Please click here to hear the audio recording.
In the inaugural episode of Clean Incentives, hosts Brendan Sigalet and Derrick Osborne, alongside special guests Ashley White and Jason Roth, delve into the myriad of tax incentives available for businesses in Canada, with a focus on the newly enacted Bill C-59. This legislation introduces the Clean Economy Investment Tax Credits (ITCs), aiming to provide $93 billion in federal incentives by 2034–2035. These incentives are designed to attract investment, foster Canadian innovation, create jobs and propel Canada’s economy toward achieving net zero by 2050.
Tune in to this episode to gain invaluable insights on:
- the nuances of refundable clean technology ITCs and their transformative benefits for businesses;
- key legal considerations, including corporate and First Nation partnerships, essential for maximizing these incentives; and
- real-world insights from industry experts on structuring successful clean technology projects.
Disclaimer: During the episode when Brendan discusses the tax-exempt status of the First Nation, he is specifically referring to the income resulting from the project being exempt from tax, not the overall tax-exempt status of the First Nation.
Transcript
Brendan Sigalet: [00:00:00] One interesting thing to note with respect to all these clean economy ITCs but in respect to the clean technology investment tax credit that we're chatting about today is that they're actually refundable. So that's kind of a change from historic investment tax credits that are available through the Income Tax Act.
Welcome to Clean Incentives. A podcast series within the Bennett Jones Business Law Talks podcast that discusses topics around taxation incentives for developing clean technology projects in Canada. I'm Brendan Sigalet and together with my colleague Derrick Osborne, we are your hosts for this podcast series.
Derrick Osborne: [00:00:44] Brendan and I are tax associates at Bennett Jones LLP and our practice includes advising on tax aspects of energy transition deals. Including renewable energy, carbon capture and hydrogen projects. Today we are focusing on the federal clean technology, tax credit and various legal considerations relevant to the industry this tax credit effects.
Our discussion will include an overview from a tax perspective, followed by topics such as corporate, commercial and First Nation legal considerations that go into a Cleantech project.
Brendan Sigalet:: [00:01:21] Before we begin this podcast, please note that anything said or discussed on this podcast does not constitute legal advice. Always seek proper advice from your legal advisor as every situation is different and outcomes can vary. Today we are joined by Ashley White and Jason Roth. Ashley is the co-head of the energy industry team at Bennett Jones.
Her practice includes advising on all commercial aspects of energy projects, including acquisitions and divestitures, structuring and the negotiation of contracts for all stages of project lifecycle. Ashley's practice includes advising on and negotiating joint ventures between industry. And indigenous communities in connection with equity ownership and investments in energy projects in Western Canada.
Jason is the head of the Bennett Jones Construction Law Group. His practice includes advising on infrastructure development projects including liquefied natural gas, power and renewables, electrical transmission and mining. Jason's practice touches on all phases of project development, from the drafting and negotiation of contracts at the design and engineering stages, to project construction and throughout the operation of projects.
Derrick Osborne: [00:02:27] So to start us off, the Clean Tech Income Tax Credit is really built on a building block of what's called the CCA regime in the Income Tax Act. And the CCA regime is a system where you buy a property, a depreciable property, and then you get a percentage reduction from your income every year that you claim it.
When you make these expenditures for depreciable property, the Clean Tech ITC effectively builds on top of that and gives you a tax credit, effectively money in your pocket. In addition to that capital costs you can claim on a yearly basis, there's only specific properties can qualify for the Clean Tech ITC, and these are generally properties that are designed to help Canada achieve its net zero goal and incentivize the carbon transition and get us to a net zero economy in Canada.
The types of properties that are available include solar, wind, hydro projects and the equipment for those projects. Stationary electrical storage equipment, clean heating equipment such as heat pumps and such things, zero emission vehicles, equipment for geothermal projects, solar concentration equipment, and, of course, small modular reactors.
Brendan Sigalet: [00:03:36] Yeah, so basically you're going to get 30 percent of the capital cost of this eligible equipment, which is defined as clean technology property. And as Derrick mentioned, you know, it's based off the regs and as far as the definition of clean technology property. So you buy this equipment, and then you get an investment tax credit based on the cost of the equipment or the capital costs as we call it.
And so that includes such items as, you know, the cost to install the equipment and, you know, legal costs relating to the acquisition of the equipment, that sort of thing. One interesting thing to note with respect to all these clean economy ITCs, but in respect to the clean technology investment tax credit that we're chatting about today is that they're actually refundable.
