Written By Brendan Sigalet and Greg Johnson

In Budget 2024, the Government of Canada continued their drive to implement government incentives aimed at decarbonizing the economy through providing further clarification and design details for the Clean Electricity investment tax credit (the Clean Electricity ITC), and through providing an additional tax credit for electric vehicle manufacturers in the form of the EV Supply Chain ITC (the EV ITC). The Government of Canada additionally announced an update to the clean technology manufacturing investment tax credit (the CTM ITC), which responds to consultations with industry as to the practicality of the proposed draft legislation of the CTM ITC that was released on December 20, 2023 for critical mineral producers in Canada (see our previous blog on this draft legislation, Government of Canada Releases Proposed Legislation for Clean Hydrogen ITC and Clean Manufacturing ITC).

The Clean Electricity ITC

The Government of Canada provided additional design details for the Clean Electricity ITC, the last of the major clean economy investment tax credits (by which we are referring to the carbon capture, utilization and storage investment tax credit (the CCUS Tax Credit), the clean technology investment tax credit (the Clean Tech ITC), the clean hydrogen investment tax credit (the Clean Hydrogen ITC), the CTM ITC, and the Clean Electricity ITC, collectively, the Clean Economy ITCs) to be announced by the Government of Canada since 2022. As previously provided, the Clean Electricity ITC will be a 15 percent refundable investment tax credit.

Eligible Canadian Corporations

Budget 2023 had provided that the Clean Electricity ITC will apply to both tax exempt and taxable Canadian entities. Further clarification on this point was provided by Budget 2024, which announced that the Clean Electricity ITC will be restricted to be claimed by certain eligible Canadian corporations. These eligible Canadian corporations will include:

• taxable Canadian corporations;
• provincial and territorial Crown corporations (Crown Corporations), subject to certain requirements;
• corporations owned by municipalities;
• Indigenous community owned corporations; and
• pension investment corporations.

For the tax-exempt or tax-immune entities above (i.e., the latter four categories of eligible Canadian corporations), the corporation must agree to be subject to the provisions of the Income Tax Act (Canada) (the Act) relating to the Clean Electricity ITC, including the provisions in the Act relating to audit, penalties, and collections, and agree to not assert any immunity or exemption in respect of the Clean Electricity ITC being claimed by the corporation.

Provincial and Territorial Crown Corporations

Budget 2023 had stated that the Clean Electricity ITC would only be available in provinces or territories in which a “competent authority” within the province has made a commitment to the Government of Canada that the federal funding will be used to lower electricity bills within the jurisdiction and has committed to a net-zero electricity sector by 2035.

Budget 2024 clarifies this requirement and provides that this requirement will only apply to Crown Corporations within that jurisdiction. Therefore, Budget 2024 proposes that the Clean Electricity ITC will only be available to Crown Corporations in “designated jurisdictions”. The Minister of Finance will have the authority to designate jurisdictions where they are satisfied that the provincial or territorial government has publicly committed:

• to work towards a net-zero electricity grid by 2035; and
• that Crown Corporations in that jurisdiction will pass through the value of the Clean Electricity ITC to reduce the electricity bills of electricity ratepayers in that jurisdiction.

In connection with this latter requirement, the Minister must further be satisfied that the provincial or territorial government has directed the Crown Corporations that claim the Clean Electricity ITC in that jurisdiction to provide a public report annually on how the Clean Electricity ITC has improved the electricity bills of its ratepayers. Where a Crown Corporation fails to produce this report, a penalty will be charged to the Crown Corporation.

The Department of Finance provided that it will consult with the provinces and territories on the details of these conditions.

Partnerships

Similar to the other Clean Economy ITCs, an eligible Canadian corporation can still claim the Clean Electricity ITC through a partnership. With respect to partnerships between taxable Canadian corporations and tax-exempt entities where the project will qualify for both the Clean Electricity ITC and the Clean Tech ITC, Budget 2024 provides that the tax-exempt entity can claim their proportionate share of the Clean Electricity ITC on the same property on which the taxable Canadian corporation claims its proportionate share of the Clean Tech ITC.

