On 7 April, Deputy Prime Minister and Finance Minister Chrystia Freeland tabled the Government of Canada’s latest Budget, which outlined various measures to address housing, climate change, jobs and affordability.
Whilst there were no unexpected policies that would impact the project finance sector, it did confirm the Government’s intention to proceed with the tax changes and related measures previously announced in the 2021 Budget. As a result, there have been changes to capital cost allowances while certain investment tax credits available for businesses have been formalised.
In this article, we explore these measures and their impact on the project finance sector.
Investment Tax Credit (ITC)
New Tax Credit
Whilst it was announced in the 2021 Budget that there would be an ITC to support the adoption of carbon capture, utilisation and storage (CCUS) technologies by businesses, the 2022 Budget provides the specifics and detailed guidance. It confirms that the CCUS ITC is available, and therefore refundable, to businesses that incur eligible expenses on or after 1 January 2022.
The CCUS ITC is available in respect of the cost of purchasing and installing eligible equipment in an eligible CCUS project so long as the equipment was part of a project where the captured CO2 was used for an eligible use.
In general, eligible equipment refers to equipment that will be used solely to capture, transport, store, or use CO2 as part of an eligible CCUS project.
What is an eligible CCUS project?
- A new project that captures CO2that would otherwise be released into the atmosphere; or
- A new project that captures CO2from the ambient air, prepares the captured CO2 for compression, compresses and transports the captured CO2, and stores or uses the captured CO
The extent to which the CCUS Tax Credit is available for eligible equipment would depend on the end use of the CO2 being captured. Eligible uses would initially include dedicated geological storage and storage in concrete. Enhanced oil recovery would not be eligible.
Where eligible equipment is part of a project that plans to store CO2 through both eligible and ineligible uses, the CCUS Tax Credit would be reduced by the portion of CO2 expected to go to ineligible uses over the life of the project, as set out in initial project plans.
The following rates would apply to eligible expenses:
||Applicable ITC rate
||Incurred on or after 1 January 2022 – 31 December 2030
||Incurred on or after 1 January 2031 – 31 December 2040
|Eligible capture equipment used in a direct air capture project
|Other eligible capture equipment
|Eligible transportation, storage, and ‘use’ equipment (i.e. equipment that uses CO2 in an eligible use)
Comparison to the US
The CCUS ITC is similar to the US 45Q tax credit that allows businesses to claim credit for carbon capture projects.
The 45Q credit has provided important incentives for CCUS projects in the US for several years. President Joe Biden recently signed the Infrastructure Investment and Jobs Act in November 2021, providing for a multi-billion dollar investment in CCUS. This is the most significant federal investment in CCUS ever, reinforcing his commitment to reach net-zero emissions by 2050. Investment in such projects has increased considerably over the past few years. This trend is expected to continue following the passing of this Act.
However, the Canadian credit is likely to be seen as more generous than its American counterpart as the Canadian ITC gives fiscal relief upfront. In contrast, the 45Q credit offers fiscal relief typically towards the back end of a project. However, oil producers in Canada will be disappointed that the CCUS ITC does not extend to projects that capture CO2 for use in enhanced oil recovery while the 45Q credit does.
Change to Capital Cost Allowances (CCAs)
Carbon capture, utilisation and storage (CCUS) equipment
Eligible CCUS equipment will be included in two new capital cost allowance classes depending on the nature of the equipment:
- 8% rate on a declining-balance basis (e.g. capture, transportation and storage equipment); and
- 20% rate on a declining-balance basis (e.g. use equipment)
These classes would also be eligible for enhanced first-year depreciation under the Accelerated Investment Incentive.
These CCA classes are available on costs incurred on CCUS equipment on or after 1 January 2022.
Clean Energy Equipment
Expansion of classes
Under the Income Tax Act, there are already accelerated CCAs for equipment included in classes 43.1 and 43.2. The Budget proposes to expand these classes to include air-source heat pumps primarily used for space or water heating.
The expansion applies to property that is acquired and became available for use on or after 7 April 2022, where it has not been used or acquired for any purpose before
Impact on the project finance sector
With an increasing emphasis on greener energy sources and the announcements made in the 2021 Budget, it was not unsurprising that this Budget focused on investments within the renewables sector in greater detail. As a result, the proposed expansion of certain capital cost allowance classes is likely to benefit a number of renewables projects over the coming decades.
In addition, the Budget confirms the Government’s intention to proceed with the interest deductibility measures announced in February 2022. This could have a material impact on the project finance sector, given the high financing costs incurred during the early phases of these projects, as we have previously discussed.
Combining our world-class modelling team along with our tax and accounting team’s knowledge of the proposed changes, we can help you assess the impact of these changes on transactions and ensure that your financial models are optimised to reflect the maximum benefit from any enhanced allowances and tax credits available.
Get in touch with our Tax & Accounting team to discuss how these changes might impact your transactions.
The full budget can be viewed here.