So that's kind of a change from historic investment tax credits that are available through the Income Tax Act. Generally, an investment tax credit that you're going to get under the ITA is a tax credit that offsets your tax payable. So you'll have a bunch of income. You'll have tax that you'll have to pay on that income and then the investment tax credit will then offset that tax payable, so you don't have to pay tax.
But the unique aspect about these clean economy ITCs is that they're refundable. And so, even if you don't have all that much income, and all that, the resulting tax on that income, you actually will still, the government will write you a check as to the excess. Clean Tech ITC that you get in the year and you'll get that in cash following filing your tax return.
So it's more of a method that the government's using to, to utilize the investment, uh, the Income Tax Act in order to incentivize and subsidize these projects because you're not offsetting the tax payable, you're actually getting cash from the federal government in order to build these projects.
So it's a massive incentive in that regard. As I mentioned, the clean technology investment tax credits, the ITC that you're actually going to receive is equal to 30 percent of the capital cost of your equipment. There's going to be some reductions if you're getting, you know, Government assistance, for example, some, the government's paying you in order to get this project done, then that's not going to count towards the capital cost of the assets that qualify that will be the capital cost be reduced and you get 30 percent on the remainder.
Generally, it's just, it's a very powerful incentive. The government's developed in order to get these projects built a little, a little delay on the, the implementation. But, but we're here now, they passed bill C 59. They'll see 69 and so ready to hit the ground running. As far as the timing for getting these investment tax credits, uh, you'll get the investment tax credit when the equipment's available for use under the cleantech ITC, generally, this means that it's when the equipment's operational and it's being used by the taxpayer for making money.
But, there's some nuance there in the investment tax act. And it's a whole concept.
Jason Roth: [00:06:32] Hey, Brendan, it's Jason. We get a lot of questions about, what if we turn the equipment on before the project is in commercial operation? Could we get the credit at that point?
Brendan Sigalet: [00:06:41] Absolutely. So the general rule is if the equipment becomes operational, whatever equipment you're claiming the cleantech ITC on, and it's being used by the taxpayer for the intended purpose for which it's used.
So, you know, like a solar panel gets turned on. If it's just being used for testing, then it wouldn't be available for use. But if it's being used, you get, like, multiple stages of a solar project. You don't have to wait till the whole thing is built in order to receive the investment tax credit. You can do it as soon as the solar panels are making money on one stage.
Then you get the ITC for that, and then so on. Another key thing to note, with respect to all these clean economy ITCs, with the exception of the clean electricity ITC, which we'll chat about in a different podcast, they're only available to taxable Canadian corporations. However, the corporations can claim the clean technology ITC through a partnership.
However, this has kind of led to a little bit of an issue with respect to how the legislation is structured, and I'll just pass it over to Ashley to kind of chat about a little bit about how these infrastructure projects and these, you know, resource projects, because that's essentially what these are, are built from a historical perspective, and then we can go through a little bit of, you know, how that may not work so well in it based on the latest version of the legislation.
Ashley White: [00:08:04] That's right. Thanks, Brendan. Historically, for corporate liability protection and taxation purposes, the most common legal structure for equity investment in resource projects, as broadly as that term may be used, has historically been through a limited partnership.
We've also seen unincorporated joint ventures, but typically, particularly in the case in the recent years where there have been. Indigenous communities that are participating in an equity investment. It has been done through a limited partnership.
Brendan Sigalet: [00:08:36] Yeah. And so unfortunately, you know, when this, when this first legislation was first released, there were rules that allowed, you know, the limited partners to claim up to basically their equity amount. And that this is getting a little bit detailed.
So I'll back up a little bit. So under the legislation, the general rule is that limited partners are only allowed to claim the cleantech ITC up to their at risk amount, which is essentially their equity participation in the limited partnership. And so if you get project financing at the partnership level, then that reduces the amount of equity that they've actually put into the, into the project.
And so it ends up in the situation where you have a partner of the limited partnership that's actually building this project and they're putting in, let's say 20 and other taxpayers putting in 30 or let's say make it 10 and 10, 10 each partner. And so then they get 80 worth of financing and they go and buy a bunch of eligible assets with that.
Now, under the Cleantech ITC rules, if that had been a corporation, they would get 30 in ITC, but because it's a partnership, they're limited to the equity participation or the at risk amount that they actually have in the partnership. And so they're limited to taking only 10 out of the ITC out of the partnership.
And so that's problematic because what happens to the remaining 10 dollars that's left in that partnership, right? So the previous rules had said that the general partner could kind of mop up. Any of that extra ITC that can't be allocated to the limited partners, but they've since changed that and I'm not really sure from a policy perspective why it seems that they've kind of are interested in dissuading investors from using limited partnerships in order to invest in these projects.
