Clean Economy Investment Tax Credits – A Post-Election Update

The past year included significant milestones for Canada’s clean economy tax credits before a period of turbulence and uncertainty caused by the prorogation of Parliament and the recent federal election.

On June 20, 2024, Bill C-59 and Bill C-69 received royal assent and enacted legislation implementing the carbon capture, utilization and storage investment tax credit (“CCUS  ITC”), clean technology investment tax credit (“CT ITC”), clean hydrogen investment tax credit (“CH ITC”), and clean technology manufacturing investment tax credit (“CTM ITC”), and the prevailing wage and apprenticeship requirements (“Labour Requirements”) that a taxpayer must elect to satisfy in order to maximize the applicable rate for a CCUS ITC, CT ITC, CH ITC or the proposed clean electricity investment tax credit (“CE ITC”). Draft legislation for the clean electricity investment tax credit (“CE ITC”) was released on August 12, 2024. 

Progress with respect to the CE ITC, the proposed EV supply chain investment tax credit (“EV ITC”) and outstanding proposals to update the enacted clean economy tax credits was stalled by the prorogation of Parliament on January  6, 2025. The then proposed draft legislation became caught in Parliamentary limbo, and taxpayers were left with the uncertainty as to whether those proposals would ever be passed into law.

Now that the federal election concluded and the new session of Parliament has commenced, taxpayers may soon gain greater certainty regarding the future of Canada’s clean economy tax credits. 

As in many other contexts, one remaining source of uncertainty with respect to clean energy tax credits is the status of renewable energy tax incentives in the United States. On May 22, 2025, the House of Representatives passed the Trump administration’s Bill making significant cuts to many of the United States clean energy tax credits introduced by the Inflation Reduction Act. The Canadian clean economy tax credits were largely introduced in response to the Inflation Reduction Act, it will be interesting to follow the ongoing developments in the United States. Of particular interest will be whether the proposed cuts to the United States clean energy tax credits are passed by the Senate and become law.

Current Status of Clean Economy Tax Credits under New Government

With the Prime Minister Mark Carney led Government now in place, taxpayers may take some degree of comfort in the fact that the Liberal Party’s election platform included major initiatives aimed at continuing to build a clean economy and tackle climate change. Among other things, the Liberal Party’s platform included commitments to: 

• Kickstart the clean energy supply chain by investing in critical minerals, attracting investment in critical minerals to get them from “rock to road” faster, supporting early stage mining companies, and supporting thousands of jobs across the supply chain.
• Expand Canada’s EV charging network by supporting the building of thousands of new stations by 2027.
• Move forward on Canada’s six major investment tax credits that support clean energy and technology (i.e., the CCUS ITC, CT ITC, CE ITC, CH ITC, CTM ITC and EV ITC. 
• Speed up approval of clean energy projects. 

A similar sentiment was raised in the Prime Minister’s mandate letter dated May 21, 2025 in which the Prime Minister emphasized that Canada must “build an enormous amount of new infrastructure at speeds not seen in generations” including infrastructure to “become an energy superpower in both clean and conventional energies”.

Further, according to its campaign materials, the Government also expects Canada’s clean economy tax credits to support $200 billion of private capital investment in Canada over five years. 

The current government’s campaign promises, coupled with the previous government’s statement in Budget 2024 that it sees tax credits as its cornerstone incentive to attract private investment, grow Canada’s economy, and create high paying jobs, indicate that Canada’s clean economy tax credits should not be expected to go away anytime soon. 

Select Outstanding Proposed Amendments to Clean Economy Tax Credits

2025 is likely to bring additional milestones with respect to the clean economy tax credits. It is also likely that the Government will bring forward legislative proposals to amend the existing clean economy tax credits that were not enacted before the end of the previous session of Parliament. The following summarizes some of the key outstanding proposed amendments that may be renewed and enacted in 2025. 

Polymetallic Projects

Budget 2024 proposed to modify the CTM ITC to expand eligibility for the credit to businesses engaged in polymetallic projects. The August 12 Proposals included draft legislation effecting that proposal by modifying the “CTM use” definition in subsection 127.49(1) by replacing the “producing all or substantially all qualifying materials” requirement (generally regarded as 90% or more) with an “expected to produce primarily qualifying materials” test which will be measured in terms of the fair market value of all commercial outputs relevant to the taxpayer’s CTM ITC. Budget 2024 indicated that the “primarily” test is generally regarded as 50% or more; however, the explanatory notes accompanying the August 12 Proposals do not comment on the meaning of the term “primarily.” 

