Is Canada’s Clean Technology Manufacturing Investment Tax Credit (CTM ITC) enough to accelerate clean technology manufacturing? In this episode of Clean Incentives, host Brendan Sigalet is joined by Michael Smith and David Wainer to unpack this tax credit and its role in driving sustainable investment across the country. They break down what the CTM ITC is, who stands to benefit and the key opportunities and challenges facing technology manufacturers and critical mineral miners in Canada.
In addition, they discuss how Canada’s incentives compare to international programs—most notably the US Inflation Reduction Act—and delves into the evolving landscape of emissions trading systems and clean fuel regulations.
Transcript
Brendan Sigalet: [00:00:00] Another thing that clients are really interested in is obviously the change of government risk, you know, with respect to this potentially going away. Are automakers also, uh, concerned about any potential for the CTM ITC to be canceled by a potential future government?
Michael Smith: [00:00:17] I don't know. I haven't spoken with them about that, but if I would be concerned about that. If I was any business participating or doing business planning partially on the basis of these ITCs, I would always be concerned about, uh, whether a change of government would result in them changing to a point where I couldn't use them as I planned to, and it affected my business plan.
Brendan Sigalet: [00:00:47] Welcome to Clean Incentives, a podcast series within the Bennett Jones Business Law Talks podcast that discusses topics around taxation incentives for developing clean technology projects in Canada.
I'm Brendan Sigalet, tax associate at Bennett Jones LLP. And my practice focuses on the tax aspects of energy transition deals, including renewable energy, carbon capture, and hydrogen projects. Before we begin this podcast, please note that anything said or discussed on this podcast does not constitute legal advice. Always seek proper advice from your legal advisor as every situation is different and outcomes can vary.
Today we are focusing on the Clean Technology Manufacturing Tax Credit in Canada and some of the challenges that might arise for technology manufacturers and critical mineral miners looking to take advantage of this tax credit. This tax credit represents one of the many incentives that has helped pushing Canada towards a greener, more sustainable energy future. But to take on development of manufacturing facilities for clean technology is complex and requires a lot of thought, planning, and expertise to execute.
Before we look at some of these challenges and potential ways to navigate them, let's first look at what the Clean Technology Manufacturing Tax Credit is. So the Clean Technology Manufacturing ITC, or the CTM ITC, is a 30 percent tax credit that's available for clean technology manufacturers and critical mineral miners. By clean technology manufacturers, we are referring to manufacturers that produce equipment required for the decarbonization of the environment. This would include items such as solar panels, batteries, and critically, as we will discuss today, electric vehicles. Critical mineral miners can also take advantage of the CTM ITC, as it's available for equipment used to extract certain critical minerals, referred to in the legislation as qualifying materials. These qualifying materials include lithium, copper, nickel, cobalt, graphite, and rare earth minerals, i.e. minerals that will be essential to the decarbonization of the environment.
In order for critical mineral miners to qualify, they must carry out qualifying mineral activities and producing primarily, which is, uh, to mean at least 50 percent qualifying materials, uh, with the output determined by the value of the minerals produced by the miner. These qualifying mineral activities generally include resource extraction, processing, and purification. So mining, let's say lithium, uh, and then purifying it and then getting it to market. The CTM ITC is restricted to being claimed by taxable Canadian corporations. However, as with other clean economy ITCs, it can be claimed through a partnership. Unlike other clean economy ITCs, the CTM ITC does not have labour requirements. So there's no prevailing wage or apprenticeship requirements associated with the CTM ITC. And another incentive that we probably should touch on, uh, which we may touch on today is the EV ITC. Now, we don't know too much about this investment tax credit as of yet. It was just announced in Budget 2024. But, uh, it stands for the Electric Vehicle ITC, and it's proposed to be a 10 percent ITC that will apply to the cost of buildings used in certain segments of the electric vehicle supply chain. It will be available for businesses that invest in three different segments of the EV supply chain, including EV assembly, EV battery production, and cathode active material production.
The taxpayer must claim the CTM ITC in all three of these business segments in order to qualify, or alternatively must claim the CTM ITC in two out of three of these segments and hold a qualifying minority interest in an unrelated corporation that claims the CTM ITC in the third. We're still not sure exactly what a qualifying minority interest, uh, will be, and a lot of other further details are outstanding. The government stated that they will provide further guidance on this particular EV ITC in the 2024 fall economic statement. So for organizations looking to take advantage of this opportunity, what are some of the legal and financial challenges?
