On Tuesday 21 November 2023, Canadian Deputy Prime Minister and Federal Finance Minister, Chrystia Freeland, released the Federal Government’s 2023 Fall Economic Statement.

 

It contained some announcements relating to various investment tax credits that aim to enhance Canada’s clean economy and therefore could affect taxation of projects in the clean economy project finance sector.  In addition, there was confirmation of the intention to proceed with the proposed Excess Interest and Financing Expenses Limitation (EIFEL) rules.

 

In this blog we discuss these announcements which might be relevant to a number of Canadian projects.

 

Clean Economy Investment Tax Credits (ITCs)

Carbon Capture, Utilisation and Storage (CCUS) ITC

 

There will be legislation introduced before the end of 2023 following the consultation that ended on 8 September 2023.  The CCUS ITC will be available for CCUS projects that have incurred eligible expenditure from 1 January 2022 until 31 December 2040.  Projects are expected to operate for at least 20 years.  If the operating period is less than 20 years, there is a clawback mechanism of the CCUS ITC.

 

Clean Technology ITC

 

There will be legislation introduced before the end of 2023 following the consultation that ended on 8 September 2023.  The 30% Clean Technology ITC will be available from 28 March 2023.  The ITC will be expanded to include systems that produce electricity, heat or both electricity and heat from waste biomass with the expansion being available to businesses investing in eligible property that is acquired and becomes available for use on or after 21 November 2023 assuming the property had not been used for any other purpose before being acquired.

 

Clean Technology Manufacturing ITC

 

The federal government will launch consultations soon with the aim to introduce legislation in early 2024.  The tax credit will be available from 1 January 2024.  While the Clean Technology ITC, first announced in Budget 2022, will provide support to Canadian companies adopting clean technologies, the Clean Technology Manufacturing ITC will provide support to Canadian companies that are manufacturing or processing clean technologies and their precursors.

 

Clean Electricity ITC

 

This is a 15% tax credit that is available to both taxable and non-taxable entities such as publicly-owned utilities and Crown corporations.  The Fall Economic Statement announced that the details relating to the design and implementation of the credit will be published in early 2024 (except those pertaining to publicly-owned utilities).  With respect to the credit for publicly-owned utilities, the federal government will begin consultations with provinces and territories next year with a target of introducing legislation in relation to the Clean Electricity ITC in the fall of 2024.

 

The ITC will be expanded to include systems that produce electricity or both electricity and heat (but not heat only) from waste biomass with the expansion being available as of the date of Budget 2024 for projects that begin construction on or after 28 March 2023.

 

Clean Hydrogen ITC

 

The federal government will launch consultations soon with the aim to introduce legislation in early 2024.  The tax credit will be available for qualifying expenditure incurred from 28 March 2023.

 

The Fall Economic Statement provided details of design elements of the credit in respect to eligible projects, credit rates, measuring carbon intensity, eligible equipment, verification and compliance.  For example, details on the use of Power Purchase Agreements and renewable natural gas in calculating carbon intensity for the purposes of the tax credit were provided.

 

It is also proposed that property that is required to convert clean hydrogen into ammonia will now qualify for the ITC assuming a number of conditions are met.

 

Labour Requirements

 

In order to receive the maximum tax credit available in relation to the tax credits detailed above, certain labour requirements need to be met.  A consultation on these requirements ended in September 2023 and the Fall Economic Statement indicated that draft legislation will be released before the end of 2023 setting out requirements such as prevailing union wages and apprenticeship training.

 

The effective date for these labour requirements will be the date when the enabling legislation is first tabled.

 

Excessive Interest and Financing Expenses Limitation (EIFEL) rules

 

The Fall Economic Statement confirmed the federal government’s intention to proceed with the previously announced EIFEL rules which will be modified to take into account the consultation that ended on 8 September 2023.  We published a blog on the originally announced rules here and intend to detail changes incorporated in the final rules once they are available.

 

Impact on the project finance sector

 

These ITCs are likely to be a benefit to a number of transactions where expenditure is incurred in the relevant time period and the EIFEL rules could have an impact on the timing and amount of interest allowable in Canadian project finance transactions.

 

Using our world class modelling team along with our tax and accounting team’s knowledge of the proposed tax credits and EIFEL rules, we can help you assess the positive impact of the available tax credits on transactions and ensure that your financial models are optimised to reflect the maximum benefit from any tax credits available whilst assessing the impact of any disallowable interest due to the EIFEL rules.

 

Get in touch with our Tax & Accounting team to discuss how these changes might impact your transactions.

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