Eligible Property

Budget 2024 provides that the following property will be eligible for the Clean Electricity ITC:

• equipment used to generate electricity from solar, wind or water energy described in subparagraphs (d)(ii), (iii.1), (v), (vi), or (xiv) of CCA Class 43.1, with the caveat that hydroelectric installations will not be subject to the capacity limitations included in Class 43.1 (and so will include large-scale hydroelectric projects);
• concentrated solar energy equipment as defined in the Clean Tech ITC proposed legislation, but limited to such equipment that is used to generate electricity;
• nuclear energy equipment as described in the Clean Tech ITC proposed legislation, but including large scale nuclear installations (i.e., no capacity limitations or requirement that equipment be factory-assembled and pre-built modular nuclear reactors);
• geothermal energy equipment used to produce electricity, or both heat and electricity as described in Class 43.1(d)(vii), but excluding equipment that is part of a system that extracts fossil fuel for sale;
• equipment that is part of a system used to generate electricity or electricity and heat from specified waste materials as was provided by the 2023 Fall Economic Statement;
• stationary electricity storage equipment that is described under subparagraph (d)(xviii) of Class 43.1 and equipment used for pumped hydroelectric energy storage that is described under subparagraph (d)(xix) of Class 43.1, but excluding equipment that uses any fossil fuel in operation;
• equipment that is part of an eligible natural gas energy system; and
• interprovincial electricity transmission systems.

Eligible Natural Gas Energy Systems

Budget 2024 provides that in order to qualify for the Clean Electricity ITC, that natural gas energy systems must use all or substantially all natural gas solely to generate electricity, or both heat and electricity, and use a carbon capture system to limit the resulting emissions. The emissions intensity of the system must be 65 tonnes of carbon dioxide per gigawatt hour of energy produced, which will be calculated using a modified form of the formula used in the Regulations Limiting Carbon Dioxide Emissions from Natural Gas-fired Generation of Electricity under the Canadian Environmental Protection Act. The modifications to the formula will include:

• adding emissions attributable to the combustion of biomass to the total emissions calculation; and
• removing emissions that are captured and stored in dedicated geological storage from the total emissions calculation.

This formula generally operates to determine the emissions intensity of the system by dividing the total carbon dioxide released into the atmosphere by the total energy produced (in the form of electricity and useful heat) over a fixed period of time.

In order to be removed from the total emissions calculation, carbon dioxide that is captured must be stored in dedicated geological storage, the requirements for which will be “aligned” with those required for the “CCUS Tax Credit”. The Budget specifically mentions that currently dedicated geological storage is restricted to Alberta, Saskatchewan and British Columbia, and that captured carbon used for enhanced oil recovery or other storage, or use will not be removed from the calculation. This suggests that these requirements will likely use the definition of “designated geological storage” contained in the proposed legislation for the CCUS Tax Credit.

Eligible equipment that will be included in the Clean Electricity ITC for eligible natural gas systems will include:

• equipment that generates both electrical and heat energy (i.e., gas turbine generators);
• heat recovery equipment (i.e., heat recovery steam generators);
• electrical generating equipment (i.e., steam turbine generators);
• heat generating equipment used primarily for the purpose of producing heat energy to operate the electrical generating equipment (i.e., steam boilers used to produce steam to operate steam turbine generators); and
• carbon capture equipment, including equipment that prepares or compresses captured carbon for transportation.

Expressly excluded from eligible equipment is buildings or other structures, heat rejection equipment (i.e., cooling towers), electrical transmission and distribution equipment, fuel handling equipment, or equipment used for carbon dioxide transportation, storage or use.

Recapture

Budget 2024 states that the recapture requirements for the Clean Electricity ITC will be similar to those for the Clean Tech ITC. Generally, this means that where an incentive claimant has converted property qualifying for the Clean Electricity ITC to an ineligible use, exported the property from Canada, or disposed of the property within 10 years of acquiring the property and becoming entitled to the Clean Electricity ITC in respect of the property, then the Clean Electricity ITC can be subject to recapture.

Budget 2024 states that the amount of recapture will be in proportion to the fair market value of the particular property when it is subject to recapture.

For reference, for the Clean Tech ITC, the amount of recapture is the lesser of the amount of the Clean Tech ITC claimed on the property and the amount determined by a formula provided in the proposed legislation. For an arm's length disposition, it is the product of the amount of Clean Tech ITC claimed on the property, multiplied by the proceeds of disposition divided by the capital cost of the property on which the Clean Tech ITC was deducted. In all other cases, the second amount is the product of the amount of Clean Tech ITC claimed on the property, multiplied by the fair market value of the property divided by the capital cost of the property.

For eligible natural gas systems, the recapture period is 20 years, and as described below, additional compliance obligations exist in respect of the property.

