Canada’s clean economy tax credits and labour compliance

In this article, we take a deep dive into this last concept—prevailing wage and apprenticeship requirements—using typical examples as they relate to the Clean Technology ITC to help taxpayers understand their obligations when claiming the regular credit rate in the suite of Clean Economy ITCs. 

For background and context, the most readily adopted credit by Canadian business so far has been the Clean Technology ITC that allows for the acquisition of specific clean technology properties, including certain properties in Classes 43.1, 43.2, and 56, such as solar photovoltaic systems, air-source heat pump systems, and non-road zero-emission vehicles (electric forklifts and yard tractors) along with their associated charging equipment. 

The Clean Technology ITC provides a regular rate of 30% for qualifying Clean Technology property, however the rate decreases to 20% if a company cannot show it has met the prevailing wage requirements. 

Therefore, a Canadian corporation that spends $1 million in eligible costs to acquire, install, and commission a photovoltaic rooftop solar project could receive between $200,000 and $300,000 back in tax credits. 

For further information about Clean Technology ITCs, see our article, Clean technology and carbon capture tax credits: An overview.

Clean Technology ITC rates and the impact of labour requirements

The Clean Economy tax credit legislation also introduced a new concept and an additional layer of complexity, which has proven to be a common challenge in documenting and reporting for many claimants: the labour requirements.

These requirements are often unknown to taxpayers, yet they directly determine whether a project qualifies for the regular credit rate or the reduced credit rate. 

Under the legislation, corporations claiming the CT, CH, and CCUS tax credits must both elect and attest on the taxpayer’s corporate tax return that they have met specific labour requirements on the project to receive the regular credit rate. If a taxpayer chooses not to make this election, the outcome is detrimental as the regular rate for that credit is automatically reduced by 10 percentage points to 20%. 

Furthermore, if a taxpayer incorrectly elects and attests, there will be an addition to tax for prevailing wages not paid, an addition to tax for apprenticeship hours not met, and potentially gross negligence penalties. 

For successful claims, an awareness of the structure, Income Tax Act (ITA) definitions, and implications to improperly electing and attesting is essential early on in a taxpayer’s project to prevent costly surprises on filing or during the currently mandatory CRA audit. 

The labour requirements apply to specified property prepared or installed on or after Nov. 28, 2023, and are built around two pillars: 

1. The prevailing wage requirement for covered workers 
2. The apprenticeship requirement

Prevailing wages for covered workers

The prevailing wage requirement is designed to ensure that covered workers on Clean Economy properties and projects are compensated fairly and consistently with industry standards.

Under the ITA, covered workers are defined as individuals engaged in the preparation or installation of specified property at a designated work site. This includes employees of contractors and subcontractors, which includes the individual who performs physical or manual work, but excludes administrative, clerical, and executive staff on the designated work site.

To meet the prevailing wage requirement, a taxpayer must pay these covered workers at the standard wage rate and benefits in an amount that is at least equal to the amount provided for that worker's relevant trade, experience level, and geographic region under an eligible collective agreement. The benchmark for this eligible collective agreement in most provinces is the most recent multi-employer collective bargaining agreement for the relevant trade and region negotiated with a trade union affiliated with Canada's Building Trade Unions.

To ensure the wage requirements are met, the legislation also imposes a communication requirement. During the work performed on the designated work site, taxpayers must inform covered workers that the project they are working on is subject to prevailing wage rules, and the taxpayer must provide clear instructions on how workers can report non-compliance of the prevailing wage rules directly to the CRA. Failure to do so will result in non-compliance with the prevailing wage rules.

In practice, this means that even if a claimant paid their covered workers correctly, failure to communicate these requirements on the worksite could potentially result in a finding of non-compliance, resulting in a reduction to the regular rate by 10%.

Meeting the apprenticeship threshold under Clean Economy ITCs

To comply with the additional apprenticeship requirement, a corporation must ensure that apprentices in Red Seal trades perform at least 10% of the total labour hours completed by Red Seal workers on the project.

If that 10% target cannot be achieved, the corporation must either point to an applicable law or collective agreement that restricted the percentage of hours worked to below 10% or demonstrate that it made “reasonable efforts” to meet the 10% target. The list for what is constitutes as “reasonable efforts” is detailed and intensive, and the burden of proof lies with the claimant. If documentation is lacking, the CRA may determine that reasonable efforts were not made, leading to a rate reduction or penalty.