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05 December 2024 Canada's clean technology manufacturing investment tax credit - an update
The Department of Finance released for public comment draft legislative proposals relating to the clean technology manufacturing investment tax credit (ITC) on 12 August 2024 to clarify and expand the existing rules.1 The legislation implementing Canada's clean technology manufacturing ITC, which was previously announced in the 2023 federal budget, received Royal Assent on 20 June 2024. The initial draft legislative proposals were outlined in EY Global Tax Alert, Canada's proposed technology manufacturing investment tax credit discussed, dated 4 March 2024. This Tax Alert highlights specific clean technology manufacturing ITC updates contained in the latest round of draft legislative proposals, which includes proposed amendments to support polymetallic extraction and processing that were previously announced in the 2024 federal budget.2 Broadly speaking, the draft legislative proposals are consistent with previous announcements and include various other technical amendments. The purpose of the clean technology manufacturing ITC is to encourage the investment of capital in Canada for qualified zero-emission technology manufacturing activities, the extraction and processing of six key critical minerals, and similar recycling and synthetic graphite activities. The clean technology manufacturing ITC is refundable and available to "qualifying taxpayers" that make eligible investments in certain clean technology manufacturing property that is acquired and available for use on or after 1 January 2024 and before 2035 for eligible clean technology manufacturing use. The tax credit rate ranges from 5% to 30% depending on the year in which the property is acquired and becomes available for use, as described in our previous Tax Alert noted above. The credit is available in respect of the capital cost of certain eligible equipment that qualifies as clean technology manufacturing property. Eligible equipment includes certain property described in capital cost allowance (CCA) Classes 8, 10, 12, 41, 38, 43, 43.1, 43.2, 53 and 56 that have declining-balance-basis CCA rates ranging from 20% to 100%. Eligible equipment included in these CCA classes will also be eligible for enhanced first-year depreciation under the accelerated investment incentive if acquired and available for use before 2028. The draft legislative proposals incorporate various changes that were announced in the 2024 federal budget; most notable are the changes to support polymetallic extraction and processing projects. The following proposals announced in the 2024 federal budget and included in the 12 August 2024 draft legislative proposals are discussed below in more detail:
All the draft legislative proposals are deemed to have come into force on 1 January 2024, which aligns with the date the clean technology manufacturing ITC became effective. To qualify for the clean technology manufacturing ITC, an investment must be made in eligible property for a "clean technology manufacturing use" as defined in subsection 127.49(1) of the Income Tax Act (the Act). The definition of eligible property for a clean technology manufacturing use remains the same for property used all, or substantially all, in performing certain qualified zero-emission technology manufacturing activities defined in section 5202 of the Income Tax Regulations. Under the current definition, all property used in a "qualifying mineral activity" has to produce all or substantially all qualifying materials (i.e., lithium, cobalt, nickel, copper, rare earth metals and graphite) to qualify as a "clean technology manufacturing use." Because projects may be engaged in the production of multiple metals, proposed amendments have been made to the definition of clean technology manufacturing use with the intention of permitting property used in connection with certain eligible activities to produce a lesser proportion of qualifying materials and still qualify as a clean technology manufacturing use. Specific certification requirements will also apply in these situations (see "Certification requirement," below). More specifically, the proposed changes expand the definition of eligible property for a clean technology manufacturing use with respect to the definition of "qualifying mineral activity" to include:
The definition of "specified mineral processing activity" has also been included in the draft legislative proposals and is defined as a mineral processing activity that occurs prior to or as part of a process that is intended to increase the purity of at least one qualifying material, or produce a material with non-trace amounts of a single qualifying material, and without non-trace amounts of any elements other than permitted elements. Activities that may qualify include crushing, grinding, milling, separation, sieving, screening, froth floatation, leaching, recrystallization, precipitation, drying, evaporation, heating, calcinating, roasting, smelting, casting of ingots, refining, purification, distillation, electrodeposition and surface roughening of electrodeposited foil. The draft legislative proposals include new proposed subsection 127.49(2.2) of the Act, which allows a qualifying taxpayer to make an election with respect to the methodology used to value all commercial outputs for purposes of determining eligible clean technology manufacturing use. The taxpayer may elect to determine the value in one of two ways, either the "fair market value" or the "safe harbor price." If the property is used, or becomes available for use, before the start of commercial production within the year, the taxpayer may elect to