To support a claim for the CTM ITC in respect of a polymetallic project, a taxpayer must submit to the CRA an attestation from an arm’s length qualified engineer or geoscientist for each relevant mine or well site. If a taxpayer does not submit such attestation then its CTM ITC in respect of a polymetallic project is deemed to be nil.

These changes are proposed to apply retroactively to the original effective date for the CTM ITC (January 1, 2024).

Eligibility for Waste Biomass

The August 12 Proposals included draft legislation reflecting the 2023 Fall Economic Statement proposals to expand the property eligible for the CT ITC to support the generation of electricity, heat, or both electricity and heat from waste biomass comprising “specified waste materials” as defined in subsection 1104(13) of the Regulations. Eligible systems under this expanded eligibility for the CT ITC must:

• use feedstock which derives all or substantially all of its energy content (expressed as the higher heating value of the feedstock) from specified waste materials, as determined on an annual basis;
• not use fuel that is not produced as an integrated part of the system (even if produced from specified waste material); and
• not exceed a heat rate threshold of 11,000 British thermal units per kilowatt-hour.

The August 12 Proposals also include the 2023 Fall Economic Statement proposal to amend subsection 1104(17) of the Regulations to clarify that properties that would otherwise be eligible for inclusion in Class 43.1 or 43.2 will only be deemed not to be eligible if there is substantial non-compliance by the taxpayer with environmental laws, bylaws and regulations at the time the property first becomes available for use.

The August 12 Proposals expanding eligibility of the CT ITC for waste biomass are proposed to apply retroactively to November 21, 2023.

Preliminary Work Activity

The August 12 Proposals introduce a new reduction to the capital cost of clean technology property for any amount that is in respect of an expenditure incurred for a preliminary work activity (“Preliminary Work Activity Reduction”). An equivalent adjustment to the capital cost of clean electricity property for the purpose of the definition of “clean electricity investment tax credit” in subsection 127.491(1) is also proposed.

The proposed preliminary work activity definition defines a preliminary work activity to mean any activity that is preliminary to the acquisition, construction, fabrication or installation by or on behalf of a taxpayer of property including, but not limited to, a preliminary activity that is any of the following:

• obtaining a right of access to a project site or obtaining permits or regulatory approvals (including conducting environmental assessments);
• performing front-end design or engineering work, including front-end engineering design studies, or process engineering work for the project, including (i) collecting and analyzing of site data, (ii) calculating energy, mass, water or air balances, (iii) simulating and analyzing the performance and cost of process design options, (iv) selecting the optimum process design, and (v) conducting feasibility studies or pre-feasibility studies;
• clearing or excavating land;
• constructing a temporary access road to the project site; or
• drilling of a well.

Although an analog of the Preliminary Work Activity Reduction was proposed to apply to the CCUS ITC and the CH ITC since the original draft legislation for those credits was released by Finance, such a reduction to the capital cost of property eligible for the CT ITC and CE ITC was not proposed until the August 12 Proposals. Despite this, the Preliminary Work Activity Reduction definition is proposed to apply retroactively to the original effective date for both CT ITC and CE ITC. It should therefore be considered in determining the capital cost of clean technology property for any project in respect of which a CT ITC or CE ITC will be claimed regardless of the timing of the claim.

Expanded Eligibility of CH ITC for Methane Pyrolysis Projects

The CH ITC is currently available in respect of hydrogen produced from electrolysis of water or from the reforming or partial oxidation of natural gas or other eligible hydrocarbons (where emissions are abated using a carbon capture, utilization and storage process). 

The Fall Economic Statement proposes to expand the eligibility for the CH ITC to include projects that produce hydrogen from the pyrolysis of natural gas and other eligible hydrocarbons. The existing legislation regarding the CH ITC would generally apply in respect of such projects subject to certain modifications. The Fall Economic Statement indicates that the Government will continue to review eligibility for other low-carbon hydrogen production pathways.

This expansion of the CH ITC is proposed to apply in respect of property that is acquired and becomes available for use in an eligible project on or after December 16, 2024.

EV ITC Update

To support investments in Canada’s electric vehicle industry, Budget 2024 announced the EV ITC as a 10% investment tax credit in respect of the cost of buildings used in the three qualifying segments of the Canadian electric vehicle supply chain: (1) electric vehicle assembly; (2) electric vehicle battery production; and (3) cathode active material production.

