Understanding the clean economy investment tax credits
The clean economy investment tax credits were introduced by the federal government to attract investment, support innovation, and drive Canada’s economy towards net-zero by 2050.
EY Canada’s Martin Mclaughlin, Partner, SR&ED, Incentives and Capital Investment, and Julia Bolpois, Senior Manager, Tax Services – SR&ED and Business Tax Incentives, discuss the four new tax credits below, with a focus on the two most appealing credits for entrepreneurs.
It should be noted that six new tax credits were proposed, but only four are currently active. The Clean Electricity investment tax credit and the Electric Vehicle Supply Chain investment tax credit are not yet active.
1. Clean Technology investment tax credit
The Clean Technology investment tax credit is a key refundable tax credit for capital invested in the adoption and operation of new clean technology property in Canada. Any business incorporated as a taxable Canadian corporation can apply for this credit.
“It’s particularly appealing because SMEs can qualify regardless of their business sector,” points out Bolpois. “For example, an SME can install solar panels on its distribution centre and claim the tax credit for the property it acquired if it meets the eligibility criteria.”
“The Government of Canada introduced this tax credit to encourage investment in the adoption and operation of clean technology property,” explains Mclaughlin.
What clean technology property qualifies?
In order to qualify, the acquired equipment must be new, in addition to being located and intended for use exclusively in Canada.
Here are some examples of property that may qualify:
- Equipment used to generate electricity from solar, wind and water energy.
- Stationary electricity storage equipment that does not use any fossil fuel in operation.
- Active solar heating equipment, air-source heat pumps and ground-source heat pumps.
- Non-road zero-emission vehicles and related charging and refuelling equipment that is used primarily for such vehicles. This includes heavy equipment powered by hydrogen or electricity used in mining or construction.
- Equipment used exclusively for the purpose of generating electrical energy or heat energy (or a combination of both), solely from geothermal energy.
This excludes any equipment that is part of a system that extracts both heat from geothermal fluid and fossil fuel for sale or use. - Eligible concentrated solar energy equipment all or almost all of which is used to produce heat or electricity exclusively from concentrated solar energy.
This includes reflectors and related solar tracking systems and thermal energy storage equipment. - Small modular nuclear reactors.
What is the acquisition period?
Only equipment acquired after March 27, 2023, and before 2035 qualifies for the tax credit.
What is the credit rate?
The rate depends on when the property was acquired and whether you elect to meet the labour requirements.
The credit rate for property acquired after March 28, 2023, and before 2034 is:
- 30% if you meet the labour requirements
- 20% if you do not meet the labour requirements
The credit rate for property acquired after December 31, 2033, and before 2035 is:
- 15% if you meet the labour requirements
- 5% if you do not meet the labour requirements
There is no tax credit for property acquired after December 31, 2034.
What are the labour requirements?
The labour requirements concern workers involved in the installation of clean technology property whose work is mainly manual or physical in nature.
To meet these requirements, companies must pay such workers according to the terms of their collective agreement. In the absence of a collective agreement, wages must be at least equivalent to those specified in an eligible collective agreement that best matches the workers’ experience, duties and work site.
“This applies both to the employer claiming the tax credit and to the subcontractors hired to install the equipment,” adds Bolpois.
Employers claiming the tax credit must provide workers with a clear notice explaining these requirements, as well as information on how to report non-compliance.
Apprenticeship requirements
To meet the requirements, employers must 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.
The Red Seal endorsement is granted under the Red Seal Program, which sets common standards to assess the skills of tradespeople across Canada.
“Employers really need to plan ahead to make sure that they are able to meet labour requirements, especially when it comes to the companies they do business with,” says Julia Bolpois.
2. Clean Technology Manufacturing investment tax credit
The Clean Technology Manufacturing investment tax credit applies to all taxable Canadian corporations in the cleantech supply chain.
“This includes companies that manufacture solar panels, for example,” says Mclaughlin.
The credit also applies to companies involved in the extraction, processing and recycling of critical minerals needed for clean technology manufacturing, such as lithium, cobalt, nickel, copper, rare earth elements and graphite.
What clean technology property qualifies?
In order to qualify, the acquired property must be new, in addition to being located and intended for use exclusively in Canada. Businesses that wish to lease the property must also meet other requirements.
Below are some examples of property that may qualify as part of qualified zero-emission technology manufacturing activities, the extraction and processing of six key critical minerals, and similar recycling and synthetic graphite activities:
- Machinery and equipment used for manufacturing or processing. This includes industrial robots used to manufacture electric vehicles.
- Certain property used for mineral extraction and processing.
- Certain specialized tooling such as machines used to cut solar cells.
- Non-road vehicles and automotive equipment not designed for use on the road network. This includes hydrogen-powered vehicles designed for extracting rock from mine sites or electric vehicles designed for use in factories.
What is the acquisition period?
Only property acquired between January 1, 2024, and December 31, 2034, qualifies for the tax credit.
What is the credit rate?
The rate depends on when the property was acquired. Below is a list of the credit rates to be claimed:
| Date of acquisition | Credit rate |
|---|---|
| Between December 31, 2024, and January 1, 2032 | 30% |
| Between December 31, 2031, and January 1, 2033 | 20% |
| Between December 31, 2032, and January 1, 2034 | 10% |
| Between December 31, 2024, and January 1, 2035 | 5% |
There is no tax credit for property acquired after December 31, 2034.
3. Carbon Capture, Utilization, and Storage investment tax credit
The Carbon Capture, Utilization, and Storage investment tax credit applies to eligible expenditures incurred for a qualified carbon capture, utilization, and storage project from January 1, 2022, to December 31, 2040.
4. Clean Hydrogen investment tax credit
The Clean Hydrogen investment tax credit applies to eligible clean hydrogen property that is acquired and becomes available for use after March 27, 2023, and before 2035. The credit rates range from 15% to 40%, depending on the carbon intensity of the hydrogen to be produced by the project.
Capitalizing on the opportunity to invest in clean energy
Many countries around the world are looking to seize opportunities associated with the energy transition,” says Bolpois. “As a matter of fact, the credits and labour requirements introduced in Canada are based on what was done in the United States with the Inflation Reduction Act. We needed to keep our competitive edge and continue to appeal to businesses.”
The federal government has also announced that it will introduce the Clean Electricity investment tax credit and the Electric Vehicle Supply Chain investment tax credit. In all, clean economy investment tax credits will represent $93 billion in tax incentives by 2034–2035.
“Through these incentives, the federal government seeks to improve Canadian clean technology manufacturing capabilities, while encouraging companies to use them, which will reduce their carbon footprint,” says Mclaughlin. “As a result, Canada will move closer to its goal of achieving net-zero emissions.”
Federal investments in the clean economy represent a great opportunity for your company. Your future investments could both improve your bottom line and benefit the environment.