Martha Breithaupt:
Canada has recognized the impact of climate change on our country, on the globe, and really also its effect on business. And so these tax credits are really trying to stimulate growth within our sustainability sector, as well as offset those expenses for our Canadian companies.
Paul Dostaler:
Welcome back, everyone, to the latest episode of the Cross-Border Tax Podcast series. My name is Paul Dostaler, manufacturing industry leader here at BDO Canada. In today's podcast, we'll be exploring the incentives available for manufacturing companies that invest in clean energy in Canada, including the five Clean Tech ITCs. Joining me for today's discussion, I have Martha Breithaupt, partner in our SR&ED and Government Incentives and leader of our sustainability tax credit practice here at BDO. Martha, welcome to the podcast.
Martha Breithaupt:
Thanks, Paul. It's an exciting time to be here with all of the funding opportunities currently announced for our Canadian manufacturers.
Paul Dostaler:
Great. So Martha, my background is IT, and last year I was speaking to manufacturers about digital adoptions through programs like CDAP and DMAP. This seems entirely different. Can you start by telling us about the current landscape for manufacturers who are looking to offset their costs?
Martha Breithaupt:
For sure, yeah. So the funding landscape in Canada really consists of direct funding like the CDAP program where the government selects projects upfront to really provide that grant or loan during the course of a project. And then there's indirect funding. And so that's what we would call investment tax credits or ITCs that would support investments across innovation, growth, international market expansion, and now sustainability, but after the fact, so after a company has invested in a new technology, for example.
Paul Dostaler:
So then what is the government doing to encourage investments in clean tech?
Martha Breithaupt:
So in Budget 2023, the government actually designed five new fully refundable tax credits that accelerate investment in sustainable technologies, infrastructure, and energy production.
Paul Dostaler:
Okay, five tax credits, let's get into it. What are the proposed credit rates and how do they vary depending on the type of investment?
Martha Breithaupt:
For sure. So they are all quite long, so get ready, buckle up, but there's five of them. I'm going to break them out into the first bucket, being energy production. And so this would be the Carbon Capture, Utilization, and Storage tax credit that provides up to 60% refundable, the Clean Hydrogen Investment tax credit up to 55% refundable, and the Clean Electricity tax credit up to 15%.
The next bucket is really for manufacturers and processors of clean technology. And so they are eligible for up to 30% again on capital investment and a final fifth tax credit called the Clean Technology tax credit at 30% for investments in clean technology like solar, wind, biogas, and such.
Paul Dostaler:
Okay, yeah, that's a lot to digest. I'd like to start with the two last ones that you mentioned. Both of them are 30% refundable tax credits. What's the difference between them?
Martha Breithaupt:
So both credits cover investments in capital. However, the Clean Technology tax credit is really accessible by all corporations that make investments in capital for the adoption and operation of clean technology property in Canada. So think of any business that would invest in solar on the roof of their building, for example, using or installing a heat pump to save and conserve our energy utilization, or investment in industrial zero-emission rated vehicles, for example.
The Clean Technology Manufacturing tax credit is meant for only companies that would identify as manufacturers and processors on their tax returns. And again, it's for them to invest in capital equipment that would have a clean technology use. So a company that supports production of a clean tech product, for example, 30% of their spends on things like machinery, tooling, and again, zero-emission vehicles, for example, would all qualify under that tax credit.
Paul Dostaler:
Okay, so it sounds like something for everyone. Sustainability is a very big and important topic these days. So Martha, what's the history of the government providing incentives to Canadian manufacturers to adopt clean technology?
Martha Breithaupt:
So these credits were just announced in Budget 2023, and they actually received Royal Assent in June 19th and 20th, 2024. So they are now fully in effect. But to your question around history, because these are new, we don't have a lot of history with these investment tax credits clearly. So no one has filed yet for them. However, we now are able to going forward. So what we're hoping to do is base a lot of our decisions around eligibility on Natural Resource Canada's interpretation of class 43.1 and 43. 2 equipment and purchases.
And this is really founded on the Canadian Renewable Conservation Expense tax credit, which has been around for many, many, many years. So there is a lot of historical jurisprudence around some of these concepts for what is clean tech property. So we are very thankful for that and we'll just have to see how the forms and guides assist us down the road in claiming for these programs.
