Clean Economy Tax Credits: Labour Requirements
On August 4, 2023, the Department of 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 revised draft legislation in respect of the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS Tax Credit), draft legislation in respect of the Clean Technology Investment Tax Credit (CTI 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 Budget 2023 but the August 4 Proposals do not include draft legislation in respect of these credits.
This article reviews the Labour Requirements. We will release reviews of the impact of the August 4 Proposals on the CCUS Tax Credit and on the CTI Tax Credit.
All statutory references are to the Income Tax Act (Canada) (Tax Act) as amended by the August 4 Proposals.
In brief, in order for a taxpayer to claim the maximum available CCUS Tax Credit (the specific rate depends on the type of qualified CCUS expenditure and whether carbon is captured from the ambient air) or CTI Tax Credit (30%), the taxpayer must elect to satisfy the Labour Requirements. If the taxpayer does not elect to satisfy the Labour Requirements, the applicable percentage of the relevant credit is reduced by 10%. The Labour Requirements have two prongs: a prevailing wage requirement and an apprenticeship requirement. If the taxpayer elects to satisfy the Labour Requirements but fails to do so, absent the Minister determining that the taxpayer knowingly or in circumstances amounting to gross negligence failed to meet the requirements, the credit is not reduced but the taxpayer will be liable to certain additional taxes and penalties which may be mitigated in certain circumstances by taking corrective measures.
Incentive Claimants, Specified Property, Covered Workers, Designated Work Sites and Installation Taxation Year
The Labour Requirements generally apply in respect of each “covered worker” at a “designated work site” of an “incentive claimant”.
The August 4 Proposals provide that “incentive claimant means a person, or a partnership at least one member of which, plans to claim or has claimed a specified tax credit for a taxation year.” “Specified tax credit” is currently defined as the CCUS Tax Credit or CTI Tax Credit but presumably will be expanded to include the Clean Hydrogen Investment Tax Credit and Clean Electricity Investment Tax Credit in due course.
The Labour Requirements appear not to treat partnerships in a consistent manner. The definition of “incentive claimant” provides that, in the case of a partnership where a partner plans to claim or has claimed a specified tax credit for a taxation year, the partnership is the incentive claimant. This makes sense since the relevant project will be carried out by the partnership and its activities will establish whether the prevailing wage requirement and apprenticeship requirement are satisfied. However, other provisions contemplate that the incentive claimant “claims” a specified tax credit and in the case of a partnership, it is the partners, not the partnership, that claim the credit.
A “specified property” is a property, all or a portion of the cost of which qualifies for a specified tax credit.
A “designated work site” in a taxation year of an incentive claimant is a work site where specified property of the incentive is located during the incentive claimant’s taxation year. It specifically includes the site of an incentive claimant’s “CCUS project” (as defined in subsection 127.44(1)).
A “covered worker” is an individual who:
- is engaged in the preparation or installation of specified property at a designated work site as an employee of an incentive claimant or of another person or partnership engaged in the preparation or installation of the specified property (e.g., a contractor); and
- is engaged in primarily manual or physical work or duties in respect of the designated work site.
A worker who is an administrative, clerical, or executive employee, or who is a business visitor to Canada as described in section 187 of the Immigration and Refugee Protection Regulations, is specifically excluded from being a covered worker.
An “installation taxation year” in respect of a specified tax credit is a taxation year during which preparation or installation of specified property occurs. Note that in a multi-year project, costs may be incurred in a taxation year but the relevant property may not be considered to be acquired until a subsequent taxation year when it becomes available for use. The taxation years before that in which the property is available for use would also be “installation taxation years”. Conversely, in the case of a CCUS project, the explanatory notes observe that the CCUS Tax Credit may be claimed in a taxation year before the labour is performed.
If an incentive claimant does not elect to satisfy the Labour Requirements, the applicable percentage of the relevant credit is reduced by 10%. The election is to be made in prescribed form and manner.
Prevailing Wage Requirement
Each covered worker at a designated work site of an incentive claimant for an installation taxation year must be compensated for their work in the preparation or installation of specified property under the terms of an “eligible collective agreement” or, if there is no eligible collective agreement, in an amount that is at least equal in value to the wages and benefits specified in the eligible collective agreement that most closely aligns with the covered worker’s experience level, tasks and location, calculated on a per-hour or similar basis. If the relevant eligible collective agreement expires, the relevant wages and benefits stipulated under the agreement are to be indexed for inflation.
“Eligible collective agreement” means, in Québec, a collective agreement negotiated in accordance with provincial law. In any other case, it means either (i) the most recent multi-employer collective bargaining agreement that may reasonably be considered the industry standard for a given trade, in a region, province or territory between a group of employers and a trade union, who are accredited to bargain together and to be bound by the same agreement, or (ii) a project labour agreement that covers the work associated with the investments eligible for the specified tax credit and that is based on such industry standard, multi-employer collective bargaining agreements.
