Investing in a clean growth future: Federal government unveils Clean Technology Investment Tax Credit draft legislation
Is your business looking to reduce your environmental impact? There’s never been a better time. The new clean technology investment tax credit presents huge opportunity for Canadian corporations to buy into clean tech by providing a fully refundable 30% credit on the capital cost of eligible technology.
The federal government defines clean technology as:
- any good or service designed with the primary purpose of contributing to remediating or preventing any type of environmental damage
- any good or service that is less polluting or more resource efficient than equivalent normal products that furnish a similar utility.
On August 4th, 2023, the Department of Finance proposed draft legislation amending the Income Tax Act (Canada) (the Act), which amendments include implementation of the Clean Technology Investment Tax Credit (the Clean Tech ITC).
An Overview of the Clean Tech ITC
The federal government first introduced the Clean Tech ITC in the 2022 Fall Economic Statement, and eligibility for the credit was further expanded in chapter 3 of this year's Federal Budget, tabled in Parliament on March 28, 2023. Canadians are welcome to provide feedback on the proposed legislation by submitting proposals by September 8, 2023.
The purpose of the Clean Tech ITC is to incentivize taxable Canadian corporations to adopt clean technology by crediting them with 30% of the capital cost of eligible equipment in the year that the equipment is acquired.
A "taxable Canadian corporation" is essentially a Canadian corporation (as defined in the Act) that is not exempt from income tax. The credit will be available to any clean technology acquired by taxable Canadian corporations on or after March 28, 2023. In the year 2034, the credit rate of 30% will be reduced to 15% for clean technology acquired that year. The credit will no longer be available for property acquired after December 31, 2034.
Note that clean technology is not acquired until it has become "available for use by the taxpayer." The language "acquired" and "available for use" are not defined in the legislation, creating uncertainty in the legislation as currently drafted.
This concept will become important for Canadian businesses purchasing eligible technology prior to the clean technology credit phasing out in the years 2033 and 2034. Clean technology purchased in 2033 that is not available for use until 2034 will only be eligible for the 15% credit. Clean technology purchased in 2034 that is not available for use until 2035 will be ineligible for credit. Courts will be placed in a position where they will need to interpret the intent of the legislation, if it remains as drafted, to determine when eligible technology has been acquired and whether or not it is eligible for credit.
If the eligible clean technology property is not paid for in full within 180 days of the tax year which the eligible property was acquired, the unpaid amount will be deducted from the capital cost for the purpose of calculating the Clean Tech ITC, for the year. If the balance is paid in a subsequent year, the payment will be added to the capital cost of the clean technology property at the time it is paid; however, if the Clean Tech ITC has already been claimed, and the time limit to file a prescribed form has lapsed, it is unclear from the draft legislation how subsequent payments will be treated for the purpose of claiming the Clean Tech ITC.
Application of the Clean Tech ITC to Corporations that are Partners in a Partnership
The Clean Tech ITC can be claimed by both taxable Canadian corporations and taxable Canadian corporations that are partners in partnerships which partnership acquires eligible clean technology property. If a partnership acquires eligible clean technology, the portion of the credit that can be "reasonably" attributed to a taxable Canadian corporation partner's share of the credit will be allocated as such. There are further restrictions that apply to allocation amongst limited partners that go beyond the scope of this article.
Technology Eligible for Clean Tech ITC
Clean technology property eligible for the credit must be situated and exclusively used in Canada, and must be new. Eligible clean technology property includes:
- zero-emission electricity generating technologies (including concentrated solar energy equipment and small modular nuclear reactors)
- stationary electricity storage equipment (unless such equipment uses fossil fuels in its operation)
- active solar heating equipment, air-source heat pumps and ground-source heat pumps
- non-road zero-emission vehicles and charging or refuelling equipment used primarily for such vehicles
- geothermal energy systems (unless such a system also produces fossil fuels)
It is permissible for taxpayers to lease their eligible clean technology property to third parties, but only if the equipment is leased to another qualifying taxpayer in accordance with the rules stipulated in the draft legislation. Taxpayers who purchase eligible clean technology property that subsequently lease out their property to a non-qualifying taxpayer, or otherwise lease their clean technology property in contravention of the legislation, may not be eligible for the Clean Tech ITC.