Joining me on this episode today are two of my colleagues here at Bennett Jones who bring a wealth of experience and expertise. First, we have Michael Smith. Prior to joining Bennett Jones, Michael was a counsel to General Motors of Canada, where he managed or advised on litigation, regulatory and business matters, including class actions, dealer franchisee disputes, commercial litigation, product liability and warranty claims, basically everything that has to do with the car manufacturing in Canada. In addition to his work at Bennett Jones, Michael has recently served as Acting General Counsel and Government and Regulatory Affairs Counsel at Volkswagen Group Canada.
Also joining us today is David Wainer. David has a general corporate practice with a particular emphasis on intellectual property, privacy, emissions trading. David has experience working on transactions in the fields of information technology, procurement, licensing of intellectual property. In addition to his IP practice, David assists project proponents with the marketing and sale of emissions offsets, emissions performance credits, compliance credits, and other emissions trading credits and instruments. So we'll start off in the field of auto manufacturing. So we'll turn to you first, Michael. First of all, I kind of want to get the 30,000 foot view of the international context in which this CTM ITC fits, because I understand that there's similar incentives kind of across the world that are aimed at auto manufacturers.
Michael Smith: [00:06:16] Yeah, there's a global competition now for companies to invest in clean technologies generally in jurisdictions throughout the world. It's largely seen that the clean economy is the new economy. It's very capital intensive. And so governments are competing with one another across the world to attract that investment because. Once you've got a plant built, it's hard to move it. So we're seeing it in North America. We're seeing it in Europe. We're seeing it everywhere.
Brendan Sigalet: [00:06:51] And so is this something new in like in the auto manufacturing world, uh, as far as, you know, government's trying to lobby these big auto manufacturers to produce, you know, to, to build their plants in their particular jurisdiction.
Michael Smith: [00:07:05] Yeah, it really is because the auto industry is undergoing Its biggest transformation in its 100 plus year history. You're taking an internal combustion engine industry and transforming it into electric alternative fuels. That in and of itself is incredibly capital intensive, requires the development of new know how. So there is a massive shift in the auto industry generally.
Brendan Sigalet: [00:07:37] And in order to kind of facilitate this shift, then they require these kind of, you know, this, this battery technology and, you know, this is just an extensive different technologies than, than they were previously required for just the internal combustion, uh, engines.
Michael Smith: [00:07:52] That's exactly right. And if you think about it from a supply chain perspective, everything is changing. It used to be predominantly metals. Now we're talking about battery chemistries, battery design, improvements in battery technology that are occurring as the industry is going through that transformation. So you're changing substantial parts of the business, uh, throughout the supply chain from raw materials, all the way through manufacturing.
Brendan Sigalet: [00:08:22] And is, do you think that this kind of tax credit can be effective in incentivizing that, because it sounds like what you're trying to incentivize isn't just, you know, the production of the electric, electric vehicles themselves, but the entire supply chain leading up to, uh, the, the production of the electric vehicles themselves. So do you think that the time horizon that's given in the CTM ITC is going to be sufficient to allow the kind of development of these supply chains that this, uh, ITC envisions?
Michael Smith: [00:08:52] Yeah, that it does remain to be seen. Um, remind me the CTM ITC phases out as a 2034.
Brendan Sigalet: [00:09:01] Starts to phasing out in 2034. Yeah.
Michael Smith: [00:09:03] Yeah. So I mean, that ought to be sufficient. Um, governments in Europe and in North America. Are setting up the industry to transform to 100 percent electric vehicles as new vehicles coming off of the assembly line in 2035. So this is the window where governments should be investing in order to attract industry ground industry in their various jurisdictions. And develop the supply chain domestically or with trading partners.
Brendan Sigalet: [00:09:43] Yeah, and that kind of leads us kind of the other part of this, you know, and on the one side, we have, you know, incentivizing the production of clean technology being the carrot that's, you know, being offered to these producers, uh, in order to incentivize the decarbonization of the economy. And then on the other side, I understand there's a stick of some sort, uh, in relation to this, uh, you know, the carbon credit system, which can also, I think, be a carrot in certain circumstances. I'm not really sure. Anytime I hear clean fuel regulation, I kind of black out. So, uh, if you don't mind giving us a brief overview of, uh, of, uh, how the clean fuel regulations fit into, into this Dave.
David Wainer: [00:10:23] Yeah, absolutely. Thanks, Brendan. Uh, so the Clean Fuel Regulations, the CFR, uh, one important thing to note is that it's still pretty new. They, they fully came into force in January 2023. So, so it's still kind of a novel regime in that respect. Uh, but to your, your points about the carrot and the stick, I think, I think that's a good starting point. And that essentially is project proponents of facilities have to register under the clean fuel regulations, and then you have compliance obligations that are determined at the end of that registration process. And if you do not meet those compliance obligations, then the stick that you talked about, that's where that comes into play.
