Clean technology investment tax credit

On August 4, 2023, the Department of Finance (“Finance”) released draft legislation (the “August 4^th Proposals”) in respect of the clean technology investment tax credit (“Clean Technology ITC”), which was initially proposed in the 2022 fall economic statement and updated in the 2023 federal budget (“Budget 2023”). The Clean Technology ITC allows qualifying taxpayers to claim up to a 30% refundable tax credit on the capital cost of clean technology property.

The draft legislation includes labour requirements, which are similar to provisions in the United States Inflation Reduction Act (which in turn references certain labour requirements in the United States Davis-Bacon Act) and that must be complied with to be eligible for the full 30% Clean Technology ITC.

Although Finance announced a clean hydrogen investment tax credit (“Clean Hydrogen ITC”) in Budget 2023, the August 4^th Proposals did not include draft legislation regarding the Clean Hydrogen ITC.

The description of the Clean Technology ITC below is based on the draft legislation included in the August 4^th Proposals.

Clean Technology ITC

The purpose of the Clean Technology ITC is to promote the adoption and operation of clean technology in Canada. The condition of satisfying the labour requirements in order to maximize the tax credit suggests that another policy goal of the Clean Technology ITC is to develop the clean technology workforce in Canada.

The Clean Technology ITC is a specified percentage of the capital cost to the qualifying taxpayer of clean technology property acquired by that qualifying taxpayer in the year. The specified percentage is 30% for clean technology property acquired and available for use from March 28, 2023 until December 31, 2033.

A “qualifying taxpayer” is a taxable Canadian corporation, including a taxable Canadian corporation that is a member of a partnership. This definition effectively excludes individuals, tax-exempt entities, and non-residents that carry on business through a branch in Canada from entitlement to the Clean Technology ITC.

The “specified percentage”, in respect of a clean technology property acquired by the qualifying taxpayer means:

• before March 28, 2023 — nil;
• on or after March 28, 2023, and before January 1, 2034 — 30%;
• after December 31, 2033, and before January 1, 2035 — 15%; and
• after December 31, 2034 — nil.

Clean technology property

Types of properties eligible for the Clean Technology ITC include:

• equipment used to generate electricity from solar, wind, and water energy;
• stationary electricity storage equipment;
• active solar heating equipment, air-source heat pumps and ground-source heat pumps;
• non-road zero-emission vehicles that are fully electric or powered by hydrogen and charging or refuelling equipment that is used primarily for such vehicles;
• equipment used exclusively to generate electrical energy and/or heat energy, solely from geothermal energy, but excluding any equipment that is part of a system that extracts both heat from a geothermal fluid and fossil fuel for sale or use;
• concentrated solar energy equipment; and
• a small modular nuclear reactor.

Such properties must also satisfy additional requirements to qualify as “clean technology property”. Specifically:

• the property must be situated in Canada and intended for use exclusively in Canada;
• the property must not have been used, or acquired for use or lease, for any purpose before it was acquired by the taxpayer; and
• if the property is to be leased by the taxpayer to another person,the lessee must be a qualifying taxpayer;
• the property must be leased in the lessor’s ordinary course of carrying on a business in Canada; and
• the lessor taxpayer’s principal business must be:
  • selling or servicing property of that type; or
  • leasing property, lending money, purchasing conditional sales contracts, accounts receivable, bills of sale, chattel mortgages or hypothecary claims on movables, bills of exchange or other obligations representing all or part of the sale price of merchandise or services, or any combination thereof.

Clean technology property available for use

Clean technology property is deemed not to have been acquired by a taxpayer before the property is considered to have become available for use by that taxpayer.

Election is required to be eligible for the 30% Clean Technology ITC

To be eligible for the Clean Technology ITC’s full rate of 30%, the incentive claimant must elect to meet the specified labour requirements. Otherwise, the applicable Clean Technology ITC rate will be reduced by 10%. If the incentive claimant elects to meet the labour requirements but fails to do so, the incentive claimant could be subject to financial penalties. The draft legislation defines “incentive claimant” as a person, or a partnership at least one member of which, plans to claim or has claimed a specified tax credit for a taxation year.

Clean Hydrogen ITC

The August 4^th Proposals did not include draft legislation for the Clean Hydrogen ITC. As outlined in Budget 2023, the Clean Hydrogen ITC is a refundable tax credit of 15% to 40% available for eligible projects that produce all, or substantially all, hydrogen through their production process.

