By Jim Cruikshank, Graham Haynes, and Dave Randell

On November 3, 2022, the Honourable Chrystia Freeland delivered the Federal Government’s Fall Economic Statement (“FES”).  The FES included a number of tax related announcements, including further details on the Clean Technology Investment Tax Credit and the Hydrogen Investment Tax Credit, both of which were originally proposed in the 2022 Federal Budget.

The FES states these tax credits are made in response to similar initiatives in the United States following the passage of the Inflation Reduction Act and are intended to help Canada remain competitive in the North American clean energy and clean technology industries.

Clean Technology Investment Tax Credit

The Clean Technology Investment Tax Credit will be a refundable tax credit equal to either 20% or 30% or of the capital cost of qualifying equipment, which is currently proposed to include:

• Electricity generating systems including solar photovoltaic, concentrated solar, wind, and water energy generating systems;
• small modular nuclear reactors used to generate electricity;
• industrial zero-emission vehicles plus related charging or refueling equipment; and
• stationary non-fossil fuel energy storage equipment including batteries, flywheels, supercapacitors, magnetic energy storage, compressed air energy storage, pumped hydroelectric energy storage, gravity energy storage and thermal energy storage.

The applicable percentage of the investment tax credit will vary based on the ability of claimants to meet certain labour conditions which have not yet been developed but are expected to include wage thresholds and apprenticeship positions.  The Department of Finance has stated it will consult stakeholders to determine what the final thresholds will be, and the results of this consultation will be released in the 2023 Federal Budget.

The Clean Technology Investment Tax Credit is proposed to be available in respect of the capital cost of property acquired and that becomes available for use on or after Budget Day 2023 and until 2031, then will gradually be phased out by 2035.  Note that this credit is proposed to be available in respect of new property only.

Atlantic Canadian businesses will be able to benefit from both the Clean Technology Investment Tax Credit and the existing Atlantic Investment Tax Credit on certain capital expenditures.  The Atlantic Investment Tax Credit, for reference, was established in March, 2012, and provides a refundable credit of up to 10% of the value of new qualified property purchased in the Atlantic Provinces and the Gaspé Peninsula which includes, among other things, energy generation and conservation property.

Clean Hydrogen Investment Tax Credit

The Clean Hydrogen Investment Tax Credit will be a refundable tax credit of up to 40% of the investment cost in clean hydrogen projects.  The credit percentage applicable to the Clean Hydrogen Investment Tax Credit will be based on a combination of the carbon intensity of the project and the satisfaction of certain labour conditions.

In particular, in line with the US tax credits announced under the Inflation Reduction Act, the credit will begin to apply when emissions from the production of hydrogen are 4.0kg of CO2e per kilogram of hydrogen produced or lower and will be capped at 30% when emissions from the production of hydrogen are 0.45kg of CO2e per kilogram of hydrogen produced or lower.

An additional 10% credit rate can also apply if the project satisfies certain labour conditions, yet to be announced.  A consultation process regarding the labour conditions and the overall requirements of this credit will be launched in the coming weeks.

The Clean Hydrogen Investment Tax Credit is proposed to be available in respect of eligible investments made on or after Budget Day 2023 and until 2030, at which time it will be gradually phased out.

This new tax credit, combined with the recent signing in Atlantic Canada of the Joint declaration of intent between the Government of Canada and the Government of the Federal Republic of Germany on establishing a Canada-Germany Hydrogen Alliance which propositions the creation of a “transatlantic supply chain for hydrogen” with first deliveries aimed for 2025, are positives for the development of a green hydrogen industry in Atlantic Canada.

The furtherance of progress on the above-mentioned tax credits are welcome news in the Canadian market and in Atlantic Canada specifically.  Stakeholders should watch for upcoming details on both such items in the 2023 Federal Budget.

Jim Cruickshank is a senior partner with Stewart McKelvey who specializes in tax matters.  Working with clients that range from large public companies to small businesses, Jim helps clients with their tax and business structuring needs.

Graham Haynes is an associate in the firm Stewart McKelvey who specializes in tax planning, dispute resolution and litigation.  Prior to this, he clerked for the Tax Court of Canada.

Dave Randell is a partner in the Halifax office, with extensive experience across various industries including energy,  insurance, mining, media, manufacturing and technology. He has acted as lead advisor for a number of noteworthy Canadian and international clients in the energy sector.

This update is intended for general information only. If you have any questions on the above we would invite you to contact the authors.

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