Conversely, if you do better than your compliance obligations, that's the carrots that we're talking about, where you get certain compliance credits, you know, people colloquially refer to them as carbon credits. And, uh, you can use those. You can save them for next year. You can trade them to third parties.
There's a variety of things you can do with them that are, you know, attractive for these large commercial entities that are producing them at scale. Uh, so I think that's important to keep in mind. Um, and one other point to, to keep it in the automotive space that we've been discussing is that. You know, the clean fuel regulations are quite broad. They apply to a bunch of different activities, some of which may or may not relate to automotive activities. So an easy way to frame. This is that there are 3 compliance credit categories in the CFR, and 1 of them is really kind of aimed at, you know, end use fuel switching that probably is more relatable to this conversation than not. So it includes. It also includes hydrogen. You don't have to just think battery vehicles, we're talking about alternative fuels, um, but really it's end use fuel switching and transportation. And one activity to think about here would be hosting or operating charging stations for, for EVs or hydrogen vehicles.
Brendan Sigalet: [00:12:21] And so this just applies the clean fuel regulations. It's, it's different than the carbon tax, correct? Like it just applies to project proponents who are building these projects.
David Wainer: [00:12:30] Yes, is the short answer. The slightly long winded answer I'll give is that the carbon tax that, so to speak, is a different piece of legislation. It's a different animal in its own right. Whereas the clean fuel regs, pardon me, are enacted under the Canadian Environmental Protection Act. And you're right. Um, they're, they're aimed at the project proponents themselves, the vehicle producers in this context.
Brendan Sigalet: [00:12:51] Okay. And then so they basically are trying to incentivize cleaning of these activities, whatever it might be. And, you know, they set a baseline level that of emissions that you should have. And then if you do better than that, then you get a credit. Do worse than that, then you get, uh, what, what happens, you know, worse than that.
David Wainer: [00:13:11] And you have to what's called true up your obligations. So you essentially are buying from either other third parties in the space or directly from the government. You're, you're buying a credit that you can apply so that you do end up hitting your obligations. So it's really a simple way to think about it is really just a, it's an accounting exercise. It's all about accounting for the emissions that you have. Um, so if you do or do not hit them, then you have to use your credits to get to where you're supposed to be under the regulations, what your compliance obligation is.
Brendan Sigalet: [00:13:43] And so if you're building a clean project, um, whatever it may be, a battery plant, um, let's say something like that, and you're creating a bunch of these credits. Then you could then sell those to other areas where they need those credits.
David Wainer: [00:14:02] Yeah. So, so going back to my, the, the three categories, the compliance categories, what's important to keep in mind is that at the end of the year, if I'm a project proponent and I get all my credits, it doesn't say compliance category one, I have this many credits and compliance category two, I have this many credits. It only says, you know, compliance credits and then just a sum. So those can be traded to any other third party that's within the, clean fuel regulation space. So to your, to directly answer your question. Yeah. If I'm a vehicle producer, I'm setting up a battery plant and I generate a ton of pain fuel regulations credits. I can trade them to, or sell them to any entity that's in the key clean fuel regulation space. They don't have to be another battery plant.
Brendan Sigalet: [00:14:42] And is there a robust market for these credits?
David Wainer: [00:14:44] So that's an interesting point because like I said earlier, it's still quite new, right? 2023 was the first full compliance year that we have data from.
Uh, so, so we don't have a robust data set. So it's the value of the credits and essentially how many players are in the space and are able to buy and or sell the credits as, as applicable. Um, it's still kind of being felt out what the what really the baseline is going to be. I think it'll take another year, maybe two, maybe three to really understand kind of what the space is going to look like on a on a long term basis.
Brendan Sigalet: [00:15:18] It actually matches pretty, you know, similarly with, you know, this whole IT, the whole, uh, clean economy, ITC's world, like, you know, we're, we're all trying to figure out exactly, you know, project proponents are all trying to get, you know, investment surgency in this kind of new climate where everything's new. You know, we don't know necessarily how all these, the intricacies of these programs work. We don't generally how they're supposed to work.
Um, but as far as the details, these investment tax credits have just been passed on June 20th, 2024. So everyone's brand new to this space. Based on your experience, Michael, what are some key considerations and challenges project proponents are facing in, in setting up these manufacturing facilities? Obviously, you don't, you're dealing largely in, uh, the, the EV world.