use the fair market value of the expected output from that property to determine eligibility for the tax credit. If the property is used in commercial production in subsequent years, the taxpayer must calculate the fair market value of the actual output to determine where recapture may be applicable. Alternatively, to prevent future recapture due solely to fluctuations in the market prices of outputs, a taxpayer may elect to use the "safe harbor price" computed at the time the clean technology manufacturing ITC is claimed to determine whether the property is expected to meet the "primarily" or "all or substantially all" test. The draft legislative proposals define safe harbor price in subsection 127.49(1). The safe harbor price must be calculated using the five-year historical average spot price of the relevant material. Where available, the safe harbor price should be calculated using prices from a recognized commodities exchange. Otherwise, the safe harbor price would be determined based on the normal and accepted commercial practices in the industry to calculate the five-year historical average spot price of the relevant material. Once a taxpayer has elected a method to value qualifying mineral activity outputs produced from a particular property, as outlined above, the same valuation method must be used for any tax year subsequent to the year the related clean technology manufacturing ITC is claimed, as proposed in subsection 127.49(2.3) of the Act. Where a taxpayer relies on the "primarily" test, the clean technology manufacturing ITC claim will be denied unless certification is provided in respect of property used, or to be used, in qualifying mineral activities producing primarily qualifying materials. The certification requirements in proposed subsection 127.49(2.1) of the Act stipulate that an independent engineer or geoscientist certify that the property is being used, or is intended to be used, at a specific mine site or well site of the taxpayer, and in accordance with a plan that primarily targets qualifying materials (as determined under proposed subsection 127.49(2.2)). An "independent engineer or geoscientist" is an individual who is a "qualified professional engineer or professional geoscientist," as defined in subsection 127(9) of the Act. More specifically, the individual must, among other things:
In addition, the independent engineer or geoscientist must remain at arm's length with, independent of, and not employed by each taxpayer claiming a related clean technology manufacturing ITC. Under the current legislation, if the taxpayer has received assistance or is entitled to receive assistance, either from the government or non-government organizations, the capital cost of the property eligible for the ITC must be reduced by the amount of the assistance received or receivable. If the taxpayer subsequently repays the assistance received, or the assistance is no longer expected to be received, the amount repaid may be eligible for the ITC. Proposed legislative changes to subsection 127.49(7) are intended to clarify that an ITC may be available in respect of amounts that have been repaid if that assistance previously reduced the capital cost of property. More specifically, proposed amendments deem a separate property to be acquired in the year of repayment, provided that recapture has not occurred in respect of the property on which the assistance has been repaid. Under the current legislation, if a portion of the cost of the property capitalized remains unpaid after 180 days from the end of the tax year in which it became available for use, the capital cost of the property must be reduced by the unpaid amount. The amount can later be added back to the capital cost upon payment of the outstanding balance. Proposed legislative changes to subsection 127.49(9) are intended to clarify that an ITC may be available for amounts in respect of a clean technology manufacturing property that are paid 180 days after the end of the tax year in which the ITC would have been otherwise available. More specifically, proposed amendments deem a separate property to be acquired in the year of payment, provided that recapture has not occurred in respect of the property for which the amount has been repaid. The draft legislative proposals include the following three new subsections with respect to partnerships:
In addition, section 127.47 of the Act provides rules that apply to partnerships with respect to certain clean economy ITCs, including rules regarding the allocation of ITCs from a partnership to its members. The draft legislative proposals released on 12 August 2024 include proposed subsection 127.47(4.1) of the Act, which provides rules to clarify the amount that a taxpayer who is a member of a partnership is deemed to have paid on account of its tax payable under Part I of the Act under each of the clean economy tax credits. A qualifying taxpayer is generally restricted to claiming only one of the clean economy tax credits if the property is eligible for more than one clean economy tax credit. Proposed subsection 127.47(4.1) generally provides that where property is owned at the partnership level, each member of the partnership may generally claim any one — but not more than one — credit that they have been allocated by a partnership. The rules provide an exception to ensure that the dual-use equipment rules in the carbon capture, utilization and storage and clean hydrogen ITC context still allow each portion of the property to support a credit claim. For more information on proposed subsection 127.47(4.1), refer to EY Global Tax Alert, Canada's proposed technology manufacturing investment tax credit discussed, dated 4 March 2024.
Document ID: 2024-2214 | ||||||||
