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Budget 2024: Clean Energy Incentives and Resource Sector Measures

April 18, 2024 Tax Bulletin 5 minute read

The federal Government tabled Budget 2024 on April 16, 2024 (“Budget Day 24”). Canada’s transition to a net-zero economy remains a priority of the current Liberal government, and Budget 2024 contains several measures aimed at facilitating that ongoing transition. These measures are summarized below.

Extension of Mineral Exploration Tax Credit Availability

Budget 2024 proposes to extend availability of the 15% mineral exploration tax credit (the “METC”) available to subscribers of flow-through shares in resource issuers undertaking certain grassroots exploration activities. Under the current legislation, the METC would not apply to flow-through share agreements entered into after March 31, 2024, so the proposal to extend availability of the METC to flow-through share agreements entered into on or before March 31, 2025, is a welcome, albeit expected, measure.

EV Supply Chains

Budget 2024 announced the Government’s intention to expand the suite of clean energy incentives introduced in Budget 2023 by proposing a new Electric Vehicle Supply Chain Investment Tax Credit (the “EV Supply Chain ITC”). The EV Supply Chain ITC is closely linked to the Clean Technology Manufacturing Investment Tax Credit first introduced in Budget 2023 (the “CTM ITC”), which is a 30% tax credit on the cost of eligible machinery and equipment used in critical minerals projects and the manufacture and production of clean energy technologies, including zero-emission vehicles and certain primary components (e.g., batteries, recharging systems, fuel cells.).

The EV Supply Chain ITC is a new 10% tax credit on the cost of buildings acquired and available for use after January 1, 2024, that are used in (i) electric vehicle assembly, (ii) electric vehicle battery production, or (iii) cathode active material production. In order to qualify for the EV Supply Chain ITC, a taxpayer (or a member of a group of related taxpayers) incurring qualifying building costs must also claim the CTM ITC in respect of property/equipment used in all three of those supply chain segments, or two of the three segments and hold at least a qualifying minority interest in an unrelated corporation that claims the CTM ITC in the third segment. The EV Supply Chain ITC rate will decrease to 5% in 2033 and 2034 and expire thereafter.

The Government has signalled its intention to provide details regarding the design and implementation of the EV Supply Chain ITC in the 2024 Fall Economic Statement. We expect those details to include guidance regarding both the level of building dedication required to a particular activity in order to qualify for the credit and the threshold required for the “qualifying minority interest” to be satisfied. While the CTM ITC is a refundable tax credit, Budget 2024 was silent on whether the EV Supply Chain ITC is intended to be refundable or non-refundable.

Clean Electricity Investment Tax Credit

Budget 2024 provides eligibility details for the Clean Electricity Investment Tax Credit (“CE ITC”), which is a 15% refundable tax credit (reduced to 5% in certain circumstances) first proposed in Budget 2023. The CE ITC will be available in respect of new (i.e., not previously used) eligible property and equipment acquired and available for use after Budget Day 24 and before 2035.

The detailed legislative amendments necessary to implement the CE ITC have not yet been introduced, but Budget 2024 contains further details regarding the design and implementation of the program.

Taxpayer eligibility

The CE ITC is only available to Canadian corporations (i.e., corporations incorporated in Canada), including taxable Canadian corporations, provincial and territorial Crown corporations (for investments made in certain yet-to-be designated jurisdictions), corporations owned by municipalities, corporations owned by Indigenous communities, and pension investment corporations. Tax-exempt Canadian corporations will be afforded access to the tax credit provided they agree to be subject to certain provisions related to audit, penalties and collections in respect of the credit. Corporate partners eligible for the CE ITC will generally be able to claim their share of the partnership’s CE ITC entitlement.

Conversion, exportation, or other disposition of property and equipment in respect of which the CE ITC has been received will trigger repayment obligations in certain circumstances.

Property and equipment eligibility

The following types of property and equipment will be eligible for the CE ITC:

  • certain Class 43.1 equipment used to generate electricity from solar, wind, or water energy;
  • certain concentrated solar energy equipment used to generate electricity;
  • certain equipment used to generate electricity, or both electricity and heat, from nuclear fission;
  • certain Class 43.1 equipment used for the purpose of generating electricity, or both electricity and heat, solely from geothermal energy (provided the equipment is not part of a system that extracts fossil fuel for sale);
  • equipment that is part of a system used to generate electricity, or both electricity and heat, from certain waste materials (including wood waste, plant residue, municipal waste, sludge from an eligible sewage treatment facility, spent pulping liquor, food and animal waste, manure, pulp and paper by-product and separated organics);
  • certain Class 43.1 stationary electricity storage equipment and equipment used for pumped hydroelectric energy, (provided the equipment does not use any fossil fuel in its operation);
  • equipment that is part of an eligible natural gas energy system (i.e., a system that uses fuel all or substantially all of which is natural gas solely to generate electricity, or both electricity and heat, uses a carbon capture system to limit emissions, and meets certain yet-to-be-finalized requirements relating to emissions intensity and CO2 storage); and
  • equipment and structures used for the transmission of electricity between provinces and territories, including electrical transmission equipment (e.g., cables and switches), electrical transmission structures (e.g., towers and lattices), and related equipment used for managing traded electricity (e.g., transformers, electric power conditioning equipment, and control equipment), but excluding buildings, electrical distribution equipment, and electrical transmission equipment rated for voltages less than 69 kilovolts.

CE ITC Rate

A taxpayer’s eligibility for the full 15% CE ITC is contingent on continuous adherence to certain prescribed labour requirements currently contained in Bill C-59, which has received second reading in the House of Commons and is currently in consideration at the Standing Committee on Finance. A brief summary of these requirements can be found here. Failure by a taxpayer to meet the labour requirements will result in eligibility for a 5% CE ITC rate (rather than the full 15% rate).

Applicability of the CTM ITC to Equipment Used In Polymetallic Projects

As noted above, in addition to its availability in respect of equipment used to manufacture and produce certain clean energy components (e.g., batteries and fuel cells), the 30% refundable CTM ITC is also available in respect of the cost of eligible machinery and equipment used to extract and process the critical minerals (i.e., copper, nickel, cobalt, lithium, graphite, and rare earth elements) that are, in many instances, necessary to manufacture such components.

Budget 2024 proposes to amend the CTM ITC legislation (introduced in December of 2023) to ensure that equipment used for extraction and processing activities occurring at polymetallic projects (e.g., projects engaged in the production of both qualifying and non-qualifying minerals) could still be eligible for the CTM ITC provided certain requirements relating to the value of critical mineral output from the project (relative to total output) are satisfied. In essence, a project will need 50% or more of the financial value of the project’s output to be attributable to critical mineral output, and an attestation from an arm’s-length qualified engineer or geoscientist to the Canada Revenue Agency would be required in support of such assessment. Specific language to implement the proposed amendments was not contained in Budget 2024.

By Ted Thiessen

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024

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