Michael Smith: [00:16:06] Yeah, mostly it's capital intensity. Uh, I mean, it is a big investment to retool your plant or build a new plant in order to manufacture EVs as opposed to, uh, internal combustion engine vehicles, I.C.E. vehicles, the battery supply chain is entirely new at the scale that we're talking about going into the automotive industry. So that's a nascent industry that in and of itself is very capital intensive.
And has a supply chain that's completely different from anything automakers have ever dealt with. There are more automakers talking to miners these days than has ever happened in the history of the industry.
Brendan Sigalet: [00:16:51] And you mentioned, you know, automakers talking to miners, are they investing in miners in order to make sure that they have access to these minerals or, or they, you know, they, you know, talking to a bunch of different, you know, miners in order to, you know, get exclusivity for, for the required materials. Like what, what are the markets look like for, for these critical minerals that are required in order to build these batteries?
Michael Smith: [00:17:15] Referring only to publicly available information. There are lots of reports of automakers talking directly to miners from the automakers perspective, they want a stable supply chain.
And the best way to do that is to vertically integrate, either have an equity interest in the mine rock solid offtake agreements that are quite long term, that is definitely of interest to automakers.
Brendan Sigalet: [00:17:43] And by offtake agreements, you mean like the, the agreements actually purchased the minerals that are required.
Michael Smith: [00:17:48] Exactly. That's right. And I mean, that can happen on spec before mine is even operational. The market is such that an offtake agreement may be put in place.
Uh, in order to secure that feedstock supply, the raw material supply in the battery supply chain.
Brendan Sigalet: [00:18:08] Interesting. So, so they, they, even prior to the mine entering operation, then there could be an agreement for the relevant minerals that are going to be produced from that mine to be sold to an automaker. Wow. Oh, uh, it's, it's just the, the global markets are such that that's where the automakers are having to go. Like they don't, I suppose they don't, maybe there's just not enough supply of these minerals to satisfy the exorbitant demand required, but in order to make these electric vehicles.
Michael Smith: [00:18:42] Yeah, that's the concern. Uh, there's also a, uh, large concentration of that raw material supply in China, in Africa, and automakers in the West are looking to diversify that supply chain.
Brendan Sigalet: [00:19:01] Interesting. And so, uh, you know, that's, so the, the terms of the electric vehicle ITC, uh, we obviously we don't have very many details on it yet, but one of the interesting notes is that you have to have claim the CTM ITC. In each of these particular business sections segments. I was actually not clear as to what cathode active material production meant. Uh, I assume that's something to do with this, this, these critical minerals.
Michael Smith: [00:19:28] Yeah, it's, uh, it's a component of the battery that itself requires a lot of processing.
Um, so it's a critical component of the battery. Uh, unless batteries. technology evolves beyond requiring cathodic material, uh, which is another industry, interesting thing in this space. Not only is the industry in transformation, but the technology is changing during a transformation. There are multi dimensions happening. And this transformation, which makes business planning very difficult.
Brendan Sigalet: [00:20:03] So we're getting the incentivization of, you know, the technology and the equipment in order to build these, you know, this, this massive capital expenditure on all the equipment required to build this technology. But then that technology could then change.
Michael Smith: [00:20:19] Yeah.
Brendan Sigalet: [00:20:20] That's really rapidly. And then it might be obsolete.
Michael Smith: [00:20:24] I don't know about obsolete, but it is changing underneath the automaker's feet and, uh, battery makers feats. Yes.
Brendan Sigalet: [00:20:32] Yeah, very interesting. And so, so this qualifying minority interest that might be something, you know, for the EV ITC. That might be, you know, in relation to, you know, these car makers going out and investing in potentially, you know, one of these critical mineral miners in order to secure their requisite supply of material in order to produce these batteries.
Michael Smith: [00:20:56] Yeah, the EV supply chain tax credit requires a lot of vertical integration. You've got to be doing cathode active material battery production and final assembly of EVs themselves in order to qualify for it. And that is a really massive amount of vertical integration. You can in one of those three elements, you can have whatever, we'll find out what a qualifying minority interest is, uh, once we see more legislation and regulations surrounding the ITC, but you're quite right. It will require an automaker to itself be doing, say, battery manufacturing, EV production, and also have a qualifying minority interest in the cathode active material supplier in order to qualify for the credit, which is. It's going to be very difficult for Canadian participating automaker.
