The Government of Canada advanced its clean energy agenda in the 2024 Fall Economic Statement (FES 2024) by expanding and providing further guidance on several key clean economy investment tax credits (ITCs) designed to accelerate the country's transition to a low-carbon economy. FES 2024 provides further guidance for the Clean Electricity Investment Tax Credit (CE ITC) and the Electric Vehicle (EV) Supply Chain Investment Tax Credit (EV ITC) and announces a further “eligible pathway” that is proposed to be added for the Clean Hydrogen Investment Tax Credit (Clean Hydrogen ITC).
As previously discussed, the CE ITC is a 15 percent refundable ITC available for the capital cost of equipment associated with investments in clean electricity generation, storage solutions and interprovincial electricity transmission.
This tax credit is proposed to be available to various qualifying entities, including:
This credit is designed to reduce the upfront capital costs for businesses investing in infrastructure aimed at reducing the carbon footprint of Canada's power generation.
FES 2024 announced that the CEITC is proposed to be expanded to include the CIB as a qualifying entity and introduces an exception where CIB financing will not constitute government assistance for the purpose of the CE ITC, and therefore will not reduce the cost of eligible clean electricity property that qualifies for the CE ITC. These measures apply to eligible property acquired and in use on or after December 16, 2024, the date of the release of FES 2024.
Drat legislation released in August 2024 for the CE ITC provided that in order for a Provincial or territorial Crown Corporation to claim the CE ITC, the Minister of Finance must designate such jurisdiction as an “eligible jurisdiction”. In order to be designated, the draft legislation provides that the jurisdiction must meet certain requirements that would be published on a website maintained by the Government of Canada. FES 2024 provides further guidance on what those requirements would be, stating that in order to be designated as an eligible jurisdiction, the Minister must be satisfied that the provincial or territorial government had:
The first condition for designation as an "eligible jurisdiction" under the CE ITC is that the provincial or territorial government must publicly commit to publishing an energy roadmap aimed at achieving net-zero emissions by 2050. Note that this Net-zero 2050 target is a significant change from previous statements of the Federal government, which would have required a Net-Zero 2035 Target (see Budget 2024, for example).
This commitment must be made in a written public statement, and issued by the relevant minister responsible for energy policy or by the head of government. Alternatively, the commitment may be made in a government publication (such as a budget or fiscal update) provided it is approved by one or more of these same ministers. The public statement must further be available on the website of one or more of the minister responsible for energy or electricity policy, the finance minister, or the premier.
This statement should outline the jurisdiction’s vision and actions toward achieving net-zero emissions and must be published by the end of 2026. This roadmap should be inclusive of all energy sources, including electricity, fossil fuels, hydrogen, and biofuels. Exports are not required to be considered for the purposes of the roadmap. Provinces and territories are encouraged to consider the best practices for preparing energy roadmaps provided in the final report of the Canada Electricity Advisory Council.
The roadmap will serve as a strategic framework for transitioning to cleaner energy while balancing the use of traditional and emerging energy sources.
The second condition is that the province or territory must issue a written public request to its Crown corporations to pass on the benefits of the CE ITC to the electricity ratepayers in their jurisdiction. This written public request must be made in a written public statement and issued by the relevant minister responsible for energy policy or by the head of government. Alternatively, the request may be made in a government publication (such as a budget or fiscal update) provided it is approved by one or more of these same ministers. The written request must further be available on the website of one or more of the ministers responsible for energy or electricity policy, the finance minister or the premier.
This means that provincial and territorial governments must actively encourage their Crown corporations to ensure that the CE ITC is used to reduce costs or provide other benefits to consumers. These benefits may include one or more of the following: lower electricity prices, enhanced system reliability, new services, or other benefits, and should be relative to a scenario where the CE ITC had not been claimed.
Once a provincial or territorial government believes it has met these conditions, it can submit a request to the federal Minister of Finance for designation as an eligible jurisdiction. The request must include supporting documentation, such as evidence of the commitments made and website links to the public statements issued.
