On November 21, 2023, the Department of Finance of Canada released its Fall Economic Statement (the “Economic Statement”). The Economic Statement proposes updates to certain measures to grow Canada’s clean economy previously introduced by the federal government. Such measures include certain new investment tax credits (“ITCs”) to promote investments in the clean economy.

The Economic Statement proposes amendments to the Income Tax Act (Canada) to alleviate certain adverse tax consequences of receiving concessional loans (i.e., loans that do not bear interest or that bear interest at rates which are below-market) on the claim of ITCs. The Economic Statement also clarifies and expands the Clean Hydrogen ITC (the “CH ITC”), and expands the Clean Technology ITC (the “CT ITC”) and the Clean Electricity ITC (the “CE ITC”). The CH ITC was introduced by the federal government’s Budget 2023. The CT ITC and the CE ITC were introduced by the 2022 Fall Economic Statement and Budget 2023, respectively.

In this post, we discuss the proposed legislative amendments regarding the receipt of concessional loans. We also summarize the main elements that are proposed to apply in relation to the new CH ITC, CT ITC and CE ITC. Finally, we outline the delivery timeline of the ITCs to grow Canada’s clean economy, as presented in the Economic Statement.

1. Concessional Loans

Generally, if an ITC arises in respect of the cost of a capital property or an expenditure that is subsidized by government assistance, the amount of such assistance received that can reasonably be considered to be used to acquire a capital property or to incur an expenditure will reduce the cost of the capital property or the amount of the expenditure, as applicable. In CAE Inc. v. R. (2021 TCC 57, and affirmed by the Federal Court of Appeal), the Tax Court of Canada determined that the full principal amount of a concessional loan was government assistance. The Economic Statement proposes to amend the Income Tax Act (Canada) to provide that bona fide concessional loans which are granted by public authorities with reasonable repayment terms would generally not be treated as government assistance. Therefore, the cost of a capital property or the amount of the expenditure that is subsidized by a concessional loan would not reduce the applicable ITC.

This amendment would come into force on the date of the Economic Statement.

2. Clarifications and Expansion to CH ITC

The CH ITC is intended to encourage the investment of capital in the adoption and operation of property generating clean fuels like clean hydrogen in Canada. As such, it provides a refundable credit between 15% and 40% of eligible property costs, with the projects that produce the cleanest hydrogen receiving the highest credit rates. More specifically, the credit rate is determined based on assessed carbon intensity (“CI”) of the hydrogen that is produced (i.e., kilogram (kg) of carbon dioxide equivalent (CO2e) per kg of hydrogen).

a. Expanding the CH ITC to the Production of Clean Ammonia

Budget 2023 announced that the CH ITC would also encourage property aimed at producing clean ammonia by providing a refundable credit of 15%. The Economic Statement clarifies that property that is required to convert clean hydrogen into clean ammonia would be eligible for the CH ITC if the following criteria are met:

  • The taxpayer producing the ammonia must use their own hydrogen feedstock to produce ammonia;
  • The hydrogen feedstock must come from the taxpayer’s own clean hydrogen projects that are otherwise eligible to the CH ITC;
  • The clean hydrogen projects must have sufficient production capacity to meet the taxpayer’s needs in respect of the ammonia production facility; and
  • The taxpayer must show the feasibility of transporting the hydrogen from the hydrogen production facilities to the ammonia production facility.

For example, equipment that is only used to convert clean hydrogen into clean ammonia would be eligible to the refundable credit of 15%. Special allocation rules would apply to equipment used for both hydrogen and ammonia production.

b. Clarifications Regarding CI

The Economic Statement also includes additional details on the manners of determining the CI:

  • Budget 2023 provided that Power Purchase Agreements (PPAs) and other similar agreements with respect to the purchase of clean electricity would be eligible for purposes of calculating a clean hydrogen project’s CI if certain requirements to be announced at a later date are met. The Economic Statement now announces such requirements.
  • Recognizing that some clean hydrogen projects may use renewable natural gas (“RNG”), the Economic Statement proposes that RNG can be eligible for purposes of determining such projects’ CI, subject to certain requirements.
  • Budget 2023 provided that clean hydrogen projects would need to undergo an initial project CI assessment and meet the assessed CI levels on a continuous basis. The Economic Statement clarifies the parameters of such initial assessment and on-going compliance. It also details the manner in which a CH ITC recovery would apply if a project fails to maintain the CI tier required to receive the credit at the claimed rate.

