Go for Green: 2023 Federal Budget adds more incentives for green energy

In Canada’s 2023 Federal Budget, the Government tabled a number of new and improved green tax credits that are aimed at promoting sustainable growth, reducing greenhouse gas emissions and creating jobs in the green economy.

The budget includes significant investments in clean energy, green infrastructure and other initiatives designed to support Canada’s transition to a low-carbon economy.

Get ahead of the curve and go for green today with Canada’s new and improved green tax credits explained below. 

Clean Hydrogen Investment Tax Credit – Refundable

Budget 2023 introduces a new refundable tax credit of 40%, 25% or 15%, called the Hydrogen Credit for the purchase and installation of equipment that is acquired and produces clean hydrogen from electrolysis or natural gas.

The emissions from the equipment must be abated using carbon capture utilization and storage (CCUS) technology. The tax credit rate depends on the assessed carbon intensity (CI) of the hydrogen that is produced. Certain labour requirements must be satisfied to qualify for the full hydrogen investment tax credit and will be subject to a verification and compliance process. If not met, the tax credit rate is reduced by 10%.

The labour requirements apply in respect of certain workers engaged in the portion of a project that is subsidized by the respective investment tax credit whether they are engaged directly by the business or indirectly by a contractor or subcontractor and, focuses on workers whose duties are primarily manual or physical in nature and not to workers whose duties are primarily administrative, clerical, supervisory or management. In order to meet the prevailing wage requirement, a business would need to ensure that all covered workers are compensated at a level that meets or exceeds the relevant wage plus the value of benefits and pension contributions as specified in an eligible collective agreement.

This Hydrogen Credit will apply to property acquired or becomes available for use on or after March 28, 2023 (Budget Day).

Clean Technology Investment Tax Credit – Refundable

Budget 2023 introduces a new 30% refundable tax credit (Clean Tech ITC) to businesses investing in eligible property including geothermal energy systems that are eligible for Class 43.1 of Schedule II to the Regulations to the Tax Act.

Eligible property includes equipment used primarily for the purpose of generating electricity and/or heat solely from geothermal energy. This credit also requires certain labour requirements be met to qualify for the full Clean Tech ITC. If not met, the tax credit rate is reduced by 10%. See discussion of the labour requirements in Refundable Investment Tax Credit for Clean Hydrogen above.

This Clean Tech ITC will apply to property acquired or becomes available for use on or after March 28, 2023 (Budget Day).

Clean Technology Manufacturing Investment Tax Credit – Refundable

While the Clean Tech ITC will provide support to Canadian companies adopting clean technologies, Budget 2023 proposes a new investment tax credit called the Clean Technology Manufacturing Investment Tax Credit that will provide support to Canadian companies that are manufacturing or processing clean technologies and their precursors. The tax credit is equal to 30% of the capital cost of machinery and equipment used in clean tech manufacturing and processing as well as critical mineral extraction. Eligible activities related to clean technology manufacturing and processing include:

• Manufacturing of certain renewable energy equipment (solar, wind, water or geothermal)
• Manufacturing of nuclear energy equipment
• Processing or recycling of nuclear fuels and heavy water
• Manufacturing of nuclear fuel rods
• Manufacturing of electrical energy storage equipment
• Manufacturing of equipment for air and ground source heat pump systems
• Manufacturing of zero emission vehicles
• Manufacturing of batteries, fuel cells, recharging systems and hydrogen refueling stations for zero emission vehicles
• Manufacturing of equipment used to produce hydrogen from electrolysis
• Extraction and certain processing activities related to six critical minerals essential for clean technology, specifically: lithium, cobalt, nickel, graphite, copper and rare earth elements

The Clean Technology Manufacturing ITC will apply to property acquired or becomes available for use on or after January 1, 2024.

Clean Electricity Investment Tax Credit – Refundable

Budget 2023 proposes a 15% refundable clean electricity investment tax credit referred to as the “Clean Electricity ITC” for eligible investments in:

• Non-emitting electricity generating systems such as wind, solar, solar photovoltaic, hydro, wave, tidal and nuclear systems
• Natural gas fired electricity generation which would be subject to an emissions threshold
• Stationary electricity
• Stationary electricity storage systems that do not use fossil fuels in operations such as batteries, pumped hydroelectric storage and compressed air storage equipment

This credit also has a labor requirement in order to qualify for the full Clean Energy ITC. To the extent the labor requirements are not met, this will reduce the tax credit rate by 10%.  See discussion of the labor requirements in Refundable Investment Tax Credit for Clean Hydrogen above. The Clean Electricity Investment Tax Credit would be available as of the day of Budget 2024 for projects that did not begin construction before the day of Budget 2023. The Clean Electricity Investment Tax Credit would not be available after 2034.

Carbon Capture, Utilization and Storage (CCUS) Investment Tax Credit – Refundable

Budget 2022 introduced a refundable investment tax credit for CCUS projects for businesses that incurred eligible expenses starting on January 1st 2022. This Budget provides additional design details for this tax credit. The government has attached wage and apprenticeship requirements to this credit.  In order to qualify for the full tax credit rate, the labor requirements will need to be met.  See discussion of the labor requirements in Refundable Investment Tax Credit for Clean Hydrogen above. To meet the apprenticeship requirement, a business would need to ensure that not less than 10% of the total labor hours performed by covered workers engaged in the portion of the project that is subsidized be performed by registered apprentices. Covered workers are those whose duties correspond to those performed by journey persons in a Red Seal Trade.

Zero Emission Technology Manufacturers-  50% Reduction in Corporate Income Tax Rates

Budget 2021 introduced a measure to reduce the corporate income tax rate by half for qualifying zero emission technology manufacturers. This initiative has been expanded to cover income from the following nuclear manufacturing and processing activities:

• Manufacturing of nuclear energy equipment
• Processing or recycling of nuclear fuel cells and heavy water
• Manufacturing of nuclear fuel rods

Expansion of Flow Through Shares and Critical Mineral Exploration Tax Credit

Budget 2023 proposes to include lithium from brines as a mineral resource such that eligible corporations can issue flow through shares to fund exploration and development of resources that extract lithium from brines. The Budget also expands the 30% critical mineral exploration tax credit to this resource.

Article written by Ken Chong, CPA, CA

For more information about the 2023 Budget, please read our 2023 Federal Budget Highlights. For more information on how these measures might apply to you and your business, contact a DMCL advisor.