The Cleantech Tax Credit in Canada is a financial incentive aimed at fostering investment in clean technology and carbon capture solutions. Facilitating Canada’s push towards a low-carbon future, this tax credit offsets a substantial share of the capital costs for eligible projects. If you’re wondering how this might impact your business’s green investments or the broader environmental agenda, our guide explains its design, benefits, and who qualifies.
Key Takeaways
Cleantech tax credits in Canada support clean energy investments and help the country progress towards its net-zero emissions target by 2050, providing financial incentives for businesses investing in a wide range of clean technologies and carbon capture projects.
The Clean Technology Investment Tax Credit offers a refundable tax credit of up to 30% for eligible property acquired by taxable Canadian corporations, with a diminishing rate post-2033, whereas the Carbon Capture, Utilization, and Storage Investment Tax Credit offers a credit rate up to 60% depending on the project type.
Canadian corporations must adhere to specific criteria and labor conditions, including prevailing wage and apprenticeship requirements, to benefit from cleantech tax credits, with significant penalties for non-compliance, yet these incentives bolster investments in clean technologies and job creation.
Exploring the Cleantech Tax Credit
Cleantech tax credits in Canada are the government’s answer to the urgent call for environmental sustainability. They facilitate the country’s green recovery post-COVID-19 and help adhere to its commitment to reach net-zero emissions by 2050 by providing financial incentives for clean energy investment. The Clean Technology and Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credits specifically target investments in:
renewable energy projects
emissions reduction projects
wind and solar equipment
geothermal energy systems
air-source heat pumps
non-road zero-emission vehicles
carbon capture technologies
These credits offer financial support by defraying a portion of the capital costs associated with acquiring eligible equipment for clean technology and CCUS projects, enhancing their financial viability. By encouraging businesses to engage in clean technology manufacturing and clean hydrogen initiatives, the Canadian government promotes the growth of the clean economy.
Clean Technology Investment Tax Credit (ITC)
The Clean Technology Investment Tax Credit (ITC) is a key component of Canada’s cleantech incentives. It offers a refundable tax credit of up to 30% for eligible clean technology property acquired by taxable Canadian corporations. This credit is applicable to clean technology property acquired on or after March 28, 2023.
The ITC rate starts at 30% for property acquired and in use from March 28, 2023, to December 31, 2033, after which it will gradually decrease to 15% in 2034 followed by a phase-out. This timeline provides a sustained incentive window for businesses considering investments in clean technologies, aiding in the growth of Canada’s clean technology sector.
Carbon Capture, Utilization, and Storage Investment Tax Credit (CCUS ITC)
The Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS ITC) encourages investment in carbon capture initiatives. It is designed to spur investment in the development, deployment, and operation of technologies that:
Capture CO2 emissions from industrial sources
Transport CO2 emissions
Store CO2 emissions
Utilize CO2 emissions
To qualify for the CCUS ITC, the property must be new, mainly used in Canada to earn income from a business or property, and must be part of a certified qualified CCUS project. The credit rates for this tax credit range from 18.75% to 60% of the qualified CCUS expenditure, making it an attractive option for businesses engaged in carbon capture and storage technologies.
Eligibility Criteria for Cleantech Tax Credits
Eligibility for cleantech tax credits is not a one-size-fits-all scenario. There are specific criteria that businesses need to meet. Taxable Canadian corporations, including specific entities such as:
Provincial and territorial Crown corporations
Corporations owned by municipalities
Pension investment corporations
Those owned by Indigenous communities
are eligible to claim the Clean Technology ITC.
In addition to being a taxable Canadian corporation, the property involved must be newly acquired and not have been previously used for any purpose. This ensures that the incentives are channeled towards the growth of new clean technology projects.
Qualifying Clean Technology Property
To be considered eligible clean technology property for the Clean Technology ITC, there are specific criteria the particular property must meet. It must encompass systems like those producing electricity and/or heat from waste biomass, concentrated solar energy equipment, active solar heating equipment, or small modular nuclear reactors, and must fall within certain parts of Class 43.1, 43.2, or 56 of Schedule II in the Income Tax Regulations.