Brendan Sigalet: [00:21:53] Okay, so any of the big automakers wanting to come to Canada, they'll have to really get all in and each of these segments in order to, you know, qualify for this particular ITC. Uh, another thing that clients are really interested in this is obviously the change of government risk, you know, with respect to this potentially go going away. Are automakers also, uh, uh, concerned about, you know, any, any potential for the CTM ITC to be canceled by a potential future government?
Michael Smith: [00:22:25] I don't know. I haven't spoken with them about that, but if I would be concerned about that. If I was any business participating or, or doing business planning partially on the basis of these ITCs, I would always be concerned about uh, whether a change of government would result in them changing to a point where I couldn't use them as I planned to, and it affected my business plan.
Brendan Sigalet: [00:22:54] Just as far as what kind of time horizon does it generally take in order to, if you can answer this, does it generally take in order to build one of these, you know, massive battery plants or EV plants or that sort of thing?
Michael Smith: [00:23:09] Yeah. So, uh, you are looking at. A good five years vehicle planning, even in the old internal combustion market where the vehicle development process was very well known, very well healed, you would typically have a five year vehicle planning cycle. So between drying up a vehicle in CAD to production, like the vehicle rolling off the line, it would typically between be between three and five years.
Uh, so this is a very long lead industry, both in developing manufacturing capacity, but also in planning the product that's going through that manufacturing infrastructure, both aspects are very long lead.
Brendan Sigalet: [00:23:55] Interesting. It just gets, you know, this, this, this particular ITC, it's, you know, it's available when the particular equipment in this case, the plant, uh, is available for use. Um, so, you know, they, there's, that's a nuanced definition under the investment tax or the income tax act, but generally you can kind of ballpark it as when the equipment's actually, you know, being used, there's like colloquially available for use. Um, and so, you know, five year uh, time horizon, uh, could be, you know, a significant lead time prior to actually having the ITC available.
Michael Smith: [00:24:32] Yeah, if you're developing a plant from the ground up, you've got to do all of your site preparation, get your foundations in, build your building shell. Uh, it's only at that point that you're installing equipment and that doing. A lot of test production, and you're likely not, as you say, Brandon, you're likely not able to claim the tax credit until you, uh, start that test production.
Brendan Sigalet: [00:24:59] And do you think the, the complexity of the CTM ITC, uh, might be prohibitive for companies that are looking to take advantage of this incentive?
Michael Smith: [00:25:08] Yeah, it's not super easy. I'm not, I'm no tax lawyer. I don't even play one on TV. Uh, I, I've picked through it. Uh, I found it to be fairly complex because it's new. It will require learnings within the company in order to develop the. internal know how as to how to take advantage of it, uh, in the finance, accounting and tax departments.
Uh, so there is administrative, there is an administrative cost that goes along with participating in the program and trying to reap its benefits.
Brendan Sigalet: [00:25:44] Definitely, having been through the legislation in some detail, it's, uh, it's, it's not, it's not a simple one. It's, it's, it's not the most complex, but it, but it's definitely not simple. Turning to you, David. So how, how do you see the CTM ITC interacting with the, you know, the other existing emissions trading systems and clean fuel regulations? And what, and what implications would this have for manufacturers?
David Wainer: [00:26:08] I think there's a couple things to unpack here. I think what we've kind of been been discussing a lot is, you know, getting these ITCs off the ground, getting, getting the project going, getting, you know, shovels in the ground. And I, I think where the, you know, emissions trading and, and one trading system being the, where, where those come in is a lot of on a, on a go forward basis. You know, how do you, um, commercialize and have a, have a little bit of, of more of a, of a capital flow on a, on a long term forward looking basis, whereas perhaps, you know, the CTM ITCs are really just helping with the really large upfront capital incentives. So it's almost coming at it from, from both sides of the equations for, for these manufacturers.
I think, I think another point to your, to, to your question of, you know, how do, how do they all interact with. Existing systems is, is, that's just right. There's other systems that, that people should be aware of, that manufacturers should be aware of. You know, for example, you might not just be, uh, only in the CFR ballpark. There may be other regimes, other, other systems that, that manufacturers should be aware of. Right? BC has the low carbon fuel standard, just as an example.
Uh, you know, you might be able to generate credits in both BC's, low carbon fuel standard, the LCS. And the CFR, right? It depends on on the specifics of your project and and what your actual activity is, but there's um, a lot of ways that all of them interact and might be most beneficial for a manufacturer.
Brendan Sigalet: [00:27:32] So just to touch on that, so there's, there's multiple different emissions trading systems, what I heard you say, uh, so is there kind of one federal one and multiple provincial ones or, or how, how does, how does that work?
