ITC. In the meantime, guidance on what information to submit can be found here.    

Clean electricity investment tax credit [proposed]

What is it?

This credit is intended to support and accelerate clean electricity investment in Canada to expand the capacity of the clean electricity grid.

Who is eligible?

The credit will be available to qualifying entities, including taxable Canadian corporations, designated provincial Crown corporations (subject to additional requirements), municipal corporations, corporations owned by an Aboriginal government or similar Indigenous governing bodies, and pension corporations. This includes qualifying entities that are members of partnerships that acquire property eligible for this credit.

Key dates:

The ITC will apply to new clean electricity property acquired and that becomes available for use on or after April 16, 2024, and before 2035, provided it was not part of a project that began construction before March 28, 2023.

ITC rate:

Up to 15 percent. Taxpayers must elect to meet labour requirements to access the maximum ITC rate (see below).

Other eligibility details:

Types of property that may qualify for this ITC include equipment used to generate electricity from solar, wind, or waste energy, concentrated solar energy equipment used solely for generating electrical energy, nuclear energy equipment, and geothermal equipment used to generate electricity and / or heat from geothermal energy, among others. See the August 2024 legislative proposals for more details.

The clean electricity property must be situated in and intended to be used exclusively in Canada.

Additional annual compliance requirements:

Taxpayers claiming this ITC for a qualified natural gas energy system will have to file a compliance report with both Minister of National Revenue and the Minister of Natural Resources containing certain information within 180 days after the end of each of the first 20 operating years. In the fifth operating year, the taxpayer will also have to include a report prepared by a qualified verification firm confirming the actual emission intensity for each of the compliance period. This information will be used to determine whether any recovery tax is payable.

How to claim:

To date, no details have been released in respect to how the credit will be claimed. Stay tuned for further updates.

Electric vehicle supply chain investment tax credit [proposed]

What is it?

This ITC is for businesses that invest in Canada across three supply chain segments: EV assembly, EV battery production, and cathode active material production.

Who is eligible?

This ITC is available to taxpayers that claim the clean technology manufacturing ITC in all three of the above specified segments, or two out of three of the specified segments and hold at least a qualifying minority interest in an unrelated corporation that claims the clean technology manufacturing ITC in the third segment.

Key dates:

The ITC will apply to property that was acquired and becomes available for use on or after January 1, 2024, and before 2035.

ITC rate:

A 10 percent rate will apply to eligible property through 2032. The credit will be reduced to five percent for 2033 and 2034.

How to claim:

To date, no details have been released in respect to how the credit will be claimed. Stay tuned for further updates.

Labour requirements

To qualify for the full rates on the clean technology, clean hydrogen, CCUS, and clean electricity ITCs, certain labour requirements must be met. Where the requirements are not met, the benefit of the ITC is reduced by 10 percent.

There are two main components to the labour requirements:

Prevailing wage requirements

For the purposes of these ITCs, the taxpayer must ensure each worker (referred to as covered workers) is compensated according to the worker’s collective agreement or, if no such agreement exists, a comparable agreement. The taxpayer must attest that this requirement is met in respect to its own covered workers and that a reasonable effort was made to verify that covered workers employed by others involved in the project also meet the requirement. In addition, the taxpayer is required to take steps to ensure covered workers are aware of the requirements through specified communication channels.

Apprenticeship requirements

The taxpayer must make reasonable efforts to ensure that apprentices registered in Red Seal trade work perform at least 10 percent of the total work performed by Red Seal workers on the project. Some exceptions may apply if labour laws or other agreements restrict the use of apprentices. Certain steps must be taken throughout a year — as often as every four months — to ensure compliance.

As noted earlier, the taxpayer must elect to have met the prevailing wage and apprenticeship requirements for each tax year. Otherwise, the reduced ITC rates will automatically apply. Taxpayers should be aware that penalties — including potential gross negligence penalties — will apply where the full ITC rate is claimed but the taxpayers have failed to meet the requirements.

However, the legislation indicates taxpayers will also be provided an opportunity to take corrective measures if notified by the CRA. While this is a welcome measure, taxpayers should ensure they have a firm understanding of the labour requirements and related documentation requirements to prevent attracting these penalties.

Final thoughts

Although the clean economy ITCs can be highly beneficial to some businesses, the incentives introduced are quite complex. Maintaining eligibility for the credits claimed requires substantial attention before, during, and after the project periods.

Businesses looking to utilize any of these incentives must be fully aware of any pre-approvals, the ongoing compliance requirements, as well as the specified timelines related to the respective ITC.

The rules for these ITCs may sound complex, but you don’t need to face them alone. Our tax advisors are here to help you determine if pursuing these ITCs makes sense for you.