Moreover, the qualified clean technology property must meet the following criteria to be eligible for the tax credit:
It must be situated in Canada
It must be intended for exclusive use within the country to earn income from a business or property
Investments in eligible clean technology property must be acquired and available for use within specified time frames to acquire clean technology property
By meeting these criteria, you can take advantage of the tax credit for your clean technology investments.
Requirements for Taxable Canadian Corporations
For taxable Canadian corporations, additional requirements must be fulfilled. Corporations, including those that are members of a partnership, that purchase property exclusively for use in Canada are eligible for the Clean Technology Investment Tax Credit (ITC) as well as the Carbon Capture, Utilization, and Storage Investment Tax Credit (CCUS ITC).
Further, these corporations must ensure that at least 10% of total labor hours for the installation of clean technology property are performed by apprentices registered in a Red Seal trade. There are also special rules for partnerships that need to be adhered to when claiming the Clean Technology ITC.
Claiming the Cleantech Tax Credit
Claiming the cleantech tax credit involves a specific process that businesses must follow. Canadian corporations must submit a prescribed form with their income tax return to claim the Clean Technology Investment Tax Credit (ITC) for the year in which they acquired eligible property.
This prescribed form, which must be filed on or before one year after the corporation’s filing due date for the tax year, requires details of the eligible property, including:
Description
Location
Capital cost
Declaration of labor requirements for the tax credit.
Filing Process and Deadlines
The filing process is a crucial step in claiming the cleantech tax credit. To claim the Clean Technology Investment Tax Credit, the taxpayer must file a prescribed form with their income tax return; this form should include the property description, location, capital cost, credit rate, amount claimed, and the election concerning labor requirements.
The deadline for submitting the application for the Clean Technology Investment Tax Credit is within one year after the taxpayer’s filing due date for the year in which the qualifying property was acquired. Applicants for the Clean Technology ITC must also maintain supporting documentation like invoices and contracts to validate their claim if requested by the Canada Revenue Agency.
Recapture and Reductions
While the cleantech tax credits offer significant benefits, it’s important to note that they may be recaptured under certain conditions. If clean technology property is used for non-clean technology purposes, exported, or disposed of within ten years of acquisition, the Clean Technology Investment Tax Credit (ITC) may be recaptured.
However, there is an exception to the recapture rule if the property is transferred to a related corporation which continues to use it for approved clean technology purposes. Moreover, the Clean Technology ITC cannot be claimed if the property has been used already for deductions under the Carbon Capture, Utilization, and Storage tax credit.
Labor Requirements and Compliance
One of the critical aspects of the cleantech tax credits is their labor requirements. To comply with the labor requirements for the cleantech tax credit, the taxpayer must meet both prevailing wage and apprenticeship conditions.
The taxpayer is required to make an election to meet these labor conditions for each taxation year that coincides with the installation of the clean technology property. This ensures quality job creation in the cleantech sector, a crucial component of the green economy.
Prevailing Wage and Apprenticeship Conditions
Meeting prevailing wage and apprenticeship conditions is an integral part of the labor requirements. To qualify for the full Clean Technology Investment Tax Credit (ITC), companies must meet these specific labor requirements related to prevailing wages and apprenticeships, with a 10 percentage point reduction in credit rate if not complied with.
Corporations must pay covered workers according to the prevailing wage, which is determined by collective agreements or, absent such agreements, equivalent to the most similar agreement taking into account the worker’s experience, tasks, and location. The taxpayer must affirm they are adhering to the prevailing wage requirement for their direct workers and must make reasonable efforts to ensure subcontractors comply as well, including informing covered workers of the requirements and posting notifications.
Penalties for Non-Compliance
Non-compliance with labor requirements can result in significant consequences. If labor conditions are not met, the taxpayer faces a reduction in their clean technology investment tax credit rate by 10 percentage points.
Non-compliance with the prevailing wage requirement results in an additional tax of $20 for each day a covered person was not compensated adequately. Failing to meet the apprenticeship labor hour requirement results in a $50 tax for each hour by which the requirement falls short. If a taxpayer chooses to fulfill the labor requirements but doesn’t meet them, they may still receive the full credit. However, they might also be required to pay penalties or make top-up wage payments.