The 2024 Fall Economic Statement included additional design and implementation details for the EV ITC and indicated that other design elements would generally be based on those of the CTM ITC under section 127.49. The Government also indicated in the 2024 Fall Economic Statement that draft legislation for the EV ITC would be published “soon”.

On February 21, 2025, the Department of Finance released draft of legislation for the EV ITC (“February 21 Proposals”). Assuming the legislation is adopted in its current form, the EV ITC would be available as of January 1, 2024 in respect of property that is acquired and becomes available for use on or after January 1, 2024. 

Qualifying Taxpayers

Only a “qualifying taxpayer” will be entitled to claim the EV ITC. A qualifying taxpayer is a taxable Canadian corporation that, at the relevant time, meets one of the following conditions:

• holds (i) a qualifying investment for use in EV assembly, (ii) a qualifying investment for use in EV battery production, and (iii) a qualifying investment for use in the production of cathode active materials to be used as inputs to the manufacturing of battery cells used in the powertrain of electric vehicles, other than production that is a qualifying mineral activity as defined in subsection 127.49(1) (“CAM production”);
• is a member of a qualifying group and one or more members of the group holds qualifying investments in each of the sectors described above;
• holds qualifying investments described in any two of the sectors described above and a qualifying minority interest in an unrelated taxable Canadian corporation that holds a qualifying investment described in the remaining sector described above;
• is a member of a qualifying group, and one or more of the members in the group holds qualifying investments described in any two of the sectors described above and a qualifying minority interest in an unrelated taxable Canadian corporation that holds a qualifying investment described in the remaining sector described above; or
• is the unrelated corporation that holds a qualifying investment described in the remaining sector in relation to another taxpayer that either (a) holds qualifying investments described in any two of the sectors described above and a qualifying minority interest in the taxpayer or (b) is a member of a qualifying group, and one or more of the members in the group holds qualifying investments described in any two of the sectors described above and a qualifying minority interest in the taxpayer.

EV Building Property

The EV ITC is available in respect of the capital cost of “EV building property”. Essentially, EV building property is a building or other structure substantially used to house clean technology manufacturing property that is used in EV assembly, EV battery production, of cathode active materials production. Specifically, EV building property is defined as property that is:

• situated in Canada and intended for use exclusively in Canada;
• a building or other structure included in paragraph (q) of Class 1 in Schedule II to the regulations under the Tax Act for capital cost allowance purposes;
• that is used, or to be used, all or substantially all to house CTM property (as defined by subsection 127.49(1)) that is used in EV assembly, EV battery production or CAM production;  and
• that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired  by the taxpayer.

Amount of the EV ITC

The EV ITC is calculated as the specified percentage of the capital cost to the taxpayer of EV building property acquired by the taxpayer in the year. 

The specified percentage for all EV building property acquired after December 31, 2023 and before January 1, 2033 is 10%. Thereafter, the specified percentage is reduced to 5% in respect of EV building property that is acquired after December 31, 2032 and before January 1, 2035. 

Labour Requirements

No amendments to the Labour Requirements were included in the February 21 Proposals. Therefore, like the CTM-ITC, it appears the Labour Requirements will not apply to the EV ITC.  

Additional Features of the EV ITC

The February 21 Proposals outline many other features of the EV ITC that are similar to the existing clean economy tax credits, including:

• If an EV building property in respect of which the taxpayer is otherwise eligible to claim the EV ITC, or an interest in a person or partnership with a direct or indirect interest in such property, is a “tax shelter investment” for the purpose of section 143.2, the EV ITC is denied in respect of the property.
• Rules providing for certain adjustments in determining the capital cost of EV building property to a taxpayer for the purpose of claiming the EV ITC.
• Rules regarding the recovery of additional cost upon the repayment of any amount of government assistance or non-government assistance that was applied to reduce the cost of a particular property for a preceding taxation year.
• The EV ITC will be subject to recapture if, within 10 calendar years of acquiring the EV building property: (a) the EV building property (or another property that incorporates the property) ceases to be situated and used exclusively in Canada or no longer houses clean technology manufacturing property that is used in EV assembly, EV batter production, of cathode active materials production, (b) the taxpayer disposes of the EV building property, or (c) the taxpayer ceases to be a qualifying.
• An exception to the recapture rules for certain non-arm’s length transfers of the EV building property.