Clean Economy Tax Credits: Clean Technology Investment Tax Credit
On August 4, 2023, the Department of Finance (Finance) released a series of draft legislative proposals (August 4 Proposals) on a variety of previously announced tax measures. The August 4 Proposals can be found here and the related explanatory notes can be found here.
The August 4 Proposals include draft legislation in respect of the Clean Technology Investment Tax Credit (CTI Tax Credit), revised draft legislation in respect of the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS Tax Credit), and draft legislation specifying the labour requirements (Labour Requirements) that must be satisfied to maximize these tax credits as well as the proposed Clean Hydrogen Tax Credit and Clean Electricity Tax Credit. The Clean Hydrogen Tax Credit and the Clean Electricity Tax Credit were announced in the 2023 federal budget but the August 4 Proposals do not include draft legislation in respect of these credits.
This article reviews the CTI Tax Credit. Our review of the Labour Requirements can be found here. We will also release a review of the impact of the August 4 Proposals on the CCUS Tax Credit.
All statutory references are to the Income Tax Act (Canada) (Tax Act) as amended by the August 4 Proposals.
In its 2022 Fall Economic Statement, the Government announced that it would introduce the CTI Tax Credit as a 30% refundable tax credit applicable to investments in eligible property that are acquired and become available for use on or after March 28, 2023.
In the 2023 federal budget, the Government announced that the CTI Tax Credit would apply to certain additional property and that the phase-out rules would be modified.
The August 4 Proposals include draft legislation to implement the CTI Tax Credit which will be deemed to have come into force on March 28, 2023. We consider the main features of the proposals below.
Consistent with Finance’s recent practice to include statements of purpose to assist in the interpretation of legislative schemes, the August 4 Proposals state that the purpose of the CTI Tax Credit is “to encourage the investment of capital in the adoption and operation of clean technology property in Canada”.
Only a “qualifying taxpayer” will be entitled to claim the CTI Tax Credit. A qualifying taxpayer is a taxable Canadian corporation. The August 4 Proposals include rules that apply to partnerships to enable partners that are taxable Canadian corporations to claim their share of the CTI Tax Credit derived from expenditures made by the partnership to acquire clean technology property.
The definition of qualifying taxpayer reflects a policy choice to exclude, for example, individuals, tax-exempts and non-residents carrying on business through a branch in Canada from entitlement to the CTI Tax Credit.
Clean Technology Property
The CTI Tax Credit is available in respect of the cost of “clean technology property”.
The types of property eligible for the credit are described in part by reference to classes of property described in Schedule II to the regulations under the Tax Act for capital cost allowance purposes. The following types of equipment are eligible:
- equipment to generate electricity from solar, wind and water energy that is described in subparagraphs (d)(ii), (iii.1), (v), (vi) or (xiv) of Class 43.1
- stationary electricity storage equipment described in subparagraphs (d)(xviii) and (d)(xix) of Class 43.1, that does not use any fossil fuels in operation
- active solar heating equipment, air-source heat pumps, and ground-source heat pumps that are described in subparagraph (d)(i) of Class 43.1
- non-road zero-emission vehicles described in Class 56 (e.g., hydrogen or electric heavy duty equipment used in mining or construction) and charging or refuelling equipment described in subparagraph (d)(xxi) of Class 43.1 or subparagraph (b)(ii) of Class 43.2 that is used primarily for such vehicles
- equipment used exclusively for the purpose of generating electrical energy and/or heat energy, solely from geothermal energy, that is described in subparagraph (d)(vii) of Class 43.1, but excluding any equipment that is part of a system that extracts both heat from a geothermal fluid and fossil fuel for sale or use
- “concentrated solar energy equipment” which is equipment, other than “excluded equipment”, used all or substantially all to generate heat and/or electricity exclusively from concentrated sunlight. “Excluded equipment” is auxiliary heating or electrical generating equipment that uses any fossil fuel, buildings or structures that are not used exclusively to support or house concentrated solar energy equipment; distribution equipment; property included in Class 10; and property that would be included in Class 17 read without reference to paragraph (a.1) thereof
- a “small modular nuclear reactor”, which is equipment that is used all or substantially all to generate electrical energy and/or heat energy from nuclear fission. It must be part of a system that has a gross rated generating capacity not exceeding 300 megawatts electric, or an energy balance equivalent gross rated generating capacity of electricity or heat equivalent of 1,000 megawatts thermal. All or substantially all of the system must be comprised of modules that are factory-assembled and transported pre-built to the installation site. There are a number of specific exclusions (e.g., nuclear fission fuel)
In addition, the following requirements must be satisfied:
- The property must be situated in Canada and intended for use exclusively in Canada.
