Leveraging Canada’s clean economy tax credits for a greener future

As Canadians, we all want a strong manufacturing sector supported by vibrant cities with robust infrastructure to grow our economy for years. With the unprecedented challenges that manufacturers are facing today, many are looking to move forward but are unaware of the tax credit supports that are currently available.

There is recognition that businesses can’t shoulder this investment burden in our country alone. Through new access to federal and provincial government supports that de-risk dollars invested in clean technologies and energy infrastructure, we can build Canadian capacity across our manufacturing industry and supply chains in the future. These new tax credits allow Canadian businesses to align profitability with sustainability and position them for long-term success towards a net-zero future.

Understanding the Clean Economy tax credits

Nearly $100 billion of refundable tax credits were legislated into the Income Tax Act in June 2024 to support the acquisition of clean technology property and enable business investment, providing billions of dollars in funding annually to taxable corporations.

Forming the Clean Economy Investment Tax Credits (ITCs), they currently consist of four tax credits to enable business investment through targeted incentives for clean technology adoption and sustainable manufacturing. These new investment tax credits cover clean technology, clean technology manufacturing, clean hydrogen and carbon capture utilization and storage.

While each credit has different refund rates, technical eligibility and filing requirements for claiming, they all represent a significant contribution to covering capital asset costs for taxable corporations, cutting years off traditional ROI calculations in many cases.

The four credits are detailed below.

Clean Technology ITC

The Clean Technology ITC can refund up to 30 per cent of expenses toward clean technologies like solar panels, wind turbines, ground or air-source heat pumps and non-road zero-emission vehicles. The credits are available to all taxable Canadian corporations and cover investments in eligible technologies, including:

• Electricity generation: Solar, wind, and water energy generation.
• Stationary electricity storage equipment: Must not use fossil fuels during operation.
• Active heat generation equipment: Solar, ground-source, and air-source heat pumps.
• Non-road zero-emission vehicles: Includes related charging and refueling equipment.
• Concentrated solar energy equipment: Includes tracking systems, distribution and transmission equipment, energy storage, and ancillary instrumentation.

Companies claiming these credits at the standard 30 per cent rate must meet many legislated requirements, including electing and attesting to meeting specific labour requirements to pay covered workers (those responsible for the physical preparation and installation of specified property) at prevailing wages.

Clean Technology Manufacturing ITC

The Clean Technology Manufacturing (CTM) ITC offers a 30 per cent refundable tax credit on capital costs for machinery and equipment for eligible manufacturers. For the CTM credit, the corporation must undertake qualified zero-emission technology manufacturer (ZETM) activities or be a producer of qualifying critical minerals such as lithium, cobalt, nickel, copper, graphite and rare earth elements.

The Canada Revenue Agency, which administers the credit programs in coordination with National Resources Canada, has defined various use cases for the CTM credit that could include:

• Industrial robots used to manufacture electric vehicles or vats used to process cathode active materials.
  Certain tangible property required for machinery or equipment and certain specialized tooling and moulds used for ZETM.
• Equipment in qualifying critical mineral extraction and processing to crush rock.
• Non-road zero-emission vehicles designed for use in factories or hydrogen-powered vehicles designed for extracting rock from mine sites.

Carbon Capture Utilization and Storage ITC

The Carbon Capture Utilization and Storage (CCUS) ITC offers a refundable tax credit on the acquisition of property used to capture CO2 emissions from fuel combustion, industrial process, or directly from the air (CC) to transport, store, or use the captured in industry (US).

Eligible uses include dedicated geological storage of captured carbon or its use in producing concrete, specifically using a qualified process for sequestration of the captured CO2 in concrete. There are many considerations in claiming the CCUS credit when applying, including ownership, location, capacity, phased construction, documentation and submission of project plans and front-end engineering and design (FEED) studies as well as meeting requirements for covered workers and regulatory considerations in order to obtain approval from Natural Resources Canada. The result of the filing is a substantive refundable credit of 37.5 per cent to 60 per cent on eligible CCUS projects.

Clean Hydrogen ITC

The Clean Hydrogen ITC offers up to a 40 percent refundable credit for the installation of hydrogen and ammonia production technologies. The refund rate is based on the intensity of the system in use and covers many technologies such as those used to produce hydrogen through electrolysis of water or eligible hydrocarbons, clean ammonia production equipment, dual-use electricity and heat equipment, or dual-use hydrogen and ammonia equipment.

Investing in Canada

When the credits were legislated, measures included many positive outcomes for all Canadians, beyond the business owners who receive the credits directly. To obtain the higher refund rate on some of the tax credits, the Covered Workers legislation requires the claimant to support the creation of qualified skilled trades and Red Seal apprentice roles that promote safe, effective, and well-paying jobs across Canada.

The federal government also encourages these credits to be stacked in coordination with additional programs like direct provincial grant funding, the Canadian Renewable Conservation Expense accelerated depreciation deduction, or the Atlantic Investment Tax Credit.

The advancement and application of these credits will accelerate the payback on eligible clean tech property, often by years.

The recent government grants for clean tech investments have sparked renewed interest among many manufacturers and distributors.  According to Momentum: BDO’s Manufacturing and Distribution Leadership Report, more than 40 per cent of respondents indicated that these incentives have influenced their investment strategies. Specifically, 25 per cent were considering increasing their investments in clean tech, while 19 per cent have already made the leap, reflecting a growing confidence in the opportunities these grants present.

However, the impact has not been collective. Another 44 per cent of respondents reported that the announcement of these programs had no effect on their investment decisions, highlighting a degree of hesitation or uncertainty within certain segments of the industry.

Beyond clean tech, manufacturers are also taking a closer look at other government incentives for investing in technology, equipment, and machinery. The responses were evenly split, with 46 per cent having taken advantage of these types of grants or incentives, while the same percentage (46 per cent) had not. This suggests that while many businesses see the value in these programs, others may be unsure about how to access them or whether they’re the right fit for their needs.

A global leader in the making

To capitalize on these credits, businesses should begin with an assessment of current operations. Identifying areas for investment, such as adopting renewable energy or storage solutions or conversion to non-road zero-emission vehicles, is the first step toward becoming a sustainable enterprise. Partners with expertise in both tax incentives and sustainability strategies can assist manufacturers in navigating the process, developing actionable plans, and ensuring compliance with regulatory requirements.

Over the next decade, taxable Canadian corporations must take advantage of the financial support offered in the Clean Economy ITCs to accelerate their growth opportunities, non-road vehicle retrofits, and equipment and facility expansions—all while insulating themselves from energy consumption and supply chain disruptions along the way.

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Martha Breithaupt, BSc., ICD.D is a Partner, Credits & Incentives at BDO Canada LLP.

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