I think that it may have something to do with the general partner having just a nominal interest. And then receiving a bunch of ITC and then they can kind of, you know, just run away and not be responsible for the project anymore. That might have something to do with it. In any case, the federal government has made a clear policy decision in order to disincentivize these projects.
So that's led to a whole lot of issues that we've kind of had to work through. And come up with, you know, unique structures in order to make these things work. It's definitely been a challenge. And actually, I know you have a lot of work with First Nations groups. And historically, they, you know, generally use these partnerships in order to flow up the income to the First Nation. Such that, to keep their tax exempt status. And that's usually how they work these resource projects, right?
Ashley White: [00:11:24] That's right. Because a limited partnership is not a distinct legal entity, it's not a taxpayer under the Income Tax Act, and so the income of the First Nation partner is taxed as if the activity were undertaken by it personally.
A First Nation, for various reasons under multiple pieces of legislation, it's income earned through the limited partnership will not be subject to income tax. So, historically, that has been a really strong structure with benefits to both the industry partner as well as the indigenous community, through its investment vehicle, whether it does so through another limited partnership, or potentially directly through the band.
Now, of course. The number of partnerships, or I should say joint ventures, as between Indigenous communities and industry has grown significantly in the last five years, where most projects, particularly in Western Canada, but, you know, throughout Canada, involve some component of an Indigenous community having an equity interest in the development of resources on its traditional territory.
And so, as a result of that, that came forward and the restrictions placed on limited partnerships has resulted, particularly in the last year, some really creative solutions that have needed to be met in order to deal with the fact that some of these limited partnerships currently exist and need to be restructured.
Or we're at the front end, whether it's through government procurement processes, and we're trying to structure at the front end, coming up with solutions that will still continue to benefit the, industry partner, indigenous community partner, as well as maximize the ability to get the full amount of the ITC.
Brendan Sigalet: [00:13:07]Yeah, no, it's definitely been a lot of work in order to adjust on the fly, as it were, in order to make sure that these projects are working for Indigenous communities. And so there's been a lot of novel solutions that have been come up in order, come up with in order to make these things work.
Jason Roth: [00:13:28]Brendan, it's Jason. What do you guys recommend then?
Brendan Sigalet: [00:13:28] Generally the easiest thing to do is to incorporate a taxable Canadian corporation underneath the project First Nations group that leads to, you know, multiple concerns one that if you're having a taxable Canadian corporation, then you lose your tax exempt status by the First Nation.
Right? So any income you earn from the project. There's got to be an evaluation done as to whether it's worth it to get the investment tax credit for the project at the front end and then lose your tax exempt status for the income on the back end. And so it kind of strategic decision has to be made there by the First Nation.
In addition, that can kind of lead to other you know, problematic, potentially problematic issues because that. In order to incorporate a taxable Canadian corporation under the First Nation, it's not necessarily the simplest thing. There's, a number of specific rules in the Income Tax Act that are, you know, aimed and around this, this issue.
And those have to be worked through in order to ensure that you're actually going to have that taxable Canadian corporation there. And another thing to note, we'll be talking about this in a later podcast, but the Clean Electricity ITC has to be a further strategic decision made because it covers a lot of the same properties.
And now it is available to you to tax these entities. So, strategic decisions definitely have to be made by the First Nation. And, you know, and then you can have other structures as well. You can have, you know, a taxable Canadian corporation from the First Nation, and then you have a partnership, and then, you know, you have to work through a bunch of issues there with respect to making sure that you have the right equity, or at risk amount in the limited partnership by the First Nation.
There's a lot of, there's a lot of different issues to work, work through. And it's, it's somewhat of a, uh, there's not a one size fits all solution. We would definitely recommend, yeah, to chatting with their tax advisors. Um, you know, it's, it's not simple and, and there's a number of issues to work through.
Derrick Osborne: [00:15:23] So moving on from the tax aspects of it. There are other issues in building renewable projects and Jason, were you able to comment on some of the regulatory issues or commercial issues that are coming up in these projects you're seeing?
Jason Roth: [00:15:35] Sure. So I think really practically, no one's going to do a project unless it's going to get a return that they're comfortable with.
And it also, the project needs to fit the kind of general objectives of the project developer. And so practically, these credits are great because that may offset some of the capital costs, as you two have talked about, but practically, that means it's a little more complicated to get the project kind of up and running.
So, as part of the advice we're typically giving is, if you're kind of working early in the project towards a final investment decision, and you're maybe hiring someone to do some engineering or some planning for your project, you should really have them mapping out the particular types of equipment. Or other capital costs that will be incurring and what will be applicable for these credits.
