Business Law Blog

The past two federal budgets introduced various new refundable investment tax credits (“Refundable ITCs”) to encourage and promote the increased adoption of alternative or renewable energy.  In the words of the Federal Government, the “transformational new big five Clean Investment Tax Credit…will help produce, manufacture, or transition to clean energy in Canada, while supporting good jobs for the middle class and ensuring more vibrant communities across Canada”.^[1]

Draft or final legislation is now catching up to the earlier proposals, with the most recent draft proposals released on December 18, 2023 and Bill C-59 making its way through Parliament for enactment.   

At a high level, Refundable ITCs operate by deeming the relevant investment tax credit to be an amount of income tax paid by a taxpayer in a taxation year so that, if there are income taxes owing at the end of the taxation year, such income taxes would be offset against the credits and any excess credits above the income taxes owing (if any) would be paid to the taxpayer as a tax refund.

The five referenced Refundable ITCs are summarized in the below chart.

Overall, Refundable ITCs will be an important factor to the economics of Canada’s energy transition efforts but the rules are complex and the exercise of qualifying for the Refundable ITCs will largely become an engineering or scientific evaluation similar to the application process for refundable scientific research and experimental development (“SR&ED”) investment tax credits.  Given the complexities, the focus of the remaining commentary is on the tax compliance or planning elements of the rules.^[6]

(a) Labor Requirements: With the exception of the Refundable ITC regime for clean technology manufacturing, the remaining four Refundable ITCs are subject to additional labor requirements that consist principally of:^[7]

- the requirement of a business to pay prevailing wages (and inform or announce to workers that it is subject to a prevailing wage requirement); and

- a minimum apprenticeship requirement providing for at least 10% of the tradesperson hours to be performed by registered apprentices in the Red Seal trades.

The consequence of not satisfying the labor requirements is that the Refundable ITC rate otherwise applicable would be reduced by 10%.

(b) Government Assistance: All categories of Refundable ITCs require that eligible capital cost outlays be reduced by government assistance and/or non-government assistance, though any subsequent repayment of the assistance may be included in computing a Refundable ITC claim in the year of repayment.

(c) Overlap of Refundable ITCs: Where an eligible capital outlay may qualify for more than one credit, a claim may only be made under one of the Refundable ITC regimes for that outlay.

(d) Recapture (Repayment) of Refundable ITCs: Refundable ITCs may be required to be repaid if any of the below circumstances arise in a period of 10 years from the date of the credit in the case of clean technology and clean technology manufacturing Refundable ITCs,^[8] and in a period of 20 years in the case of Refundable ITCs for a CCUS or clean hydrogen project:

- Property is converted to an ineligible use or, where applicable, falls below a requisite minimum or previously reported criteria (i.e., eligible use or carbon intensity);

- Property is exported outside Canada; or

- Property is sold to an arm’s length party.

These rules are referred to as recapture rules (which largely mirror the recapture rules under the SR&ED regime) and generally operate to deem the recapture to be an addition to the income tax payable for the recapture year. 

(e) Partnerships: All of the regimes provide for Refundable ITCs to be claimed at the partner level, with available credits computed at the partnership level being flowed-out to partners (including looking through tiered partnerships).

Similarly, the recapture rules also allocate recapture amounts to each person who is a partner at the end of the fiscal period in which the recapture is triggered.  This would mean that there is no look-back rule to trace recapture to the original partner(s) receiving the relevant Refundable ITC.

(f) Project Based: The Refundable ITCs for CCUS and clean hydrogen are only provided for capital outlays associated with a qualified project that effectively requires a project endorsement by the Minister of Natural Resources.

Although the remaining categories of Refundable ITCs do not require the existence of a project or some certification process by the Minister of Natural Resources, they may indirectly or practically be subject to the views of Natural Resources Canada.  In particular, all or substantially all of the qualifying property under those other categories is comprised of property that falls under depreciation classes 43.1 and/or 43.2.  Those classes generally capture capital costs associated with alternative or renewable energy and are the foundation of various other tax incentives, such as accelerated depreciation rules and the Canadian renewable and conservation expense regime.  In turn, Natural Resources Canada has been anointed with the task of providing guidance on engineering and scientific issues relating to those classes, which includes an over 200-page technical guide on the classes.^[9]

(g) New Property or Project: With the exception of the proposed Refundable ITCs for clean electricity, the remaining four regimes are generally limited to capital outlays for new, not previously used property. We will have to wait to see draft legislation to determine the expectations for clean electricity.

In summary, taxpayers should be alert to the Refundable ITCs as yet another incentive regime under Canada’s energy transition but can also anticipate that these incentives likely come with at least a decade of additional reporting, compliance and audit impacts on a business.

^{[1] Government of Canada, “Minister Guilbeault highlights the big five new Clean Investment Tax Credits in Budget 2023 to support sustainable made-in-Canada clean economy” (April 5, 2023) (Minister Guilbeault highlights the big five new Clean Investment Tax Credits in Budget 2023 to support sustainable made-in-Canada clean economy - Canada.ca)}

^{[2] Bill C-59 tabled on November 21, 2023}

^{[3] Bill C-59 tabled on November 21, 2023}

^{[4] Draft legislative proposals released for consultation on December 18, 2023.}

^{[5] Draft legislative proposals released for consultation on December 18, 2023.}

^{[6] Draft legislation is not yet available for the clean electricity Refundable ITC but certain matters have been set out in general budget commentary by the Department of Finance and we expect that some form of the below provisions will apply to the clean electricity regime.}

^{[7] Proposed section 127.46 in Bill C-59.}

^{[8] Given the clean electricity Refundable ITC rate is a lower 15% credit), we would expect any recapture period to be more 10 years.}

^{[9] For a copy, see Technical guide to class 43.1 and 43.2.: M154-75/2020E-PDF - Government of Canada Publications - Canada.ca (2019 Edition)}