Clean investment tax credits arrive

The federal government passed four of Canada’s long-promised clean tech investment tax credits (ITCs). The credits have been in the works since first being announced in Budget 2021 as a response to the US Inflation Reduction Act. The newly minted tax credits include:

• Carbon Capture, Utilization and Storage

• Clean Technology 

• Clean Hydrogen

• Clean Technology Manufacturing

Companies can claim 15-40% of their investments under the tax credits. They’re also refundable, which means companies can receive cash if the credit exceeds their tax bill.

Why it matters: The tax credits help level the playing field between Canada and the US and generate more domestic demand for climate tech. The billions in incentives available through the US Inflation Reduction Act (IRA) made a compelling case for Canadian climate tech ventures to move stateside. Now, two years later, Canada is well positioned to attract more investment. 

Stacking up: Canada’s incentives are smaller compared to the IRA - about $80B over the next decade vs close to $400B in the US. The IRA also favours production tax credits, which help with “bankability” or long-term certainty for capital planning. However, Canada’s use of Carbon Contracts for Difference through the Canada Growth Fund could provide a similar level of certainty, assuming these are made more widely available.

The ITCs also have some gaps in which technologies are eligible. For example, the CCUS credit applies to direct air capture with geologic storage but not to other forms of carbon removal. The manufacturing credit doesn’t apply to manufacturing carbon removal technologies. 

What’s next: Companies can now apply for the Clean Tech and CCUS credits, with applications for the other two available in the fall. Tax credits for Clean Electricity are planned for later this year and the EV Supply Chain tax credit in 2025.

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