So really, practically, we need to actually have sufficient information for any financial model as to what the credit will apply to, because that's going to actually really impact the returns of the project. And it also, as you guys talked about earlier, when you're going to get the money back, and the chances of getting the money back are really important.
So we're seeing more and more clients during the early feasibility study phase, or maybe front end engineering design phase, sometimes called feed, asking those contractors or someone in the organization to do this mapping exercise to see number one, which credits are applicable. And then two, which credits that are applicable, what type of equipment and other things on this project do we think would actually be applicable?
There's also prevailing wage requirements for certain of these tax credits. And if that's the case, then there needs to be some pretty serious mapping about how the project will be built and installed, etcetera, to make sure that we understand which potential tax Credit rate will be applicable to the project. And if that prevailing wage isn't used as part of the project.
So in English, what prevailing wage means is you have to be paying some of the labor on the project, a certain amount of money that's greater than a minimum amount that will be set by the legislation, whatever that is. So people are struggling a little bit in the Alberta market elsewhere as to what that would actually mean.
But I think practically we are helping clients come up with some ways to at least have a justifiable reason why they would pay a certain amount. But there's this mapping exercise to understand. Number one, what's applicable? What is the credit going to apply to? What's the timing of that credit? What type of headache or additional work will that mean for this project?
Does that impact, for example, our costs of the project or the time we need to do it in terms of putting the project in place? into contract or actually executing on it. And then determining at the end of the whole process, what does that actually mean for my returns? And so that just is something that is unusual for the Canadian market.
It's not something that would have happened five years ago. And so now people are going to have to get used to number one, thinking about that no different than they're gonna have to start thinking about talking to tax associates early. They're gonna have to start thinking about maybe looking at these.
From a more practical engineering perspective, and so what that means is these are all these projects are a little more complicated. If you're setting a project schedule to implement them, you'll probably want to give yourself a little more time to kind of do this mapping exercise. And then, I think, Brendan, one of the interesting things we're seeing is that the insurance industry is starting to step in as well to maybe look at ways to ensure the tax credits are available.
And so that will be another key piece of any financial model is what happens if these credits go away? Can I recover? And that's all part of swirling about and how these projects are going to get done. None of this is going to be insurmountable. All these projects will get up and running and ultimately the availability of the money through the tax credit's a really positive thing.
But it does mean a little bit more work up front. I think just practically you're going to need on a project team, if you're the owner or the developer, you're going to need to think about who's going to be doing that because oftentimes it's kind of the last thing that's discussed on the project, but in some ways it's the most important because it's directly tied to the project.
Ashley White: [00:19:19] The money you're going to get back, you know, Jason, and hearing that in terms of we're talking about project structuring, both in terms of project execution, as well as some of the tax structure, tax and corporate structuring, one interesting development, largely stemming from the U.S. is insurance in connection with the investment tax credits.
And I think what we've heard from a number of providers is some protections around the investment structure not being respected. So that goes back to our earlier conversation around structuring. Applicable projects not qualifying for the tax benefits. I think that kind of largely falls a little bit in your wheelhouse around looking at capital projects. And then potentially some protections around sort of loss of tax benefits through a reassessment down the road.
Jason Roth: [00:20:05] Exactly. So I think the key is that it looks like similar to the U.S. that insurance will be available. The question for the project developer will then be what's the value of that insurance and the cost of that insurance for our project.
So for example, if you're going to be financing that project from a bank, does that bank actually require that we get this insurance? So we need to build that into our financial model. Put another way, how much money do we need to borrow? Or is it something that's more just a decision because we're not doing the financing route that way we do, are we that concerned about perhaps a loss of the credit that we'd want to pay for that insurance?
And so that's no different than any other type of insurable events that the client needs to worry about on a big project. It's just another tool that they may need to consider. And, of course, that tool comes with some cost and maybe some benefits. So it's just, once again, another thing to be thinking about on these particular projects that are applicable to credits that you wouldn't think about in a more traditional resource project where you're just doing a pipeline where there's no availability for a credit.
Derrick Osborne: [00:21:01] So the prevailing wage requirement is something new in Canada. We've never had this before. Attached any tax credit before, and it's bringing up some potentially problematic contractual and corporate issues, like, for example, a project owner is typically not going to be the person who's hiring every worker, but their ITC is contingent on that worker being paid a prevailing wage.
Are you seeing any? New considerations coming up in contracts between general contractors and owners and subcontractors to deal with this issue.