The incentive claimant must attest in prescribed form and manner for each installation taxation year that it compensated its own employees who are covered workers in accordance with the prevailing wage requirement described above, and took reasonable steps to ensure that any covered workers employed by another person or partnership at its designated work site were also compensated in accordance with such prevailing wage requirement.
An incentive claimant must communicate, in a poster or notice, readily visible to and accessible by covered workers at the designated work site, or by electronic means, that the work site is subject to the prevailing wage requirements in relation to covered workers. The communication must include a plain language explanation of the consequences for workers and information about how to report failures to pay prevailing wages to the Minister.
The “standard” requirement is that the incentive claimant must make reasonable efforts to ensure that apprentices registered in a “Red Seal trade” work at least 10% of the total hours that are worked during each installation year by Red Seal workers at the incentive claimant’s designated work site on the preparation or installation of specified property.
However, if the number of apprentices employed at a designated work site is restricted or a maximum ratio of apprentices to journeypersons is specified by an applicable collective agreement or by applicable labour law which prevents the standard requirement from being met, the incentive claimant must make reasonable efforts to ensure that the highest possible percentage of the total labour hours performed during the installation year by Red Seal workers on the preparation or installation of specified property is performed by apprentices registered in a Red Seal trade within such restrictions or limitations (Step Down Apprentice Requirement).
The incentive claimant must attest in prescribed form and manner for each installation year that it has met the applicable apprenticeship requirement.
The apprenticeship requirement raises a number of issues:
- While the incentive claimant is required to use “reasonable efforts” to ensure that the applicable hours are worked by apprentices, the rules provide for an addition to tax (described below) if in fact the actual number of hours performed is less than the minimum.
- The apprenticeship requirement applies to hours worked on the preparation or installation of specified property. Hours worked by Red Seal trades in performing other tasks at a work site are not taken into account in either the numerator or denominator of the applicable fraction. That would seem to require that an incentive claimant establish a system that will distinguish between hours worked by Red Seal trades on the preparation or installation of specified property and those worked on other tasks as well as tracking hours of apprentices worked on the preparation or installation of specified property, which could be burdensome in practice.
Consequences of Failing to Meet the Labour Requirements
If the Minister determines that an incentive claimant knowingly or in circumstances amounting to gross negligence failed to meet the Labour Requirements:
- The incentive claimant is only entitled to the specified tax credit net of the 10% rate reduction.
- The incentive claimant is liable to a penalty equal to 50% of the credit claimed at the regular rate less the credit allowed after giving effect to the 10% rate reduction.
Absent such a determination by the Minister, if an incentive claimant fails to meet the Labour Requirements in an installation year, the specified tax credit is not reduced but there are other financial consequences:
- If less than 10% of the total hours that are worked during an installation taxation year in respect of the specified tax credit at the designated work site on the preparation or installation of specified property are worked by apprentices registered in a Red Seal trade, an amount is added to the tax payable under Part I of the Tax Act by the incentive claimant. The amount is $100 multiplied by the difference between the number of hours “required” to be worked in that installation year at the designated work site by apprentices registered in a Red Seal trade less the hours actually worked. The hours “required” to be worked may be less than 10% of the total hours if the Step Down Apprentice Requirement applies.
- For each day that a particular covered worker was not paid the prevailing wage in an installation taxation year in respect of that specified tax credit, $20 is added to the tax payable under Part I of the Tax Act by the incentive claimant. Note that covered workers are not limited to employees of the incentive claimant but include employees of contractors.
- The incentive claimant may be notified by the Minister that it did not meet the prevailing wage requirements for a designated work site for a taxation year. In such case, the incentive claimant may, within one year (or such longer period as the Minister may permit), pay each covered worker that received less than the prevailing wage a top-up payment equal to the shortfall plus interest at the prescribed rate applicable to taxes to be paid to the Minister. A top-up payment is included in the recipient’s income when received and is deductible by the payor when made and is not an expenditure that qualifies for any specified tax credit. If the required top-up payment is not made, the incentive claimant is liable to pay 120% of the top-up payment as a penalty. Again, note that covered workers are not limited to employees of the incentive claimant but include employees of contractors.
Since a partnership is not a taxpayer for the purposes of the Tax Act, it is not clear how the provisions adding an amount to tax payable by an incentive claimant where it fails to satisfy the apprenticeship requirement, prevailing wage requirement or both are intended to operate.
It can be expected that contracts between incentive claimants and contractors will require that the contractor ensure that each of its employees performing services relating to the preparation or installation of specified property is paid the prevailing wage and must indemnify the incentive claimant for any failure to do so. Analogous contractual requirements will need to be considered to ensure that apprenticeship requirements are met.
The Labour Requirements do not apply to a specified tax credit relating to the acquisition of zero-emission vehicles or the acquisition and installation of low-carbon heat equipment.
tax Income Tax Act Clean Economy Tax Credits CCUS Tax Credit CTI Tax Credit