Benefits of Cleantech Tax Credits for Canadian Businesses
The cleantech tax credits provide a myriad of benefits for Canadian businesses. Specifically, the Clean Technology ITC and the CCUS ITC provide financial incentives by covering a portion of the capital costs for businesses investing in eligible clean technology and carbon capture projects in Canada.
These incentives not only boost investment in clean technologies, but they also support job creation and environmental protection. By facilitating the financial viability of clean technology projects, these credits contribute to the growth of Canada’s clean technology sector and its transition to a low-carbon economy.
Boosting Investment in Clean Technologies
The Clean Technology ITC has played a significant role in boosting investments in clean technologies. The eligibility period for this tax credit is set from March 28, 2023, to 2035, offering a sustained incentive window for businesses considering investments in clean technologies.
Investments encouraged by this tax shelter investment tax credit focus on sectors such as:
renewable energy
energy efficiency
waste management
clean hydrogen technologies
clean technology manufacturing
It supports significant projects like the Atlin Hydro Expansion Project and the Taltson Hydro Expansion Project, contributing to a shift from diesel, a fossil fuel, to cleaner alternatives like renewable energy, thereby reducing reliance on fossil fuels and meeting Canada’s emissions goals.
Supporting Job Creation and Environmental Protection
Cleantech tax credits also play a vital role in supporting job creation and environmental protection. They are designed to incentivize businesses, leading to the creation of new jobs in environmentally friendly industries.
These tax credits contribute to economic resilience by supporting industries engaged in environmental protection measures and the sustainable use of natural resources. Canada’s focus on securing its role in global supply chains, as seen in Volkswagen’s decision to build a ‘gigafactory’ in Ontario, aligns with job creation and environmental protection goals.
Real-Life Examples of Cleantech Tax Credit Utilization
The cleantech tax credit in Canada has been successfully utilized by various companies to launch and scale their clean technology projects. Hydrostor, a Canadian company specializing in compressed air energy storage, benefited from the tax credit, which helped finance the expansion of their advanced energy storage facilities.
Similarly, Terramera, an AgTech company focused on sustainable agriculture practices, used the tax credit to support the development of their plant-based pest management solutions. CarbonCure Technologies, which offers CO2 utilization solutions for the concrete industry, was able to accelerate commercialization thanks to the financial support from the tax credit.
These examples illustrate the cleantech tax credit’s role in fostering a greener economy by aiding businesses in developing and implementing environmentally-friendly technologies.
Summary
Canada’s cleantech tax credits provide a powerful incentive for businesses to invest in clean technologies. They facilitate the country’s green recovery and the transition to net-zero emissions by 2050. The Clean Technology ITC and the CCUS ITC offer financial support by defraying a portion of the capital costs associated with acquiring eligible equipment for clean technology and CCUS projects.
However, claiming these tax credits requires adherence to specific criteria and labor requirements. Non-compliance can lead to penalties and reductions in tax credits. Nonetheless, these tax credits have boosted investments in clean technologies and supported job creation and environmental protection, as evidenced by real-life examples.
Frequently Asked Questions
What are the cleantech tax credits in Canada?
The cleantech tax credits in Canada support the country’s green recovery and transition to net-zero emissions by 2050 through the Clean Technology ITC and the CCUS ITC.
Who can claim the cleantech tax credits?
Taxable Canadian corporations, including specific entities such as provincial and territorial Crown corporations, municipalities, pension investment corporations, and Indigenous communities, can claim the cleantech tax credits.
How do businesses claim the cleantech tax credits?
To claim cleantech tax credits, businesses need to submit a prescribed form with their income tax return on or before one year after the corporation’s filing due date for the tax year. This is a crucial step in availing the tax credits.
What are the labor requirements for the cleantech tax credits?
Businesses must meet prevailing wage and apprenticeship conditions to comply with the labor requirements for the cleantech tax credits, as non-compliance can result in penalties and reductions in credits.
How have businesses benefited from the cleantech tax credits?
Businesses have benefited greatly from cleantech tax credits by financing the expansion of advanced energy storage facilities, supporting plant-based pest management solutions, and accelerating commercialization in the concrete industry. These credits have bolstered innovation and sustainability.