Jason Roth: [00:21:31]Yeah absolutely. It's going to be a hot topic as hot a topic as be when you're doing a tax blog, but the practically speaking, what are we going to have to contract for with our contractors so that they do the work in a manner that we can actually get the credit?
And then, of course, that's something that you would want to have planned with your contractor and discussed. But then the big question mark is going to be, well, what happens if they don't do it? What type of liability are we looking at if their actions led to us losing the credit? And my expectation is that might be a little bit of a conversation that takes a bit of time to work through.
But it's definitely something we're seeing in the market as being asked for, because ultimately no owner is going to hire the contractor to implement the job in a way that voids the tax credit. And so that's just another thing that needs to be considered, but really no different than any other thing you're dealing with when you're doing it.
A major contract for building a project. There's lots of things. You want to think about what are the regulatory requirements that needed to flow through to the contractor? What type of schedule and price? And so this is just another thing that needs to be discussed. So I would think many reputable contractors in the province and in Canada are going to understand the owner's requirements and are going to help.
The owner come up with some solutions to deal with that, and they'll probably need to get paid to figure that out as part of their planning.
Brendan Sigalet: [00:22:37] And just to be clear, in respect of losing the credit, that, uh, you know, there's a 10 percent reduction to the credit if you don't comply with these prevailing wage.
And there's also an apprenticeship requirement, whereby 10 percent of the project labour has to be registered apprentices. And there's a bunch of unique definitions that go along with that. But definitely, you know, consideration. It's been a key consideration in all these projects. And, uh, you know, in some cases the project proponent has been calculating that potentially the cost of getting the extra 10 percent might outweigh the benefit in respect of, in respect to the project.
So that strategic decision has been being made, uh, and, uh, it'll be continued to be made. Um, at the end of the day, these projects need to make sense from a dollars and cents perspective. So, uh, just going back to the, uh, the question as far as potential for tax insurance, generally, what we're seeing is that tax insurance has been becoming available for a lot of these different aspects of these projects.
Uh, the general rule is with tax insurance, if you can get an opinion on it, then you know, from a tax lawyer, then you can likely insure it. And so we've been seeing, you know, requests for, uh, to ensure for, you know, the reasonable allocation test in respect to the partnership. Um, you know, and, and, and you know, as far as the, that, you know, this equipment will qualify for a particular ITC that you're looking at in all number of other different, uh, things. And I expect that this industry will just continue to develop the, the tax insurance industry. If you look to the U.S. as an example, it's a, it's a, it's absolutely massive industry down there. There's obviously significant differences between the U.S. clean energy incentives and the Canadian clean energy incentives. So just to put a pin in the tax insurance point, we expect that, you know, this will continue to develop in Canada. Just, to briefly touch on some of the differences between Canada and the U.S. Because a lot of these incentives are directly derived from the U.S. Inflation Reduction Act, the IRA that was signed by Biden. And I forget exactly 2022 2022. Is that right, Ashley?
Ashley White: [00:24:57]That's right. In response to the Inflation Reduction Act, which was passed um, by the Biden administration in 2022, of course, the Canadian government introduced the incentive tax credits as we've been talking about the IRA really extended energy tax incentives for wind and solar generation for 10 years historically in the U.S. renewables relied on tax credits that required reauthorization from Congress every three years. So that was a notable, notable change in that tax incentive environment for the U.S. But in particular, at the time that the IRA was introduced, the impact of that, or what was the predicted impact is that it would triple us clean energy production with 40 percent of the country's energy coming from renewable sources by 2023.
So, a significant motivator for this are obviously global commitments to emissions reductions, as well as, of course, stimulating the U.S. economy. So, Canada had stepped in with our ITC structure as a direct response to that. Helping to both boost the renewable sector as well as bring in sort of foreign interests and investment within Canada.
Brendan Sigalet:[00:26:09] Yeah, and just picking up a little bit on some of the differences between the U.S. investment tax credit system and the Canadian, um, you know, and I'm not an expert on the IRA by any means. Um, it seems broadly that, you know, some, some of the incentives, uh, in the U.S., they can be production incentives. Uh, so you, you actually get paid by the government for the production of certain clean energy, whatever, hydrogen, whatever it is.
And, and that's not the case in Canada. You, in Canada, the investment tax credits are just aimed at the actual building of the projects. Additionally, there's some differences as far as refundability in the U.S. as compared to Canada. All that to say that you can't take the U.S. IRA and assume it's going to be the same in Canada.
You have to do somewhat of a deep dive and talk to, you know, your tax advisors early in order to be fully informed in making that strategic decision, um, as far as where you'd like to invest. But Canada is, those incentives are very, very competitive.
Thanks for taking the time to listen to this episode.
