Canada Keeps Adding Clean Energy Tax Credits to Catch Up With US

Canada has been playing catch-up since last year’s enactment of the Inflation Reduction Act and the tax incentives provided by the US federal government to support the US clean energy sector. The country is keenly aware that it needs to respond so it can remain competitive and grow its clean energy sector, and the latest measures and updates in the 2023 Federal Budget were a continuation of those efforts.

Canada’s framework for supporting the clean energy transition is made up of several components: pollution pricing and regulatory framework, investment tax credits, strategic funding programs, and targeted funding programs. The ITCs announced under this framework include:

• Carbon capture, utilization, and storage.
• Clean hydrogen.
• Clean technology manufacturing.
• Clean technology adoption.
• Clean electricity.

The key terms of these ITCs are summarized in the table below.

All of these ITCs (except for the clean technology manufacturing ITC) are subject to the labor requirements of paying prevailing wages and apprenticeship opportunities. For the former, workers performing physical or manual labor on eligible projects must be paid at least equal to those provided in comparable collective agreements. For the latter, at least 10% of labor hours for duties that correspond to those performed by a journeyman in a Red Seal trade must be done by registered apprentices.

Comparison to US Tax Incentives

While Canada has largely been following, and in many ways reacting to, the US proposals, Canada has made several notable deviations. Despite strong pressure from the public for Canada to adopt a production-based tax credit (as the US has done, in addition to investment tax credits), Canada has limited its offerings.

However, there are many differences in the scope and mechanism by which the ITCs are delivered in the two countries that make it an impossible exercise to measure the tax credits against each other. These include differences in the class of eligible properties, specifics of the labor requirement and consequences of non-compliance, the tax treatment of the receipt of the tax credit, and the ability to monetize the credits.

Further complicating such an analysis is the fact that all of the ITCs announced by the Canadian government are only in proposed form without draft legislation (except for the carbon capture, utilization, and storage ITC). As such, many of the details that will define these tax credits’ ultimate economic support offered are uncertain.

What to Keep Your Eye On

While draft legislation has been released on the carbon capture, utilization, and storage credit, and several rounds of consultation have been conducted, the Canadian government announced further changes to that ITC in the 2023 Federal Budget—suggesting that the ultimate design of that ITC is still in flux.

Earlier this month, the Canadian government sought stakeholder input on the design of these ITCs. This round of consultation was announced without a specific deadline, but prior consultations have indicated that the Canadian government is giving due consideration to feedback and has adjusted proposals in response.

Two key examples of stakeholder feedback having meaningful impact on the scope of these ITCs include: the Canadian government making the originally nonrefundable carbon capture, utilization, and storage credit refundable, as well as making subsequently announced ITCs refundable; and introducing a clean electricity ITC that is available to tax-exempt parties.

These changes are significant deviations from Canada’s historical approach to such credits, signaling the possibility of further refinement in these credits. Accordingly, interested parties should consider participating in the consultation and stay apprised of the development of these credits.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Colena Der is a partner at Osler, Hoskin & Harcourt. Her tax practice focuses on advising Canadian and foreign-based clients on the taxation of mergers and acquisitions, corporate reorganizations, and employee and executive compensation matters, with an emphasis in the energy sectors.

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