David Wainer: [00:27:46] Yeah, that's, uh, that was a great question. Um, so there's. Many emissions systems for many different activities, right? So you're talking earlier about the federal backstop back near the beginning of the podcast, and that kind of points to a whole other, um, you know, emissions, trading emissions regulation regime that we have to play at that, um, likely isn't really, you know, on topic for, for, you know, manufacturers of automotives, but it might be for, for other industry participants.
So there are many others. And then, um, Obviously, that's all on the federal level over overhanging the whole country, but then yeah, you're right to your point is there's a bunch of different provincial programs that may or may not be applicable as well, and it's something that manufacturers have to have the specifics of the project in mind as they wade through each program to see which do or do not apply to them in each situation, each circumstance.
Brendan Sigalet: [00:28:39] And are they generally on a jurisdictional basis then? So like if you're building a plant in Ontario, then maybe the, the, you'd have to look at the Ontario version of whatever emissions trading. So I'm not sure if they have one, but, but is that kind of how it will work or, you know, does, is there, does it vary depending on where, where the end product is being sold?
David Wainer: [00:28:58] Yeah. A large component of that analysis, you're right. It is jurisdictional, which, which province are you playing in? Obviously the federal ones apply to every province and territory in Canada. But then kind of what, what you just touched on is there are some parts of, you know, when, when drafting these regimes, this legislation, um, the government really knew that, you know, emissions don't - what's the expression? Emissions don't care about your borders, essentially. So they do account for if you're importing fuel into Canada. How do we account for those emissions going back to that hole? It's all trying to be an accounting exercise to think of it in a more general term. So there, there's a couple of different things that play, but certainly jurisdiction is a large part of that analysis.
Brendan Sigalet: [00:29:39] And is there any interplay between the different emissions trading systems as far as, you know, if you, if you're generating a credit and like your CFR, let's say, and then you said you could also generate a credit in the British Columbia version. They don't know what it's called. And then could you sell each of those credits to different industry participants?
David Wainer: [00:29:57] Provided your activity can generate both, right? Not, not every activity can because um, a key concern, uh, rightfully so, it is that the governments don't want to encourage double dipping or any sort of, you know, um, unlawful double counting of credits. But there are circumstances where it does intuitively make sense for, for a project proponent to be able to generate both. And once you have both in your pocket, then yes, you can trade it to other players within, within that regime. So a CFR credit, for example, you can trade, like I was saying earlier, to other actors in the CFR space.
Brendan Sigalet: [00:30:31] And just generally, like, don't, you don't have to get into any, you know, particular, uh, specifics, but how many systems are we talking about here federally?
David Wainer: [00:30:39] To keep it to the, you know, automotive manufacturers, I think clean fuel rigs is definitely the big one on the emissions regulation side of things. I think that's the big one to play with. I'm not sure others would be a core part of a manufacturer's, uh, you know, business plan or commercial strategy. There might be other ones that are you know, tangential or just give a little bit of a cherry on top, so to speak, but the clean fuel regs is really the one that, uh, automotive manufacturers are going to want to play with.
Brendan Sigalet: [00:31:06] Yeah. And then just, uh, aside from automotive manufacturers, uh, just if, as far as the other main ones in Canada that generally apply.
David Wainer: [00:31:18] Sure. Yeah, absolutely. So the big one is really, uh, and this goes directly back to the federal backstop conversation. Uh, so there you're looking at, uh, so that legislation is the greenhouse gas pollution pricing act. And basically that act has two parts. One of those parts is the fuel charge right at the pump, the consumer, and then you get the rebate a couple times a year through a check from the government. But the second part to your question is the output based pricing system. Um, and that's really just for industrial actors, uh, and really just setting a more stringent, uh, emissions requirement over time so that. You know, uh, entities are encouraged and incentivized to continuously get cleaner on a year by year basis. And then the more you do that, the more credits you'll generate as a result.
Brendan Sigalet: [00:33:16] Yeah. And my, and my question is just in relation to, I'm trying to just get a feel for, you know, what the demand is for these compliance credits and, you know, and whether they're, you know, you can sell one, you know, a credit from the CFR. Uh, to someone who needs a credit for the backstop and, you know, it was somewhere where the backstop applies to industry, for example, is that how it works or like, would you generate different credits and that you can only sell them within the particular regime?
David Wainer: [00:33:44] Yeah, the, the, the latter. So if you generate an Alberta tier credit, you can't, uh, sell it to a CFR proponent, someone in the CFR space. There's one exception to that rule on carbon capture, which I don't know if it's worth going down that rapid hole here, but by and large, the rule of thumb is your activity generates a credit in one regime, then that's the regime where you're going to have to trade with other third parties. You can't, they're not fungible within each system.