- The property must not have been used (or acquired for use or lease) for any purpose before it was acquired by the taxpayer. The credit is available only for new equipment.
- If the property is to be leased by the taxpayer to another person, the lessee must be a taxable Canadian corporation. The taxpayer must do so in the ordinary course of carrying on a business in Canada. The taxpayer’s principal business must be selling or servicing property of that type, or must be leasing property, lending money, purchasing conditional sales contracts, accounts receivable, bills of sale, chattel mortgages or hypothecary claims on movables, bills of exchange or other obligations representing all or part of the sale price of merchandise or services, or any combination thereof.
Determining When Clean Technology Property is Acquired and its Capital Cost
The CTI Tax Credit of a qualifying taxpayer for a taxation year is the total of all amounts each of which is the specified percentage of the capital cost to the taxpayer of clean technology property acquired by the taxpayer in the year.
A clean technology property is deemed not to have been acquired by a taxpayer before the property is considered to have become “available for use” by the taxpayer for the purpose of claiming capital cost allowance except that this determination is to be made without regard to rules that deem a property to have become available for use immediately before it is disposed of by the taxpayer.
The rules provide for certain adjustments in determining the capital cost of clean technology property to a taxpayer for the purpose of claiming the CTI Tax Credit:
- capital cost does not include any amount (i) for which a CTI Tax Credit was previously deducted by any person, (ii) in respect of which a CCUS Tax Credit was deducted by any person (it is possible that certain property otherwise eligible for the CTI Tax Credit may also be eligible for the CCUS Tax Credit), or (iii) that was added to the cost of a property under section 21 (which allows a taxpayer to capitalize certain interest payable on money borrowed to acquire depreciable property or on the unpaid balance of the purchase price of depreciable property)
- if any part of the capital cost of a taxpayer’s clean technology property is unpaid on the day that is 180 days after the end of the taxation year in which the CTI Tax Credit would otherwise be available in respect of the property, the unpaid amount is excluded from the capital cost of such property and instead is added to the capital cost of such property at the time the unpaid amount is paid
- capital cost is determined without reference to subsections 13(7.1) and (7.4) but is reduced by the amount of any “government assistance” or “non-government assistance” (each as defined in subsection 127(9)) that can reasonably be considered to be in respect of the property and that, at the time of the filing of the taxpayer’s return of income under Part I of the Tax Act for the taxation year in which the property was acquired, the taxpayer received, is entitled to receive or can reasonably be expected to receive. The definition of “government assistance” in subsection 127(9) will be amended to exclude the CTI Tax Credit. If, in a particular taxation year, the taxpayer repays (or has not received and can no longer reasonably be expected to receive) government assistance or non-government assistance that reduced the capital cost of clean technology property, the amount repaid (or no longer expected to be received) is deemed to be added to the cost to the taxpayer of a property acquired in the particular year for the purpose of determining the taxpayer's CTI Tax Credit for the year
- where property is acquired by the taxpayer from a person or partnership with which it does not deal at arm’s length, the cost will generally be the lesser of the cost otherwise determined and the cost of the property to the supplier (so as to exclude any mark-up)
Amount of the CTI Tax Credit
The CTI Tax Credit is the specified percentage of the capital cost to the taxpayer of clean technology property acquired by the taxpayer in the year.
The specified percentage is 30% for property acquired and available for use from March 28, 2023 until December 31, 2033.
Property that becomes available for use in 2034 is eligible for only a 15% credit and no credit is available for property that becomes available for use after 2034.
However, as discussed in our blog on the Labour Requirements (available here), if the taxpayer does not elect to satisfy the Labour Requirements, the amount of the CTI Tax Credit will be reduced by 10%.