Finally, the Economic Statement states that the federal government will continue to review eligibility of other low-carbon hydrogen production pathways to the CH ITC. Further details may be released in the Budget 2024.

3. Expansion to CT and CE ITCs

The CT ITC is intended to encourage the investment of capital in the adoption and operation of clean technology property in Canada. The CE ITC is intended to encourage the investment of capital in clean electricity in Canada. The CT ITC and the CE ITC each provide refundable ITCs at the maximum rate of 30% and at the rate of 15%, respectively.

The Economic Statement expands the CT ITC and the CE ITC to encourage the generation of electricity, heat, or both electricity and heat, from “eligible waste biomass”. “Eligible waste biomass” would only include specified waste materials, which are currently defined for purposes of Classes 43.1 and 43.2 in respect of accelerated capital cost allowance. In respect of the CT ITC, such expansion would apply in respect of property that is acquired and becomes available for use on or after November 21, 2023, provided it has not been used for any purpose before its acquisition. In respect of the CE ITC, the expansion would be available as of the day of Budget 2024 and to projects that did not begin construction before March 28, 2023.

a. Systems to Generate Electricity or Both Electricity and Heat

The CT ITC and the CE ITC are expanded to include systems that use specified waste materials solely to generate electricity or both electricity and heat (i.e., cogeneration). Such systems would be those that use feedstock, all or substantially all of the energy content of which is from specified waste materials. When part of an eligible integrated system, eligible property would include:

  • electrical generating equipment;
  • heat generating equipment used primarily for producing heat energy to operate the electrical generating equipment;
  • equipment that generates both electrical and heat energy;
  • heat recovery equipment;
  • equipment used to upgrade or enhance the combustibility of specified waste material; and
  • ancillary equipment (e.g., control, feedwater, and condensate systems).

Buildings would not be eligible property.

b. Systems to Generate Heat Only

The CT ITC is expanded to include systems that use specified waste materials (except spent pulping liquor) to generate only heat. Such systems would be those that use feedstock, all or substantially all of the energy content of which is from specified waste materials (except spent pulping liquor). When part of an eligible integrated system, eligible property would include:

  • heat generating equipment, other than that used to operate the electrical generating equipment;
  • equipment used to upgrade or enhance the combustibility of specified waste material; and,
  • ancillary equipment (e.g., control, feedwater, and condensate systems).

Buildings would not be eligible property.

On-going compliance requirements similar to those applicable to Classes 43.1 and 43.2 would also apply to property of the eligible integrated systems described above.

4. Delivery Timeline of New ITCs

The Economic Statement announced that the federal government aims to deliver all the new clean energy ITCs announced previously in the course of 2024.

Accordingly, the tentative timeline for the introduction of relevant legislation by the federal Parliament is as follows, subject to the outcomes of consultations.

  • This fall:
    • The CT ITC and the Carbon Capture, Utilization, and Storage (CCUS) ITC.
  • Early 2024:
    • The CH ITC and the Clean Technology Manufacturing ITC.
  • Fall 2024:
    • The CE ITC and the expanded CT and CE ITCs (to support the use of waste biomass to generate heat and electricity).

Consultations for each draft legislation are also expected according to the following timeline:

  • This fall:
    • The CH ITC and the Clean Technology Manufacturing ITC.
  • Summer 2024:
    • The CE ITC (except for publicly-owned utilities) and the expanded CT and CE ITCs (to support the use of waste biomass to generate heat and electricity).

Finally, draft legislation to implement the labour requirements, which were announced by Budget 2023 and which need to be met in order to receive the maximum credit rate for the CT, CH, CE, and CCUS ITCs, will be introduced in Parliament this fall.