There are various exceptions to the above list of technology property that are excluded and therefore ineligible for credit under the proposed legislation that Canadian business owners will need to consider. These exceptions may make it difficult for business owners to determine whether certain property will be eligible for credit. For example, the list of eligible technology includes concentrated solar energy equipment, which is equipment used to generate heat and/or electricity exclusively from concentrated sunlight; however, equipment used to distribute electrical energy is excluded and therefore ineligible for credit.
Capital Cost Reductions
The capital cost of eligible technology may be reduced in certain circumstances, which effectively would reduce the amount of the Clean Tech ITC. One example of this is where a taxpayer received "government assistance" or "non-government assistance" to purchase eligible clean technology property; in such case, the capital cost of the property will be reduced by that amount. However, if a taxpayer repaid all or a portion of said assistance, the repaid amount may still be eligible for the Clean Tech ITC. To put numbers to the example, if a taxpayer received a grant in the amount of $2,500 to help pay for a piece of eligible equipment, and the equipment costs $10,000, the capital cost of the equipment will be reduced to $7,500. The reduction in capital cost reduces the amount of the Clean Tech ITC available to the taxpayer.
Filing Requirement for Clean Tech ITC
Eligible taxpayers claiming the Clean Tech ITC will be required to file a prescribed form with their income return. The prescribed form must be filed within one (1) year after the taxpayer's filing due date for the year. The taxpayer's taxes payable will be credited the amount of the Clean Tech ITC. If the credit exceeds the taxpayer's tax payable for that year, a refund will be issued.
Clean Tech ITC Subject to Recapture in Certain Circumstances
The clean tech credit will be "recaptured" if the clean technology property acquired in connection with the credit is exported, disposed of, or converted to a non-clean technology use within 20 years after acquisition. The recapture can be deferred if the clean technology property is disposed of by the taxpayer to a qualifying taxpayer that is related to the transferor, for so long as the property is still eligible as clean technology property.
The recapture amount is calculated as the lesser of: a) the amount of the taxpayer's Clean Tech ITC; and b) the value of the proceeds of the technology property at the time of disposition to an arm's length party (or the fair market value at the time the technology is converted to a non-clean use, or disposed of to a non-arm's length party) divided by the capital cost of the technology property, multiplied by the taxpayer's Clean Tech ITC. For example, if a taxpayer purchased an eligible piece of clean technology for $100,000, and received a Clean Tech ITC for $30,000, but five years later the taxpayer sold the clean technology to an arm's length party for $70,000, the amount of the recapture calculated under a) would be equal to the amount of the taxpayer's Clean Tech ITC, being $30,000; the amount of the recapture calculated under b) would be equal to the amount that the technology was sold for, $70,000, divided by the amount the taxpayer originally paid for the technology, $100,000, which is equal to 0.7, multiplied by the amount of the Clean Tech ITC, $30,000, for a total recapture of $21,000. Because the calculation under b) is lesser than the calculation under a), the total recapture in this example would be governed under calculation b), being a total of $21,000.
Clean Technology Electricity Tax Credit
This year's Federal Budget introduces the Clean Electricity Investment Tax Credit (the "Clean Electricity ITC"), draft legislation for which has not yet been released. The Budget states that the Clean Tech ITC "will complement the Clean Electricity Investment Tax Credit by providing support to decarbonize industry. "The purpose of the Clean Electricity ITC is to incentivize a range of asset owners to adopt clean electricity by crediting them with a 15% refundable tax credit on eligible investments. The credit is expected to be available as of the day that next year's (2024) Federal Budget is read in parliament, and will no longer be available after the year 2034.
Fillmore Riley LLP's Taxation Practice
We offer tax advice to both individual and business clients on a wide range of matters, including corporate and commercial transactions, estate planning, and tax dispute resolution and litigation. For more information, or if you have any questions, please contact a member of the Fillmore Riley Taxation practice.