Brendan Sigalet: [00:35:11] Okay. So, so it's only when you get to the charging stations that you generate CFR credits?
David Wainer: [00:35:16] Exactly. And the, the, the thinking is, is, you know, but for that charging station, you'd be driving, you know, an internal combustion engine. And as a result, the, the entity that's helping you charge that car should be able to generate the credit accordingly.
Brendan Sigalet: [00:35:30] And so are there any credits that are produced from the actual assembly of the EVs and then the selling of them? Likely not in, in, in the CFR.
Michael Smith: [00:35:38] Not in the CFR, but there's a whole, right, and there's a whole other credit system that has to do with sales of internal combustion, uh, engine vehicles versus Uh, zero emission vehicles, and it's that credit system that the government is using to effectively mandate that all new car sales be zero emission vehicles by 2035. Apart from the CFR, there's a whole other credit system that exists under the Canadian Environmental Protection Act, uh, that deals with, uh, the ratio that, uh, automaker, the ratio of vehicles that a, an automaker sells. I see vehicles versus zero emission vehicles.
Brendan Sigalet: [00:36:20] Okay. Interesting. And so, and so then you can get a credit from selling the actual EVs themselves under that system.
Michael Smith: [00:36:27] Exactly. Yeah. And it's like the CFR in that the credits are bankable, uh, and tradable by the company. So they can be sold to other automakers that are in a deficit position, uh, where they can be banked, uh, and used by the automaker. In subsequent years for a certain period of time.
Brendan Sigalet: [00:36:45] And is that system country, like, is it federal?
Michael Smith: [00:36:48] It is federal, but, uh, superimposed on that, like the CFR and the BC regime that David was alluding to, we have separate provincial ZEV mandates or ZEV credit regimes in British Columbia and Quebec. So automakers have to plan. Their production with three different regimes in mind, and then have the manpower headcount in order to administer their compliance with right now in Canada, three separate regimes, the two provincial and one federal.
Brendan Sigalet: [00:37:22] So it's kind of, you know, it's, it's almost a production credit of sorts.
Michael Smith: [00:37:26] It's a sales credit. That's right. It's based on new vehicles sold per year. In a nutshell, they look at How many internal combustion vehicles you've sold versus how many, uh, zero emission vehicles you've sold. And if you are above or below the set ratio for that particular year, uh, you either earn credits that are bankable or, uh, sellable, or you're in a deficit position and you have to true up your deficit to be in compliance.
Brendan Sigalet: [00:38:02] Oh, interesting. Uh, and then there's one other incentive. I suppose we should mention at this point, uh, to, um, just available for manufacturers of, uh, clean technology equipment, which would include EVs. Uh, and that's the zero emission technology manufacturers deduction. I think that's what it is. Anyway, it's a 50 percent deduction that's available on their taxable income. So project proponents should look into that, uh, if they're interested in this space. Thanks. And how do these credits, as far as the, I suppose, CFR doesn't apply necessarily to the manufacturer, but it applies to the actual operation of these vehicles, um, and the, the recharging and that sort of thing. Um, how does the actual CTM ITC compared to the US incentive, which I understand is actually somewhat production based. Do you have any understanding of the US incentive, Michael?
Michael Smith: [00:38:53] Yeah, somewhat under the Inflation Reduction Act, there's something called the Advanced Manufacturing Production Credit that applies to certain technologies. So I know for sure that battery production is in there and it pays a certain amount of money for every battery that rolls off the production line. So it is a production credit, which is easier to administer, but all you do have, all you have to do is count batteries. You don't have to make sure you've jumped through all of the hoops in order to qualify your equipment purchases, your building construction for the credit, like the Canadian regime. But you don't get any benefit from it until batteries are rolling off the production line in my example in Canada, the tax credits, while a little bit more complex to administer are designed to encourage that capital investment, and you can gain the. Financial benefit of the credit sooner than you might otherwise under in the US under the advanced manufacturing production.
Brendan Sigalet: [00:40:05] Okay, interesting. And also just with respect to the nature of these massive investments being made by auto makers that you know, it seems like there's potential there to discuss with the government as far as you know what incentive you want to receive.
Michael Smith: [00:40:23] Yeah, for sure. The Canadian governments are very open for business, and if you're going to make a capital investment along the magnitudes of what we've been discussing in this episode, large manufacturing facilities in the billions of dollars, it's possible to speak to the government and develop a bespoke program, and then if you do that, then you've chosen that path, right?