The federal Minister of Finance will then assess whether the conditions have been satisfied. If the assessment is positive, the province or territory will be officially designated as an eligible jurisdiction, allowing its Crown corporations to claim the CE ITC for qualifying investments. If the assessment is negative, the province or territory will be informed of which conditions have not been met, and may re-submit its request after it has satisfied the outstanding conditions.
As previously provided, where the provincial or territorial government has satisfied all of its conditions by June 30, 2025, and has been designated by the federal Minister of Finance, the provincial or territorial Crown corporations investing in that jurisdiction would be able to access the CE ITC for clean electricity property that is acquired and becomes available for use on or after April 16, 2024, for projects that did not begin construction before March 28, 2023. If the provincial or territorial government does not satisfy these conditions by June 30, 2025, then a provincial or territorial Crown corporation in that jurisdiction may not access the CE ITC until the province or territory is designated as an eligible jurisdiction.
For transparency and accountability, provincial and territorial Crown corporations claiming the CE ITC will be required to report on how the benefits of the CE ITC are being passed on to electricity ratepayers. The following information will be required in the annual report:
This annual report must be made publicly available on the Crown corporation’s website and remain accessible until December 31, 2035. Reporting will begin in the taxation year when the credit is first claimed and will continue for each subsequent year until 2036. The reporting due date will be nine months after the day on which each reporting taxation year ends.
If a Crown corporation fails to meet the reporting requirements, it will be required to repay a portion of the CE ITC. The amount to be repaid will be the lesser of 5 percent of the total CE ITC received for all taxation years before the reporting due day or $10 million. If a report is submitted late, but within six months, the repayment amount will be reduced based on the number of months the report is delayed, by 1/12 of the above amount multiplied by the number of full months from the day the report is made public and the reporting due date.
As part of Canada’s broader push towards electrification, the EV ITC was introduced in Budget 2024. This is a 10 percent refundable ITC available for the capital cost of buildings used in the EV manufacturing supply chain.
The tax credit is available to taxable Canadian corporations directly investing in eligible properties. Unlike other Clean Economy ITCs, it will exclude investments from partnerships or trusts.
The EV ITC is designed to support businesses investing in buildings and structures used for key aspects of the EV manufacturing process. The credit applies to buildings and structures, including their components, as specified in paragraph (q) of CCA Class 1 of Schedule II of the Income Tax Regulations.
To qualify for the EV ITC, the property must be used all or substantially all in one or more of the following three EV supply chain segments:
To qualify for the EV ITC, a corporation must invest a minimum of $100 million in each of the three qualifying segments of the EV supply chain.
To meet this investment requirement, a corporation (either individually or as part of a related group, such as with a parent company) must take one of the following actions:
Acquire at least $100 million in property eligible for the CTM ITC that is available for use in each of the three segments; or
Acquire at least $100 million in property eligible for the CTM ITC in two segments and hold a qualifying minority interest in another corporation that acquires at least $100 million in eligible property for use in the remaining segment.
For the purposes of this requirement, a corporation qualifies as holding a minority interest in another corporation if it owns shares that grant at least 10 percent of the voting rights and value of that corporation's shares.
As with other Clean Economy ITCs, the EV ITC would be subject to recapture rules. Over a 10-year period from the acquisition of eligible property, the credit could be required to be repaid if the property is converted to an ineligible use, exported from Canada, or disposed of.
Additionally, the credit may need to be repaid if the corporation ceased to meet the other conditions set out above.
The EV ITC would apply to property acquired and put into use on or after January 1, 2024.
The credit rate would gradually decrease, reducing to 5 percent for property that becomes available for use in 2033 or 2034. After 2034, the credit would no longer be available for property that becomes available for use.
Other design elements would generally be based on those of the Clean Technology Manufacturing investment tax credit, where applicable.
The Clean Hydrogen ITC offers a refundable credit to support the cost of eligible equipment used in clean hydrogen production. The support ranges from 15 to 40 percent of eligible expenses, based on the hydrogen’s carbon intensity, with the cleanest hydrogen projects receiving the highest support. Equipment used to convert clean hydrogen into ammonia also qualifies for a 15 percent credit. To receive the maximum credit rates, labor requirements must be met.