To be eligible for the Clean Hydrogen ITC, the property must be available for use in Canada before 2034. For property that will be available for use in 2034, the tax credits are reduced by 50%. For any property available for use after 2034, the tax credits would no longer be available.

The Clean Hydrogen ITC rates depend on the carbon intensity of the hydrogen that is produced, as outlined in the table below.

Carbon Intensity[1]	Property available for use before 2034	Property available for use in 2034	Property available for use after 2034
Less than 0.75 kg	40%	20%	Nil
0.75 kg to <2.0 kg	25%	12.5%	Nil
2.0 kg to < 4 kg	15%	7.5%	Nil
4 kg or higher	Nil	Nil	Nil

For properties that convert clean hydrogen to clean ammonia, the Clean Hydrogen ITC is 15%.

The Clean Hydrogen ITC is subject to the same labour requirements as the Clean Technology ITC. Failure to meet the labour requirements will reduce the Clean Hydrogen ITC by 10%.

Labour Requirements

The Clean Technology ITC and the Clean Hydrogen ITC labour requirements have two components: (1) the prevailing wage requirements, and (2) the apprenticeship requirements.

Prevailing wage requirements

An incentive claimant must satisfy certain prevailing wage requirements for an installation taxation year (i.e. the taxation year during which preparation or installation of the specified property occurs).

Each covered worker at a designated work site of an incentive claimant must be compensated for their work on the preparation or installation of specified property:

• under the terms of an eligible collective agreement; or
• in an amount that is at least equal to the amount of wages and benefits specified in the eligible collective agreement that most closely aligns with the covered worker’s experience level, tasks, and location.

The term “covered worker” refers to an individual (other than a trust):

• who is engaged in the preparation or installation of specified property at a designated work site as an employee of an incentive claimant or of another person or partnership;
• whose work or duties in respect of the designated work site are primarily manual or physical in nature; and
• who is not
  • an administrative, clerical, or executive employee, or
  • a business visitor to Canada as described in section 187 of the Immigration and Refugee Protection Regulations.

A “designated work site”in a taxation year of an incentive claimant is a work site where the specified property of an incentive claimant is located during the year.

An “eligible collective agreement” for Quebec means a collective agreement negotiated in accordance with applicable provincial law. For other provinces and territories, it means either

• the most recent multi-employer collective bargaining agreement that may reasonably be considered the industry standard for a given trade, in a region, province or territory between a group of employers and a trade union, who are accredited to bargain together and to be bound by the same agreement, or
• a project labour agreement that covers the work associated with the investments eligible for the specified tax credits and that is based on the multi-employer agreements described above.

The incentive claimant must attest that they have met the above requirement for their employees who are covered workers. Furthermore, the incentive claimant must have taken reasonable steps to ensure that any covered workers employed by any other person or partnership at the designated work site are compensated according to the above requirements.

Moreover, the incentive claimant must communicate in a poster or notice (that is visible to and accessible by covered workers at the designated work site), or by electronic means, a notice confirming, in plain language, that the work site is subject to prevailing wage requirements for covered workers that provides information to such workers on how to report failures to pay prevailing wages to the Minister of Natural Resources (the “Minister”).

Apprenticeship requirements

To satisfy the labour requirements, the incentive claimant must also make reasonable efforts to ensure that apprentices registered in a Red Seal trade work at least 10% of the total hours that are worked during the year by Red Seal workers at a designated work site of the incentive claimant on the preparation or installation of the specified property.

The term “Red Seal trade” has its ordinary meaning of a Red Seal trade for a province or territory under the Red Seal Program. A “Red Seal worker” is a covered worker whose duties are, or are equivalent to, those duties normally performed by workers in a Red Seal trade.

If the applicable labour law or collective agreement prevents the above apprenticeship requirement from being met, the incentive claimant must make reasonable efforts to ensure that the highest possible percentage of the total labour hours, performed during the year by Red Seal workers is performed by the apprentices while respecting the applicable labour law or collective agreement.

The incentive claimant must attest that they have met the foregoing apprenticeship requirements regarding covered workers at the designated work site.

As outlined in the table below, the percentage of the Clean Technology ITC depends on: (1) whether the labour requirements were satisfied, and (2) when the property was acquired and available for use.