Compliance & Recovery

Eligible natural gas systems will be subject to a one-time verification of emissions intensity after a five-year compliance period. During this compliance period, the taxpayer will need to submit an annual third-party emissions intensity verification report to Natural Resources Canada. Similar to the “qualified verification firm” definition in the proposed legislation for the Clean Hydrogen ITC, this third-party will need to be a Canadian engineering firm with an engineering certificate of authorization, appropriate insurance coverage, and expertise in auditing continuous emissions monitoring systems.

At the end of the five-year compliance period, the project’s compliance will be assessed based on the weighted average emissions intensity over the entire compliance period. Each year’s annual emissions intensity will be weighted in this calculation based on the electricity and useful heat produced in that year.

Where the average emissions intensity of the eligible natural gas system is greater than 5 percent above the limit of 65 tonnes of carbon dioxide per gigawatt hour of energy produced, there will be a full recovery of the Clean Electricity ITC claimed by the taxpayer.

After the end of this initial five-year compliance period, annual reports will still need to be provided to Natural Resources Canada for the next 15 years. Where the annual emissions intensity of the eligible natural gas system is above the emissions limit, this will be considered an ineligible use of the property in question, and it will result in recapture as described above. It is not clear whether the 5 percent de minimus exception provided in the initial compliance period will extend to this later compliance period.

Current rules for certain properties described in Class 43.1 or 43.2 require that all the conditions for inclusion must be met on an annual basis. There is a limited exception to this requirement under Regulation 1104(14) for certain property that is part of an eligible system where the property was previously operated in the manner required by Class 43.1 or 43.2, and where the failure or shutdown of the system was beyond the control of the taxpayer, and the taxpayer makes all reasonable efforts to rectify the circumstances within a reasonable time. The 2023 Fall Economic Statement provided that similar rules would apply in respect of waste biomass systems (for both the Clean Tech ITC and the Clean Electricity ITC), and Budget 2024 proposes to further extend this treatment to eligible natural gas energy systems.  This appears similar to the exceptions contained for clawback in the CCUS Tax Credit for extraordinary circumstances in Part XII.7 of the Act.

Interprovincial Electricity Transmission Equipment

Eligible interprovincial and territorial electrical transmission property is property that is used to transmit or manage electricity that primarily originates in one province or territory that is primarily destined for another province or territory. This may include property located exclusively in one province, provided that it is used primarily for interprovincial transmission (i.e., if it was primarily used to export electricity to another province after the completion of connected transmission property that crosses the provincial border).

Eligible property will include:

• electrical transmission equipment (i.e., cables and switches);
• electrical transmission structures (i.e., towers and lattices); and
• related equipment used for managing traded electricity (i.e., transformers, electric power conditioning equipment, and control equipment).

Expressly excluded from eligible property will be buildings, electrical distribution equipment, or electrical transmission equipment rated for voltages less than 69 kilovolts.

Labour Requirements

Budget 2024 confirms that in order to qualify for the full 15 percent Clean Electricity ITC, the proposed labour requirements included in Bill C-59 will need to be complied with. Consistent with other Clean Economy ITCs, a 5 percent Clean Electricity ITC will be available where these requirements are not met.

Interaction with other Clean Economy ITCs

As previously provided, eligible corporations can only claim one of the Clean Economy ITCs or the EV ITC (together, the ITCs) in respect of a particular expenditure where that expenditure qualifies for more than one ITC. Multiple ITCs may be claimed in respect of the same project, to the extent that a project qualifies for multiple ITCs. Notably, Budget 2024 provides that for eligible natural gas systems, a project cannot claim the Clean Electricity ITC and the CCUS Tax Credit in respect of the same project.  Further clarification should be provided from the Department of Finance to confirm where the line will be drawn in respect of where a Clean Electricity ITC project ends, and where a CCUS Tax Credit project begins.

Coming into Force

The Clean Electricity ITC will apply to eligible property acquired and that becomes available for use on or after Budget Day 2024 and before 2035, provided it has not been used for any purpose before its acquisition; and provided that it was not part of a project that began construction before March 28, 2023 (i.e., Budget Day 2023). The Government of Canada provided further clarification that the phrase “began construction” would not include obtaining permits or regulatory approval, conducting environmental assessments, community consultations or impact assessments studies, or similar activities.

The same rules will apply in respect of Crown Corporations, if the provincial or territorial government has satisfied all the conditions above by March 31, 2025, and subsequently been designated by the Minister of Finance.

If the provincial or territorial government in question has not satisfied all the conditions by March 31, 2025, then Crown Corporations investing in that jurisdiction would not be able to access the Clean Electricity ITC until the province or territory in question is designated. Once the province or territorial government has been designated, the Clean Electricity ITC will be available for property that is acquired and available for use from the date the province or territory is designated, for projects that did not begin construction before March 28, 2023.