Paul Dostaler:
And at the same time, I mean, it's just still so exciting to be part of this first when it comes to sustainability. Thank you. I'd like to shift the conversation now to labour requirements and recapture. How do labour requirements impact the credit rate for businesses?
Martha Breithaupt:
Yeah, so that's a great question because almost all of the credits do require compliance with prevailing union wage rates to ensure that we are creating good paying, safe jobs in Canada for a lot of these very, very large infrastructure and equipment investment type projects. So non-compliance with those labour requirements would result in a reduction of 10% to those tax credit rates that I mentioned earlier.
Paul Dostaler:
So I'm going to get a little bit deeper, a little bit technical here, but under what conditions are the Clean Tech ITCs subject to recapture?
Martha Breithaupt:
So similar to all credits in the Income Tax Act, they're all subject to recapture if you change the use, purpose, or intent of the original investment. So these ones are designed, again, for sustainability and clean technology. So if you intended to use it for a clean tech purpose, but subsequently changed course during the project duration in the first decade, those investment tax credits would be clawed back at a rate dependent upon what that investment is valued at today.
Paul Dostaler:
Got it. So Martha, you've been in this space for a while. What impact do you foresee these tax credits having on businesses in Canada?
Martha Breithaupt:
I really do hope to see that they generate both a sense of excitement in the clean tech space, as well as speed in infrastructure investment. So I know there's a lot of folks looking to invest in clean technology that just might have been waiting for this opportunity to really see these tax credits as a discount off the sale price of some of these great products.
So Canada has recognized the impact of climate change on our country, on the globe, and really also its effect on business. And so these tax credits are really trying to stimulate growth within our sustainability sector, as well as offset those expenses for our Canadian companies.
Paul Dostaler:
I want to touch on compliance. What challenges do you see these companies will face while trying to comply with the tax credit requirements and how can they overcome those challenges?
Martha Breithaupt:
Similarly to filing under the SR&ED tax credit program or the SR&ED program, the claims are going to be required to be filed with the tax return. And as with anything that's new, there's a lot still yet to be figured out. So Natural Resources Canada and Canada Revenue Agency are working very closely together to really define how these credits are going to be administered, assessed, adjudicated for everything from eligible work, costs, and line items throughout all of these claims.
So luckily, the program is going to be administered through CRA's Business Tax Incentives Team, which has that strong background in running the $4 billion annual SR&ED program already. So should be good, but we do have a lot to see yet, so we'll see.
Paul Dostaler:
A lot to see and a lot of information to digest. How should businesses prepare to take advantage of these credits?
Martha Breithaupt:
With the announcement of these $10 billion worth of clean technology tax credits, there's also the $2.5 billion worth of funding for AI transformation recently announced, and the continued business supports for innovation like the SR&ED program, market expansion, like the CanExport program.
Businesses should really be proactively meeting with their advisors, assessing their growth and their exit plans to make sure that they're best positioned to take advantage of all of these supports that are available, really to make you that much more competitive and attractive on both the buy and the sell side.
Paul Dostaler:
That's really good information. I think we're getting to the end of our podcast here. But before we go, what final advice would you give to businesses about navigating this new clean economy tax credit?
Martha Breithaupt:
So reach out to your advisors. Definitely reach out and have a conversation with CRA that's administering these credits, just so you can learn more. But I would also encourage you to speak to your counterparts, your peers, your suppliers in industry, your associations that you’re members of to find out really what initiatives are they considering across sustainability in their businesses and where are they investing and including technology capital as they grow.
So we're happy to be part of those discussions as well, and we can provide you with client case studies and examples of how our companies have really transitioned to that path towards net zero profitably while leveraging a lot of this funding to offset those investments.
Paul Dostaler:
Well, that's really great. If you'd like to know more about what we talked about today, please reach out to Martha directly on LinkedIn or connect with me to get you to the right BDO services. So Martha, thanks so much for joining our podcast. Thanks for sharing your thoughts and your comments. And to our audience, thank you everyone for listening to the latest episode of the Cross-Border Tax Podcast. We'll be back soon. For now, this is your host, Paul Dostaler, signing off.