2023 budget provides new clean energy incentives
In recent years, Canada has taken significant steps to reduce its carbon footprint and invest in green energy. As part of this effort, Canada's 2023 federal budget has introduced new tax credits for clean electricity systems and other clean energy sectors under its Made-in-Canada Plan.
The new tax credits and investments totalling $83 billion are in addition to clean energy tax incentives, such as accelerated depreciation under Class 43.1 of the Income Tax Act. The new tax credits will provide incentives to individuals and businesses to invest in green energy, while reducing their carbon footprint and helping move the national electricity grid to its net-zero aim by 2035.
Canada is a clean energy powerhouse, as roughly 83% of electricity is generated from non-emitting sources. However, Canada’s electricity demand is anticipated to double by 2050. The budget seeks to address this unprecedented demand on Canada’s grids by encouraging investment through tax credits and other measures. While the initiatives in the budget are primarily focused on the electric generation sector, there are incentives for other clean energy initiatives including green hydrogen and critical minerals.
New investment tax credits
Budget 2023 introduces five new clean energy investment tax credits:
- the Investment Tax Credit for Clean Electricity;
- the Investment Tax Credit for Clean Technology Manufacturing;
- the Investment Tax Credit for Clean Hydrogen;
- the Investment Tax Credit for Clean Technologies; and
- the Investment Tax Credit for Carbon Capture, Utilization, and Storage (“CCUS”).
Only one out of the above investment tax credits may be claimed in respect of a particular property, even if the property is eligible for multiple investment tax credits. However, a project may include different types of eligible property and therefore benefit from multiple tax credits.
Many of the tax credit incentives have incorporated labour requirements in their eligibility criteria to ensure equitable pay and opportunities for workers in these sectors throughout Canada. These requirements include compliance with the labour union standards for worker compensation packages and a minimum hour requirement for registered apprentices.
A quick summary of the new tax credits is provided below.
a) Investment tax credit for clean electricity
Budget 2023 introduces a 15% refundable tax credit for eligible investments in:
- Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors);
- Abated (e.g. having effective carbon capture or equivalent technology) natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035);
- Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and
- Equipment for the transmission of electricity between provinces and territories.
These credits are available to the private sector, as well as non-taxable entities such as Crown corporations, public utilities, pension funds and Indigenous-owed corporations. The tax credit will be phased out by 2034.
b) Investment tax credit for clean technology manufacturing
Budget 2023 introduces a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment that is used all or substantially all for eligible activities to manufacture clean technologies or support the critical mineral supply chain, including:
- Extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements;
- Manufacturing of renewable or nuclear energy equipment;
- Processing or recycling of nuclear fuels and heavy water;
- Manufacturing of grid-scale electrical energy storage equipment;
- Manufacturing of zero-emission vehicles; and
- Manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.
This tax credit will run from January 1, 2024 until 2034, with a phase-out beginning in 2032.
c) Investment tax credit for clean hydrogen
The Clean Hydrogen Investment Tax Credit will be available for projects that produce all or substantially all hydrogen through their production process. Specifically, the tax credit is available on the cost of purchasing and installing eligible equipment for projects that produce hydrogen from (i) electrolysis; or (ii) natural gas, provided that emissions are abated through CCUS.
This tax credit will range from 15-40%, with the cleanest hydrogen receiving the highest rebate. A 15% credit will also be offered on equipment that is required to convert hydrogen to ammonia for transportation purposes. This tax credit is refundable and will run until 2034.
This tax credit has been extended to run until it is phased out in 2034.
e) Investment tax credit for CCUS
The investment tax credit for CCUS was proposed in Budget 2022. Budget 2023 expands on the design of this tax credit to include heat and/or power dual use equipment or water use equipment, which is used both for CCUS and another purpose (subject to certain conditions).
Originally this credit was only available for projects in Alberta and Saskatchewan. Budget 2023 proposes to expand the availability of this investment tax credit to projects in British Columbia.
Once legislated, the tax credit will be retroactively available to businesses that have incurred eligible CCUS expenses, starting in 2022.
Canada Infrastructure Bank
Canada Infrastructure Bank is to play a deepened role by investing in private sector-led infrastructure projects that support Canada’s efforts to reach net-zero. Budget 2023 positions the Canada Infrastructure Bank to invest at least $10 billion through its Clean Power priority area and at least $10 billion through its Green Infrastructure priority area.
Increased funding for clean electricity projects
Budget 2023 proposes increased funding through the Natural Resources Canada funding programs. Starting in 2023-24, $3 billion over 13 years would be provided for the Smart Renewables & Electrification Pathways and Smart Grid programs, as well as new investments to capitalize on offshore wind potential.
Reduced tax rates for zero-emission technology manufacturers
The reduced corporate income tax rates for zero-emission technology manufacturers were announced in Budget 2021 and were originally set to expire after 2031. Budget 2023 extends the reduced tax rates for three more years to 2034, with a phase out beginning in 2032. It also extends the availability of the reduced tax rates to nuclear energy equipment manufacturing, the processing and recycling of nuclear fuels and heavy water, and the manufacturing of nuclear fuel rods.
The Strategic Innovation Fund
Budget 2023 plans to provide $500 million over ten years to the Strategic Innovation Fund to advance clean technologies in Canada.
For further information contact one of our Canadian Energy and Natural Resources professionals