Updates to the CTM ITC

All or Substantially All Qualifying Materials

Budget 2024 additionally provides some updates to the CTM ITC, partially resulting from feedback from industry. The draft legislation provides for the CTM ITC provided that it would include the extraction of critical minerals as eligible activities in the CTM ITC, however it required that, to be eligible CTM property in respect of critical mineral extraction, the property must be used in qualifying mineral activities, producing all or substantially all qualifying materials (defined as including lithium, copper, nickel, cobalt, graphite, and rare earth minerals). The Prospectors & Developers Association of Canada (PDAC) noted in their comment to the Government of Canada on the draft legislation that this requirement to produce “all or substantially all qualifying materials” would make the CTM ITC inaccessible for “nearly every domestic known deposit”.

Budget 2024 responded to this consultation by providing updates to the CTM ITC in order to make it workable for Canadian critical mineral miners. First, they have clarified that the value of the qualifying materials produced will be used as the appropriate output metric in determining the extent to which property is used or expected to be used for qualifying mineral activities producing qualifying materials. Second, they have adopted PDAC’s recommendation to change the test from “producing all or substantially all qualifying materials”, which the CRA views as being 90 percent or more, to “producing primarily qualifying materials”, which is 50 percent or more. Therefore, the new test will be whether the property is question will be used in qualifying mineral activities in which 50 percent or more of the financial value of the output comes from qualifying materials.

Recapture & Safe Harbour Rule

The draft legislation for the CTM ITC provided that where CTM property is acquired and the taxpayer becomes entitled to a CTM ITC in respect of the property, and within a 10-year period that property is converted to a non-qualifying activity (i.e., is no longer used sufficiently in qualifying mineral activities producing qualifying materials), the CTM ITC could be subject to recapture. Budget 2024 provides an example of this potential recapture as where the value of minerals extracted from a mine site is no longer primarily from qualifying materials due to the fluctuation of mineral prices.

Budget 2024 proposes that to mitigate the effects of mineral price volatility on the potential recapture of the CTM ITC, that a safe harbour rule will be applicable to the recapture rule. Under this safe harbour rule, if the calculation of the expected production from the eligible property when claiming the CTM ITC is done using specified five-year historical average mineral prices, these prices would also be used to calculate the value of the qualifying materials produced over the 10-year recapture period. The Department of Finance will provide further details with respect to the design of this safe harbour rule at a later date. This safe harbour rule would apply in respect of all qualifying mineral activities.

The EV ITC

Budget 2024 announced that the EV ITC will be a 10 percent investment tax credit that will be available for the cost of buildings built in Canada that are used in certain segments of the electric vehicle supply chain. The Government of Canada announced that the EV ITC will be available for businesses that invest in three different segments of the electric vehicle supply chain:

• electric vehicle assembly;
• electric vehicle battery production; and
• cathode active material production.

In order to claim the EV ITC, the taxpayer in question must claim the CTM ITC in all three of these segments of the electric vehicle supply chain, or claim the CTM ITC in two of the three segments, and hold at least a “qualifying minority interest” in an unrelated corporation that claims the CTM ITC in the third segment. In this latter scenario, the unrelated corporation would then also be able to claim the EV ITC for their cost of buildings relating to this third segment.

The EV ITC is proposed to apply to property that is acquired and become available for use on or after January 1, 2024. The EV ITC will be reduced to 5 percent in 2033 and 2034, and will no longer be available after 2034.

The Government of Canada further provided that the EV ITC will incorporate elements of the CTM ITC where applicable. It is unclear whether the EV ITC will be a refundable tax credit, and many other details remain outstanding. The Government of Canada stated that they would provide additional design and implementation details for the EV ITC in the 2024 Fall Economic Statement.

Conclusion

Many details remain outstanding and draft legislation implementing these proposals has not been released. The Clean Electricity ITC, the CTM ITC and the EV ITC represent significant opportunities for electricity producers, critical mineral mining companies and electric vehicle manufacturers to assist in providing the electricity, minerals and electric vehicles necessary for a new decarbonized economy.

Bennett Jones has experience in energy, infrastructure, mining and manufacturing project development, including in power, renewables, clean technology (including EV and stationary storage batteries) 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 EV ITC, the CTM ITC or the Clean Electricity ITC in Budget 2024, please contact any member of the Bennett Jones Tax or Energy practice groups.

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