Eligible production pathways currently include hydrogen produced via water electrolysis or through the reforming and partial oxidation of natural gas or other eligible hydrocarbons, provided the emissions are abated using carbon capture, utilization, and storage (CCUS).
FES 2024 proposes expanding the tax credit to include methane pyrolysis as an eligible production pathway. The government will continue to review other low-carbon hydrogen production methods for future inclusion.
Methane pyrolysis for hydrogen production is an emerging and promising technology that can produce clean hydrogen. The process works by separating hydrogen from carbon in an oxygen-free environment, offering the potential to generate clean hydrogen from natural gas or other hydrocarbons without requiring investments in carbon capture, utilization, and storage (CCUS).
In addition to hydrogen, methane pyrolysis also produces solid carbon, which can be used as an input in other production processes or safely disposed of as waste. The market value of solid carbon can vary significantly based on its quality.
Eligible equipment includes property used to produce all or substantially all of the hydrogen from methane pyrolysis, excluding any solid carbon produced. This includes:
As with other eligible pathways for the Clean Hydrogen ITC, eligible equipment also covers dual-use electricity and heat equipment, project support equipment, ammonia production equipment, and oxygen production equipment, provided they meet existing requirements.
However, equipment used downstream of the point where hydrogen and solid carbon are separated is not eligible, including dryers, pulverizers, bag collectors, densifiers, and pin mixers.
The cost of the pyrolysis reactor system may rise if the production of higher-grade carbon is prioritized, which could increase its market value without affecting the hydrogen output. To ensure the tax credit focuses on clean hydrogen production rather than the production of solid carbon, the support for pyrolysis reactor system capital costs is limited to $3,000 per tonne of annual hydrogen production capacity. Any expenses exceeding this limit will not qualify for tax support.
Methane pyrolysis projects must generally adhere to existing rules for measuring carbon intensity using the Fuel Life Cycle Assessment Model. The guidance for carbon intensity measurement will be expanded to include methane pyrolysis projects.
The carbon intensity of methane pyrolysis projects will depend on how the solid carbon produced is used:
The end use of solid carbon, as described in the project's "End-Use Plan" (outlined below), will factor into the calculation of both the expected and actual carbon intensity of the project.
To ensure that solid carbon from methane pyrolysis is not converted to CO2 and released into the atmosphere, taxpayers must track its end use through an "End-Use Plan." This plan will track the solid carbon produced and its end use for seven years, starting when the project first produces hydrogen.
Methane pyrolysis projects must establish contracts with solid carbon off-takers before the compliance period for the Clean Hydrogen ITC begins. These contracts will bind the purchaser to use the solid carbon as specified in the End-Use Plan and facilitate information sharing to confirm its end use. Further details on the required information will be provided at a later date.
To ensure the Clean Hydrogen ITC supports clean hydrogen production, methane pyrolysis projects will be prohibited from venting or flaring hydrogen (except for safety or system integrity). This will ensure the hydrogen is used economically rather than wasted. Additional details on this restriction will be provided later.
The expansion of the Clean Hydrogen ITC to include the pyrolysis of natural gas and other eligible hydrocarbons as an eligible hydrogen production pathway would apply in respect of property that is acquired and becomes available for use in an eligible project on or after December 16, 2024.
The CEITC, EV ITC and Clean Hydrogen ITC offer businesses in Canada valuable opportunities to invest in sustainable technologies and infrastructure. For companies looking to expand their green energy portfolios, these initiatives provide a clear path to not only grow their business but also align with national and global sustainability targets.
Bennett Jones has extensive experience in clean energy project development, including power, renewables and clean technologies like electric vehicles and storage batteries. We help clients capitalize on opportunities and develop strategies to leverage current and upcoming low-carbon economy initiatives.
To discuss the potential opportunities and implications of the EV ITC, the CTM ITC or the Clean Electricity ITC in Budget 2024, please contact any member of the Bennett Jones Tax or Energy practice groups.