Federal Budget 2023: SMR Update
The federal government estimates that over US$100 trillion in private capital will be spent between now and 2050 to build the global clean economy. As outlined in the federal government’s Budget 2023 (“Budget 2023”) Canada is committed to competing in this international energy transition.
Emerging clean technologies, including small modular reactors (“SMRs”), will increasingly have an important role to play in attracting investment and securing Canada’s position as a leader in the clean energy economy. In a recent joint statement, Prime Minister Justin Trudeau and US President Joe Biden affirmed their intent to promote enhanced collaboration on nuclear energy and technology between Canada and the US. This was followed by a joint statement from the Department of Energy of the United States of America (the “DOE”) and the Department of Natural Resources of Canada (“NRCan”), which highlighted potential areas of cooperation and coordination.
Building on these significant announcements, through the release of Budget 2023 the federal government indicated its strong support for nuclear technology and confirmed nuclear as a clean energy resource. Canada has a long history of nuclear expertise and has the potential to be a leader in an emerging global market for SMRs which is estimated to reach $150 billion per year by 2040. Some of the challenges that Canada will have to overcome in order to emerge as a leader in this market include: (1) moving quickly to mobilize a new Canadian supply chain, (2) financing over the return on investment in light of the long commercialization timelines and high cost associated with development and licensing of first-of-a-kind SMR technologies, and (3) streamlining the regulatory framework to reduce the 10+ year approval timeline from development to commercial operation of nuclear projects. Budget 2023 includes several measures that begin to address some of these challenges.
1. Investment tax credits to support a growing Canadian SMR supply chain
Described in more detail in our 2023 Budget Clean Energy and Tax Incentives publication, Budget 2023 proposed a number of new investment tax credits in addition to some enhancements to certain existing investment tax credits to help build Canada’s clean economy. The investment tax credits that will benefit the nuclear industry include the following:
- 15% Clean Electricity Investment Tax Credit (“CEI Tax Credit”): the CEI Tax Credit will be a 15% refundable tax credit to support investments in clean electricity in Canada. The CEI Tax Credit will be available in respect of costs incurred in developing new SMR projects as well as refurbishing existing large-scale nuclear facilities. Budget 2023 provides that the CEI Tax Credit will be available to taxable and tax-exempt entities.
- 30% Clean Technology Investment Tax Credit (“CTI Tax Credit”): the CTI Tax Credit was introduced in the 2022 Fall Economic Statement (the “2022 FES”) and is a 30% refundable tax credit applicable to investments in clean technologies, including, specifically, SMRs. In the 2022 FES, the federal government stated that it would consider whether to make large scale nuclear project equipment eligible. Budget 2023 does not provide any further information regarding the potential eligibility of large scale nuclear project equipment and does not specify whether the CTI Tax Credit will be refundable to tax-exempt entities.
- 30% Investment Tax Credit for Clean Technology Manufacturing (“CTM Tax Credit”): the CTM Tax Credit will be a 30% refundable tax credit for investments in “eligible property” that is associated with “eligible activities”. Eligible property is depreciable property that is used all or substantially all for eligible activities such as the manufacturing of nuclear energy equipment and nuclear fuel rods or processing or recycling of nuclear fuels. Budget 2023 does not specify whether the CTM Tax Credit will be refundable to tax-exempt entities.
- up to 40% Clean Hydrogen Investment Tax Credit (“CH Tax Credit”): the CH Tax Credit will be a refundable tax credit claimed at rates of 15%, 25% or 40% based on the volume of assessed carbon intensity of hydrogen that is produced. The CH Tax Credit will be available in respect of the cost of purchasing and installing “eligible equipment” for a project producing hydrogen either from electrolysis or from natural gas if carbon capture, utilization and storage is used to abate the resulting emissions. To be eligible for the CH Tax Credit, the equipment must be made available for use in Canada. Nuclear used to make hydrogen electrolytically could be eligible for the highest level of support. Budget 2023 does not specify whether the CTM Tax Credit will be refundable to tax-exempt entities.
In addition to the suite of investment tax credits that are or will become available to the nuclear industry, Budget 2023 enhances and expands the reduced corporate income tax rates for certain zero-emission technology manufacturers that was previously introduced in 2021. Budget 2023 extends the reduced tax rate by three years and specifically includes the manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels as activities that will qualify for the reduced tax rate.
2. Government funding to assist with financing over the ROI
Budget 2023 includes an additional $20 billion for the Canada Infrastructure Bank (the “CIB”) to support major clean electricity and clean growth infrastructure projects. The CIB can help to fill gaps in funding and financing on SMR projects where both public and private investment are required due to the higher cost associated with SMRs being first-of-a-kind technologies. The CIB demonstrated its support for the SMR industry in 2022 when it announced that it had finalized an agreement with Ontario Power Generation to fund the development and construction of Canada’s first operational grid-scale SMR. The CIB’s $970 million commitment to the Darlington SMR Project is an encouraging example of government and private sector collaboration in the SMR space and was an important milestone for the industry.
Budget 2023 proposes to provide $500 million over ten years to the Strategic Innovation Fund to support the development and application of clean technologies in Canada. The newly announced funding arrives in addition to $1.5 billion of existing Strategic Innovation Fund resources allocated towards projects including SMR technologies. To date the Strategic Innovation Fund has invested in SMR players Terrestrial Energy Inc., Moltex Energy Canada Inc. and Westinghouse Electric Canada Inc.
In addition to the announced tax credits, potential funding from the CIB and eligibility for support from the Strategic Innovation Fund, the SMR industry may benefit from other funding commitments previously announced by the federal government. These include:
- the $15 billion Canada Growth Fund designed to help attract private capital into low carbon projects, technologies (which can include nuclear technologies), businesses and supply chains;
- the Critical Minerals Infrastructure Fund that was announced in Budget 2022 and launched on March 24, 2023 (uranium being identified among the class of critical minerals); and
- the additional $3 billion of funding to NRCan to recapitalize the Smart Renewables Electrification Pathways Program.
3. Reducing regulatory delays to get major projects done
Budget 2023 prioritizes improving the efficiency of the impact assessment and permitting processes for major projects. Over the next six years, $1.3 billion will be allocated to thirteen federal departments involved in project regulation, including the Canadian Nuclear Safety Commission, to improve the efficiency of assessments for major clean energy projects. Improving regulatory efficiency and clarity is a critical step in attracting further investment into SMR technologies in Canada. This announcement by the federal government will position SMR industry stakeholders to better capitalize off of the significant green technology funding commitments outlined in Budget 2023.
Our team at McCarthy Tétrault will continue to follow refinements to the programs described in Budget 2023 and their impacts on SMRs and the industry. If you would like more information about SMRs or Budget 2023 and what it could mean for your business, we are here to help.
Please contact Gaëtan Thomas, Stephen Furlan, Seán O’Neill, Audrey Bouffard-Nesbitt or any other member of the National Energy Group at McCarthy Tétrault should you have any questions or for assistance.