Claiming the CTI Tax Credit
To claim a CTI Tax Credit for a taxation year, a qualifying taxpayer must file a prescribed form with its income tax return for the year. If the prescribed form is not filed within one year of the filing due date for the taxation year, no CTI Tax Credit will be available for that year. The August 4 Proposals expressly provide that the Minister does not have the discretion under subsection 220(2.1) to waive the requirement.
If the qualifying taxpayer files the prescribed form as required, the taxpayer is deemed to have paid on its balance-due day for the year on account of its tax payable under Part I of the Tax Act for the year an amount equal to the taxpayer’s CTI Tax Credit. To the extent that the CTI Tax Credit and any other refundable credits and instalment payments exceed the taxpayer's tax otherwise payable under Part I for the year, the taxpayer is entitled to a refund.
For certain provisions of the Tax Act that apply in relation to an amount deducted in computing tax payable (the CTI Tax Credit, paragraph 12(1)(t), subsection 13(7.1), the description of I in the definition undepreciated capital cost in subsection 13(21), and subsections 53(2) and 96(2.1)), an amount equal to the taxpayer’s CTI Tax Credit is deemed to have been deducted from the taxpayer’s tax otherwise payable under Part I of the Act.
A CTI Tax Credit claimed by the taxpayer in a taxation year in respect of the acquisition of a clean technology property in the taxation year will normally reduce the capital cost of the property in the following taxation year under paragraph 13(7.1)(e). However, if the property is disposed of before the CTI Tax Credit is claimed, the “undepreciated capital cost” (UCC) of the class in which the property was included will be reduced by the amount of the CTI Tax Credit for subsequent taxation years.
Only taxable Canadian corporations may claim the CTI Tax Credit.
However, the CTI Tax Credit may be claimed in respect of the capital cost of a partnership’s clean technology property by a partner of a partnership if the partner is a taxable Canadian corporation.
In general, where a CTI Tax Credit would be determined in respect of a partnership if the partnership were a taxable Canadian corporation (i.e., because the partnership acquired clean technology property) the portion of the amount of the CTI Tax Credit that can reasonably be considered to be a partner’s share of the credit is added in computing the partner’s CTI Tax Credit at the end of the particular year if the partner is a taxable Canadian corporation. The amount so added will reduce the adjusted cost base of the partnership interest to the partner.
A new anti-avoidance rule will be added to address the sharing of a partnership’s CTI Tax Credit (and CCUS Tax Credit) by the partners of the partnership. It will provide that, where a partner’s share of the CTI Tax Credit (or CCUS Tax Credit) is not reasonable in the circumstances having regard to the capital invested in or work performed for the partnership by the partners or such other factors as may be relevant, that share shall, notwithstanding any agreement, be deemed to be the amount that is reasonable in the circumstances.
It is not clear that the capital cost of a clean technology property acquired by the partnership is reduced by CTI Tax Credits claimed by the partners. In particular, subsection 127(12), which is intended to achieve the former reduction under subsection 13(7.1) for investment tax credits, is not made applicable to the CTI Tax Credit.
Subsections 127(8.1) to (8.5) apply to determine the amount of investment tax credits generated by expenditures of a limited partnership to be allocated to the partners. These rules are to apply to the determination of the amount of a CTI Tax Credit of a taxpayer who is a member of a limited partnership with such modifications as the circumstances require.
In brief, under these rules, the amount of the partnership’s CTI Tax Credit that may be added by a particular limited partner in computing the limited partner’s CTI Tax Credit is limited to the lesser of (i) the amount of the CTI Tax Credit considered to arise because of the expenditure of the limited partner’s “expenditure base” (as defined in subsection 127(8.2)), and (ii) the limited partner’s “at-risk amount” (as determined under subsection 96(2.2)) at the end of the particular fiscal period. A limited partner’s “expenditure base” is the lesser of two amounts. The first amount reflects amounts invested in the partnership by the limited partner. The second amount is a proportion of the lesser of two amounts: (i) the capital cost of clean technology property acquired by the partnership during the fiscal period, and (ii) the total amounts invested in the partnership by all limited partners. The relevant proportion is the proportion that amounts invested in the partnership by the particular limited partner is of the total amounts invested in the partnership by all limited partners. To the extent that CTI Tax Credits can’t be added by limited partners in computing their CTI Tax Credits as a result of such limitations, the remaining CTI Tax Credits may generally be claimed by the general partner. The rules are complex and the foregoing is a high level summary only. A key take away is that the cost of clean technology property financed with money borrowed by the limited partnership will generally not generate additional CTI Tax Credits for limited partners.
