What Is The Environmental Tax Incentive In Canada?

Countries worldwide have introduced various initiatives to tackle the challenges presented by climate change while fostering economic growth. A key initiative in Canada was the introduction of the Greenhouse Gas Pollution Pricing Act in 2019, establishing the federal pollution pricing framework. Per the Canada Revenue Agency (CRA), carbon pricing pollution refers to an effective method for reducing emissions of greenhouse gasses that contribute to climate change, financially incentivizing those who pollute less.

Another example is, according to the CRA, the Canada Carbon Rebate, previously referred to as the Climate Action Incentive Payment (CAIP), which is an important Canadian environmental tax incentive that provides a non-taxed payment to eligible families and individuals in small, rural communities. The aim of this program, consisting of a primary payment and supplementary ones, is to offset federal pollution pricing costs.

What Are Climate-Friendly Tax Credits?

In 2023, Canada introduced several tax credits to support Canadian businesses in producing clean energy or transitioning to the use of clean energy in their operations. These tax credits include:

• Clean hydrogen investment tax credit: This tax credit, ranging between 15% and 40%, reduces the cost of Canadian clean hydrogen production projects.
• Carbon capture, utilization, and storage investment tax credit: This tax credit helps cover the costs for various equipment types utilized for capturing and storing carbon dioxide emissions and alternative methods of using these emissions in industrial procedures.

What Are the Clean Tech Incentives in Canada?

In addition to the above credits, Canada offers a number of incentives organized around uses of technology that align with climate action goals. Becoming aware of these incentives can help business owners to make informed decisions about their near-future tax planning and operational strategies.

Clean Technology Manufacturing ITC

Canada introduced a refundable investment tax credit (ITC) of 30% to help cover the cost of clean technology processing and manufacturing, alongside crucial mineral processing and extraction. This environmental tax incentive targets corporate investments in depreciated assets utilized for activities related to the control systems, equipment, and machinery used in clean technology processing and manufacturing. Examples may include:

• Renewable energy, such as solar, water, geothermal, and wind, equipment manufacturing
• Fuel rod and nuclear energy equipment manufacturing
• Recycling and processing heavy water and nuclear fuels
• Electrical energy storage equipment, like grid-scale storage, manufacturing
• Ground- and air-source heat pump system equipment manufacturing
• Zero-emission vehicle manufacturing alongside the components linked to them, such as recharging systems, batteries, and fuel cells
• Hydrogen production equipment manufacturing
• Upstream component processing or manufacturing

Some other activities may also be eligible, such as processing and extraction activities linked to key minerals that are vital for supply chains related to clean technology. Minerals that may fall into this category include scarce earth elements, copper, graphite, lithium, nickel, and cobalt. The Clean Technology Manufacturing ITC has estimated costs of almost $5 billion for the first five years (commencing between 2023 and 2024) and roughly $7 billion for the following six years; this ITC applies to property acquired and available to use from the beginning of 2024 to the end of 2034, with a phase-out beginning in 2032. Gain a more comprehensive response to “What is the environmental tax incentive in Canada?” and explore how an experienced Halifax tax lawyer can assist businesses with their tax concerns by arranging a consultation with Jeremy Scott Law.

Clean Electricity ITC

The Clean Electricity ITC refers to a refundable tax credit of 15% for investments in electricity that do not utilize fossil fuels. The tax credit can be used to cover refurbishments of existing facilities and new projects, such as the following:

• Stationary systems of electricity storage
• Diminished natural gas-fueled electricity generation
• Non-emitting systems of electricity generation
• Electricity transmission equipment between territories and provinces
• Storage of battery energy

The Clean Electricity ITC is available until 2034, but there are labor prerequisites concerning apprenticeships and wages that businesses must fulfill to qualify for the full 15% credit; without meeting these conditions, businesses may be eligible for a reduced tax credit of 5%. Unlike the Clean Technology ITC (explained in greater detail below), which only applies to taxable entities, both non-taxable and taxable entities are eligible for this ITC. Moreover, this ITC applies to a broader assortment of technologies and projects when compared to the Clean Technology ITC; for instance, the latter applies primarily to wind, energy, solar, and geothermal storage systems, whereas the former applies to transmission projects more generally.

Is Canada’s 30% Refundable Tax Credit for Clean Energy?

Canada recently implemented the Clean Technology ITC, which aimed to encourage capital investment in adopting and operating Canadian clean technology assets. Taxable corporations in Canada, alongside mutual fund trusts acting as real estate investment trusts, are eligible. The Clean Technology ITC is available to organizations in the above two groups that are partnership members looking to make investments in these areas.

The Clean Technology ITC provides a 30% tax refund for eligible investments in assets obtained and available to use between March 28, 2023, and December 31, 2033. A 15% tax credit is available for assets gained and available to use from 2034; the ITC does not offer a refundable tax credit beyond this year. To be eligible for the full Clean Technology ITC, taxpayers must satisfy the following labor requirements; otherwise, as with the Clean Electricity ITC, they may receive a reduced tax credit (10 percentage points lower):

• Paying covered workers per a collective agreement or similar amounts to those paid according to one of these agreements
• Ensuring a minimum of 10% of any labor performed by Red Seal trade workers, such as equipment technicians, are registered apprentices

Contact a Nova Scotia Tax Lawyer Today

Understanding Canadian environmental tax incentives can be a challenging task. A discussion with an experienced Canadian tax lawyer may help business owners to determine which tax incentives are available in their industries. Consider reaching out to a seasoned Nova Scotia business tax lawyer with Jeremy Scott Law to schedule a business tax planning conversation, including how the environmental tax incentive in Canada may impact your business tax strategy. Reach our office today for assistance with your tax-related queries by calling (902) 403-7201.