06 29, 2023

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The Canadian Government announced in March 2023 several major investment tax credits (ITCs) as part of its plan to accelerate decarbonization in Canada and meet its net-zero emissions goal by 2050. These investment tax credits, pending legislative finalization in Fall 2023, will serve to level the playing field between the U.S. and Canadian adoption of clean energy technologies. Under the new Budget 2023, eligible Canadian clean technology projects will receive a financial benefit similar in scale to the clean technology ITCs under the U.S. Inflation Reduction Act

At a high level, these ITCs will include a 30% tax credit for net-zero technologies and battery storage investments. They will also include a 15-40% tax credit for eligible clean hydrogen investments, depending on the carbon intensity of the source material. In this comprehensive overview of the various benefits under Budget 2023, we review the incentives, eligibility criteria, and what to expect in the next few months – so you have the necessary information to take advantage of this opportunity to reduce carbon emissions and contribute to a cleaner future.

An impetus for building the net-zero industries of tomorrow

As part of Budget 2023, the Canadian Government is prioritizing a clean energy economy as one of the main pillars of its initiative, which was driven in part by two significant shifts on the global scene: 

  1. The accelerated pace [from the world’s major economies] of fighting climate change and retooling their economies
  2. An intentional move toward shifting economic dependence to stable democracies like Canada’s 

Major ITCs included within Budget 2023 have been promoted as a direct competition to the U.S. Inflation Reduction Act, which was signed into law in August 2022. “While the Inflation Reduction Act will undoubtedly accelerate the ongoing transition to a net-zero North American economy, it also offers enormous financial supports to firms that locate their production in the United States – from electric vehicle battery production, to hydrogen, to biofuels, and beyond,” the Government said in its economic update. “Without new measures to keep pace with the Inflation Reduction Act, Canada risks being left behind.”

Investment tax credits (ITCs) to promote clean energy adoption

For organizations looking to decarbonize their operations, they can leverage the following ITCs from Budget 2023:

The Clean Technology Investment Tax Credit

In line with the Inflation Reduction Act’s 30% full ITC, the Clean Technology Investment Tax Credit is a 30% refundable tax credit that taxable entities can leverage for eligible investments in clean technologies and materials. It covers a wide range of zero-emitting technologies, including:

  • Electricity generating systems like solar PV, wind, water, and geothermal
  • Energy storage systems like batteries, flywheels, pumped storage, and other energy storage systems 
  • Low-carbon heat equipment like active solar heating equipment, air-source or ground-source heat pumps
  • Heat or electricity generating systems like concentrated solar and small modular nuclear reactors
  • Industrial zero-emission vehicles and related charging or refueling equipment like hydrogen or electric heavy-duty equipment used in mining or construction

While the details are not expected to be finalized until October 2023, all investments in applicable technologies from the date of the Budget release (late March 2023) onward are eligible to receive the ITC. The phase-out of this credit is still under discussion – the latest information released indicates it has been extended to 2034, guaranteeing at least 10 years of certain financial benefits. Our team is currently working with various government entities and trade associations to support the finalization of this work.

The Clean Hydrogen Investment Tax Credit

The Clean Hydrogen Investment Tax Credit is a tax credit for investments made in equipment needed to convert eligible clean hydrogen into ammonia and to transport the hydrogen. Eligible clean hydrogen in this case refers to projects that produce hydrogen from electrolysis – or natural gas, if emissions are abated using carbon capture, utilization, and storage (CCUS). The percentage of the tax credit ranges from 15-40%, depending on the carbon intensity of the produced hydrogen. 

Hydrogen projects with a carbon intensity of less than 0.75 kg of carbon dioxide equivalent per kg of hydrogen will receive a 40% ITC. The benefit decreases to 25% when the carbon intensity is between 0.75 and 2.0 kg, and to 15% when the carbon intensity is between 2.0 and 4.0 kg. 

At Enel North America,  we are focusing on producing green hydrogen via electrolysis, so we plan to leverage the full value of the 40% ITC for hydrogen projects, as they focus only on green hydrogen.

Supporting made-in-Canada labor

As with the prevailing wage and apprenticeship requirements under the U.S. Inflation Reduction Act, there are also labor requirements under the Clean Technology ITC. To qualify for the full tax credit of 30%, contractors must be paid fair compensation (including all benefits and pension contributions) from the most recent widely applicable multi-employer collective bargaining agreement or corresponding project labor agreements in the jurisdiction where relevant labor is employed. Additionally, at least 10% of the tradesperson hours worked must be performed by registered apprentices in the Red Seal trades. 

These labor market requirements will come into effect on October 1, 2023 to allow time for new labor contracts to be negotiated and updated. Further consultation processes on labor market requirements will also kick off in the coming months.

Leveling the playing field for non-taxable entities

For non-taxable entities, such as indigenous first nations and municipal governments, Budget 2023 introduces a separate ITC, known as the Clean Electricity ITC, that provides a 15% refundable tax credit for eligible investments. This includes non-emitting electricity generation systems, stationary electricity storage systems, and other equipment – the same list of qualifying technologies as those under the Clean Technology ITC for taxable entities, enabling non-taxable entities to unlock the benefits of clean electricity developments. 

It’s important to note that the Clean Technology ITC and the Clean Electricity ITC cannot be stacked.

What does this all mean for you?

Canada’s clean energy ITCs of 2023 contain hundreds of billions in incentives for organizations across Canada to catalyze private investments in clean energy, transport, and manufacturing. We are pleased to see the Canadian Government advancing and implementing the ITC to level the playing field with the U.S. and accelerate lower-carbon emissions. As we await additional guidance from the Canadian Government on certain provisions, organizations need to lay down the groundwork now to take advantage of the sizeable federal tax credits. 

Acting now allows you to create an early mover advantage and mitigate the supply chain and interconnection application bottlenecks expected in the Canadian clean energy industry in the years ahead. 

Our team of policy experts is actively tracking the movements around the rollout of the ITCs to ensure our customers unlock better returns over their project lifespan and maximize value from their investments in clean technology. We have the tools in place to secure the maximum ITC credits while promoting local unions and apprenticeship growth. Contact us today to evaluate your facilities for energy solutions that meet your specific energy requirements and sustainability goals.

Learn more about advancing your energy strategy by leveraging our integrated energy solutions.