Clean technology and carbon capture tax credits: An overview

As Canada progresses toward achieving its goal of net-zero emissions by 2050 and supporting a green recovery from the COVID-19 pandemic, the federal government has introduced tax incentives for businesses that invest in clean energy projects in Canada. 

These investment tax credits (ITCs) include the Clean Technology ITC and the Carbon Capture, Utilization, and Storage (CCUS) ITC, which cover a portion of the capital cost of acquiring eligible equipment used in clean technology and CCUS projects.

This summary provides an overview of the main features and benefits of these tax incentives for businesses.

Clean Technology Investment Tax Credit

The Clean Technology ITC encourages investment in the adoption and operation of clean technology properties in Canada, such as wind, water, and solar equipment, geothermal energy systems, air-source heat pumps, and non-road zero-emission vehicles.

The clean technology credits are proposed to be available for eligible properties acquired on or after March 28, 2023, and before 2035. The credit rates vary depending on the year of acquisition, ranging from 30% (for investments made between March 28, 2023, and 2033) to 15% (for investments made in 2034) of the capital cost of the property.

The credit rates are also subject to labour requirements, which may reduce the credit rate by 10 percentage points if the taxpayer does not elect to comply with certain prevailing wage and apprenticeship conditions for the installation of the property.

The Clean Tech ITC is subject to recapture if the property is:

• converted to a non-clean technology use;
• exported from Canada; or
• otherwise disposed of within 10 years of acquisition, unless the property is transferred to a related taxable Canadian corporation that continues to use it for clean technology purposes.

Who can claim the Clean Technology ITC?

The clean tech credits can be claimed by taxable Canadian corporations or real estate investment trusts that acquire eligible property intended for use in a business exclusively in Canada. The taxpayer must be the first owner of the property and must have incurred the capital cost of the property. There are special rules for partnerships.

The Clean Tech ITC cannot be claimed if a CCUS tax credit was already deducted for the same property. The qualified expenditure is reduced for any government and non-government assistance received or reasonably expected to be received at the time of filing.

Requirements for new property to qualify for the clean tech credit

To qualify for the clean tech credits, the property must meet the following requirements:

• The property must be new, meaning that it has not been used or acquired for any purpose before it is acquired by the taxpayer.
• The property must be clean technology property, meaning that it is:
  • included within certain parts of Class 43.1, 43.2, or 56 of Schedule II in the Income Tax Regulations, which list various types of equipment that generate or store energy by using renewable sources;
  • it must be concentrated solar energy equipment; or
  • it must be a small modular nuclear reactor.
• The property must be situated in Canada and intended for use exclusively in Canada for the purpose of earning income from a business or a property.

How to claim the Clean Technology Investment Tax Credit

To claim the clean tech credits, the taxpayer must file a prescribed form with their income tax return for the taxation year in which the property was acquired. The form will include:

• the description, location, and capital cost of the property;
• the credit rate and amount claimed; and
• the labour requirements election.

The taxpayer must also keep records and documents to support their claim, such as invoices, receipts, contracts, and certificates, as they may be required to provide them to the Canada Revenue Agency (CRA) upon request.

The application must be submitted within one year after the taxpayer’s filing due date for the year in which they acquired the qualifying property.

Carbon Capture, Utilization, and Storage Investment Tax Credit

The Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credit supports the development and deployment of projects that capture, transport, store, or use carbon dioxide emissions from industrial processes. Qualified expenditures include the cost of acquiring eligible equipment that is situated in Canada and used for these purposes. The CCUS Investment Tax Credit is proposed to be available for qualified expenditures incurred after 2021 and before 2041.

The credit rates vary depending on the type of expenditure and the year of acquisition, ranging from 18.75% to 60% of the qualified CCUS expenditure. They are also subject to labour requirements, which may reduce the credit rate by 10 percentage points if the taxpayer does not elect to comply with certain prevailing wage and apprenticeship requirements for the installation of the equipment.

The CCUS investment tax credit is subject to recovery taxes if the projected eligible use percentage of the captured carbon dioxide is not met at the end of each project period. The eligible use percentage refers to the ratio of the quantity of captured carbon dioxide that is stored or used in an eligible use (such as dedicated geological storage or concrete production) to the total quantity of captured carbon dioxide stored.