And you can't double dip and claim the ITC, you know, one, one thought that occurred to me answering your last question is, you know, both the US program and the Canadian program. It's very important to get shovels in the ground because there's a sunset on these. Incentive programs in both countries, um, in order to maximize the benefit you want to start building yesterday.
Brendan Sigalet: [00:41:11] Yeah, no, fair enough. Um, additionally, under the available for use rules, there's a, there's a rolling start rule, which I won't get into. But, uh, yeah, it makes the equipment available sooner than it otherwise would have been considered available for use. Interested project proponents should be vetting all of this with their tax advisors, obviously, in order to, to get, uh, Clarity as to, uh, what the CTM ITC is going to look like for their particular circumstances, because, uh, as Michael has alluded to, it is, uh, it's fairly complex and forms of a massive, uh, assumption on the part of the project proponent that you're going to get it and to what amount of, uh, equipment it's going to apply.
And unlike other clean economy ITCs, there's no project plan, um, that needs to be filed prior to the actually getting shovels in the ground as it were. And so. You might not end up knowing how much CTM ITC you're going to actually get until you're already have the project complete, which is kind of a backwards way of doing things.
Michael Smith: [00:42:13] Right, right. But I did bring that natural resources. Canada and our can is offering technical reviews of. project plans in order to give feedback to proponents about whether and how much they will qualify for. It's expressly not binding on the Canadian Revenue Agency, but my experience has been as government is there to help you, the Canadian government certainly is there to help. The government wants these programs to work, it wants investment in clean technology, so I would encourage Anyone with any questions, uh, about their plans and how much and whether they qualify to certainly speak to their tax advisors, but also contact government, have your tax advisors speak to government, uh, work with government, uh, to get a clearer picture.
Brendan Sigalet: [00:43:07] Yeah, so it's a unique intersection between, you know, the engineering and technically what, what this equipment is supposed to do from an engineering perspective and the legislation, you know, obviously we have capital cost allowances, which are, you know, for determining the depreciation for particular pieces of equipment, but it's not the scale of importance isn't at the level it is for the, you know, these income tax, uh, the investment tax credits, uh, for which you get a certain percentage of your capital costs back in a, um, tax credit. It's, it's an interesting experiment, um, and very powerful incentive. Yeah, David, and, uh, do you have any, uh, final thoughts in respect of the CFR and, uh, the other various emissions trading systems, uh, interacts with, uh, you know, the CTM, ITC or, or clean energy projects in general?
David Wainer: [00:43:54] I think emissions trading system, one thing to keep in mind is that each project is going to be a little bit different. Each project, uh, you know, speaking with the government and getting the project. You know, registered in whichever regime is applicable, you have to keep in mind that what gets you a credit today might not get you a credit tomorrow because they get stricter over time, these regimes, these programs. So there's sort of a, on one hand it incentivizes companies to cut their emissions on an ongoing basis, but it also, you know, it behooves a company to actually start today.
To maximize the amount of credits you can get throughout the life cycle of a project. That's something to keep in mind. There's a, you're going to lose credits. Basically, if you, the longer you wait, once it on your project, you want to get going now and continuously, uh, put out cleaner, reduce your emissions over time. But that, that's the, the key to these whole regimes is constantly improving on last year's emissions.
Brendan Sigalet: [00:44:46] Uh, and, uh, Michael, any, any final thoughts?
Michael Smith: [00:44:48] Yeah. Generally speaking, it's a really exciting time. We are. In a time of transition, uh, amongst numerous industries that are becoming connected when they weren't coming, when they weren't connected before, we have an impetus from government to support this transition, but all of that newness. I mean, until you've done something the first time, it's always new and it's always a little bit harder. So, I would say, let's celebrate these exciting times. Let's all put our heads together to try to get past the complexity and develop this new, clean economy that will hopefully power the world for the next millennia.
Brendan Sigalet: [00:45:33] Thank you for taking the time to listen to this episode. Don't forget to hit the follow and like button on whatever podcast platform you are using to listen to this episode. Take care and we will catch you in the next episode.
Please note that this was recorded prior to the release of the 2024 Fall economic statement.
Please note that this publication presents an overview of notable legal trends and related updates. It is intended for informational purposes and not as a replacement for detailed legal advice. If you need guidance tailored to your specific circumstances, please contact one of the authors to explore how we can help you navigate your legal needs. For permission to republish this or any other publication, contact Amrita Kochhar at kochhara@bennettjones.com.
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