Labour requirements	Property available for use up to and including March 27, 2023	Property available for use after March 27, 2023, and before 2034	Property available for use after 2033 and before 2035	Property available for use after 2034
Satisfied	Nil	30%	15%	Nil
Not satisfied	Nil	20%	5%	Nil

Failure to satisfy labour requirements can lead to reduced Clean Technology ITC and penalties

Additional tax and top-up payment for non-compliance with the prevailing wage requirement

The incentive claimant shall pay an additional tax of $20 for each day in the taxation year that the incentive claimant did not pay the prevailing wage to a covered worker.

If an incentive claimant receives a notification from the Minister specifying that the incentive claimant did not meet the prevailing wage requirements for a designated work site in the installation taxation year, the incentive claimant may, within one year after receipt of the notification, or such longer period as is acceptable to the Minister, pay each covered worker the top-up amount.

The top-up amount is equal to the prevailing wages that the covered worker would have been paid, less the amount that the worker was actually paid, plus the interest on the difference between the former and the latter. The interest is calculated from the beginning of the taxation year to the time of payment at the prescribed rate.

If the incentive claimant fails to pay the top-up amount, the incentive claimant shall pay to the Receiver General a penalty equal to 120% of the top-up amount.

A top-up amount that is paid to a covered worker is deemed to be the salary and wages of the worker for the year in which it is received, and deductible in computing income by the payor for the year in which it is paid. It is not an expenditure that qualifies for any specified tax credit.

Additional tax for non-compliance with the apprenticeship requirement

If less than 10% of the total hours that are worked during an installation taxation year regarding a specified tax credit at the designated work site on the preparation or installation of specified property are worked by apprentices registered in a Red Seal trade, the incentive claimant will have to pay an additional tax of $100 multiplied by the difference between the number of hours of labour the apprentices are required to perform and the number of hours of labour the apprentices actually performed.

Reduced tax credit and penalties for gross negligence or misconduct

If the incentive claimant has claimed a specified tax credit at the regular tax credit rate in a taxation year but has failed to meet the labour requirements for an installation taxation year regarding that specified tax credit and the Minister of National Revenue determines that the incentive claimant knowingly or in circumstances amounting to gross negligence failed to meet those requirements, then:

• the incentive claimant is not entitled to the regular tax credit rate, and is entitled to not more than the reduced tax credit rate of 10%, for the specified tax credit; and
• the incentive claimant is liable to a penalty for the claim year equal to 50% multiplied by the amount of the specified tax credit claimed less the amount that the incentive claimant would have been entitled to claim at the reduced tax credit rate of 10%.

Effective date for labour requirements

The effective date for the labour requirements was originally October 1, 2023. However, on September 29, 2023, the Department of Finance released an update confirming that the effective date of the labour requirements will be the date that enabling legislation for the labour requirements is first tabled.

Conclusion

Presumably, claimants will seek to maximize the Clean Technology ITC and Clean Hydrogen ITC, as applicable, by electing to comply with the labour requirements to the extent possible and by requiring any contractors that provide covered workers or Red Seal workers (as defined) to also satisfy the relevant labour requirements.

Without further guidance from the Canada Revenue Agency, it may be difficult for claimants to be certain that they are otherwise complying with the prevailing wage requirements and the apprenticeship requirements.

For example, the prevailing wage requirements provide that each covered worker at a designated work site of a claimant must be compensated for their work on the “preparation or installation” of specified property. Such compensation must be at least equal to the amount of wages and benefits as specified in the eligible collective agreement that most closely aligns with the covered worker’s experience level, tasks, and location. However, finding appropriate wage and benefit comparables may be difficult depending on the relevant job description and location of the project. It may also be unclear in many circumstances whether any particular worker is a “Red Seal worker” because it is not clear if their duties are “equivalent” to a Red Seal trade. More clarity with respect to the meaning of “preparation or installation”  and “reasonable steps” would allow claimants to plan their projects with more certainty and predictability.

The difficulty in administering the labour requirements is likely one reason why the effective date of the labour requirements was delayed. Ideally, claimants should be given additional time after the Clean Technology ITC and the Clean Hydrogen ITC legislation is enacted to administer and comply with any labour requirements given the lack of guidance with respect to the interpretation of such labour requirements and publicly available prevailing wage comparables for the tasks and locations with respect to certain projects.

---

[1]      Carbon intensity is measured as kilograms (kg) of carbon dioxide equivalent per kg of hydrogen produced.