Tax Shelters and Tax Shelter Investments
If a clean technology property in respect of which the taxpayer is otherwise eligible to claim the CTI Tax Credit, 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 CTI Tax Credit is denied in respect of the property.
All investments that are “tax shelters” as defined in section 237.1 are included within the definition of “tax shelter investment”.
Recapture of the CTI Tax Credit
In certain circumstances, some or all of the CTI Tax Credit claimed by a taxpayer may be recaptured.
Recapture will occur in relation to a particular clean technology property of a taxpayer if the following conditions (Recapture Conditions) are satisfied:
- the taxpayer acquired the property in the particular taxation year or in any of the preceding 20 calendar years,
- the taxpayer became entitled to a CTI Tax Credit in respect of all or a portion of the capital cost of the property, and
- the property is (i) converted to a “non-clean technology use” (i.e., would not be clean technology property if acquired at the particular time, disregarding the new equipment requirement), (ii) exported from Canada, or (iii) disposed of (unless it has previously been converted to a non-clean technology use or exported).
Recapture will not be triggered on the disposition of a property by a taxpayer to another qualifying taxpayer that is “related” to the taxpayer if the property would be clean technology property to the transferee disregarding the new equipment requirement. This rule facilitates transfers of clean technology property within a corporate group. If this rule applies, subsections 127(34) and (35) are to apply “with such modifications as the circumstances require”. The intention appears to be to put the transferee in the same position as if it had originally acquired the property and claimed the CTI Tax Credit for the purposes of applying the recapture rules. We observe that the circumstances would appear to require substantial modifications to subsections 127(34) and (35) for the purpose of applying them to the CTI Tax Credit.
Recapture is effected by adding an amount to the taxpayer's tax otherwise payable under Part I for the year. In the case of an arm’s length disposition of the property, the amount is determined by multiplying the CTI Tax Credit in respect of the property by a fraction, the numerator of which is the proceeds of disposition and the denominator of which is the capital cost of the property. In any other case (conversion to non-clean technology use, export or a disposition other than to a person that deals at arm’s length), the numerator of the fraction is the fair market value of the property, presumably at the time of the triggering event but that is not stated. In no case will the amount added to the taxpayer's tax otherwise payable under Part I exceed the CTI Tax Credit in respect of the property.
A recapture mechanism is also provided for clean technology property owned by a partnership. The mechanism will apply if the Recapture Conditions are satisfied as determined on the basis that the partnership were a taxpayer. If so, subsections 127(28) to (31) are to apply “with such modifications as the circumstances require”. Subsections 127(28) to (31) provide recapture rules for the cost of property that was eligible for SR&ED investment tax credits. The amount of recapture, determined substantially as described in the preceding paragraph, would first be applied to reduce the partnership’s CTI Tax Credit for the year otherwise available to be added to the CTI Tax Credit of the partners of the partnership. Where the partnership’s CTI Tax Credit otherwise available is not sufficient to offset the full amount of recapture, the excess will be allocated to the partners and included computing their tax payable under Part I of the Tax Act for the taxation year in which the fiscal period of the partnership ends and the adjusted cost base of their partnership interests will be correspondingly increased. We observe that the circumstances would appear to require substantial modifications to subsections 127(28) to (31) for the purpose of applying them to the CTI Tax Credit.
Interaction with Other Tax Credits
The August 4 Proposals address the potential overlap between the CTI Tax Credit and the CCUS Tax Credit but not that of other proposed credits, in particular the Clean Electricity Investment Tax Credit (CEI Tax Credit) which is to be available to tax-exempt entities.
tax Income Tax Act Clean Economy Tax Credits CTI Tax Credit CCUS Tax Credit