The CCUS ITC is also subject to knowledge-sharing and climate risk disclosure requirements for projects with qualified CCUS expenditures of $250 million or more.

Who can claim the CCUS Investment Tax Credit?

The CCUS ITC can be claimed by a taxable Canadian corporation that incurs qualified CCUS expenditures for a qualified CCUS project in Canada. The corporation must be the first owner of the eligible equipment. There are special rules for partnerships.

Requirements for new property to qualify for the CCUS ITC

To qualify for the CCUS ITC, the property must meet the following requirements:

• The property must be new, meaning that it has not been used or acquired for use for any purpose before it is acquired by the taxpayer.
• The property must be eligible equipment, meaning that it is used to capture, transport, store, or use carbon dioxide as part of a qualified CCUS project. Dual-use equipment may qualify for CCUS tax credits in certain situations.
• A qualified CCUS project must be certified by the Minister of Natural Resources as meeting certain technical and environmental criteria.
• The property must be situated in Canada and used in Canada solely for the purpose of earning income from a business or a property.

How to claim the CCUS Investment Tax Credit

To claim the CCUS ITC, the taxpayer must file a prescribed form with their income tax return for the taxation year in which the qualified CCUS expenditure is incurred.

The form will include:

• the description, location, and amount of the qualified CCUS expenditure;
• the credit rate and amount claimed;
• the labour requirements election;
• the projected eligible use percentage; and
• the certification number of the qualified CCUS project.

The taxpayer must also keep records and documents to support their claim, such as invoices, receipts, contracts, and certificates, as the CRA may request them.

In addition, the taxpayer must comply with the knowledge-sharing and climate risk disclosure requirements, which involve submitting reports and data on the technical and environmental performance of the CCUS project to the Minister of Natural Resources and disclosing the climate-related risks and opportunities of the CCUS project to the public.

Labour requirements for the Clean Technology and CCUS ITCs

Anyone claiming the Clean Technology or CCUS Investment Tax Credits must comply with labour requirements to be eligible to claim the full credit rate for each ITC. These requirements intend to ensure that the installation of the clean technology or CCUS property creates or supports good quality jobs in Canada. They consist of two conditions: the prevailing wage condition and the apprenticeship condition.

The prevailing wage condition requires that the taxpayer pays the workers who install the property:

• at least the prevailing wage for the occupation and region where the work is performed as determined by regulation; or
• in the absence of regulation, by reference to an eligible collective agreement; or
• by comparison to wages and benefits specified in an eligible agreement that most closely aligns with the worker’s experience level, tasks, and location.

The apprenticeship condition requires that the taxpayer 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 an installation taxation year by Red Seal workers at a designated work site. Reasonable efforts are defined in the legislation.

The taxpayer can elect to comply with the labour requirements by filing a prescribed form with their income tax return. If the taxpayer chooses not to comply with the labour conditions, they can claim a reduced credit rate of 10 percentage points lower than the full rate. If a taxpayer elects to meet the labour requirements but fails to do so, they will generally maintain entitlement to the full credit, but will be required to pay related penalties or top-up wages.

The labour conditions apply to specified properties prepared or installed on or after Nov. 30, 2023.

How can the clean technology credits and CCUS ITC benefit your business?

The clean tech credits and the CCUS ITC offer significant benefits for businesses that want to invest in clean energy projects in Canada. These benefits include:

• Reducing the upfront cost and improving the return on investment of clean energy projects by providing a refundable tax credit that can be used to offset taxes payable or be refunded in cash.
• Supporting the growth and innovation of Canada's clean technology sector and creating or securing thousands of middle-class jobs.
• Helping Canada achieve its emissions reduction targets and transition to a low-carbon economy by increasing the production, manufacturing, and use of clean energy and reducing the amount of carbon dioxide released into the atmosphere.
• Enhancing Canada's competitiveness and attractiveness as a destination for clean energy investment by offering one of the most generous and comprehensive tax incentive packages in the world.