Canada: Overview of tax-related provisions in “green measures” (Québec)

Overview of green measures from the federal and Québec governments

Overview of green measures from the federal and Québec governments

Curbing pollution and protecting the environment are now concerns shared by many, including businesses. Tax relief may be available to businesses seeking to contribute to sustainable clean technologies.

The following discussion provides an overview of certain tax-related items included in the “green measures” currently available from the federal and Québec governments.

2022 federal budget tax measures

Investment tax credit for carbon capture, utilization, and storage (“CCUS”)

CCUS is a suite of technologies that capture carbon dioxide (CO2) emissions. The new CCUS investment tax credit would be refundable and would support purchasing or installing equipment to capture, transport, store or use CO2. The credit rate is attractive, as it can be up to 60% of eligible expenses (depending on the type of equipment and the time of purchase). The credit would be available as of 1 January 2022 and would continue until the end of 2040.

Essentially, this incentive would be available for CO2 captured in Canada, or CO2 stored or used in industry (in Canada or beyond).

The measure would be subject to numerous restrictions and conditions with respect to: equipment and project eligibility, CO2-use eligibility, storage requirements, knowledge sharing, project validation and climate risk disclosure. When these requirements are not met, the credit may need to be repaid.

For capital cost allowance (CCA) purposes, two new classes would be created specifically for CCUS equipment. These classes would allow 8% and 20% CCA rates on a declining balance basis depending on the type of equipment and would qualify for the accelerated investment incentive. Lastly, two new CCA classes would be created for intangible exploration expenses and development expenses that are associated with storing CO2. These classes would allow for CCA rates on a declining-balance basis of 100% for intangible exploration expenses and 30% for development expenses.

Accelerated CCA deductions, expanded to include air-source heat pumps

It is proposed that air-source heat pumps used primarily for space or water heating would be eligible for inclusion in CCA classes 43.1 and 43.2 (clean energy generation and energy conservation equipment), thereby providing accelerated rates for capital cost allowance purposes.

Equipment that is part of an air-source heat pump system that transfers heat from the outside air and certain other equipment would also be eligible property. However, certain property would be excluded.

Tax rate reduction for zero-emission technology manufacturers

For tax years beginning after 2021, certain businesses could benefit from reduced tax rates on their eligible zero emission technology manufacturing and processing income.

It is proposed that the manufacture of air source heat pumps used for space or water heating would become an eligible manufacturing or processing activity for zero-emission technologies.

Critical minerals exploration tax credit

A new tax credit is proposed in Budget 2022—the critical minerals exploration tax credit (CMETC). The credit rate would be 30% for eligible expenditures associated with specified minerals. The specified minerals that would be eligible are:

  • Copper
  • Nickel
  • Lithium
  • Cobalt
  • Graphite
  • Scandium
  • Rare earth elements
  • Titanium
  • Gallium
  • Vanadium
  • Tellurium
  • Magnesium
  • Zinc
  • Platinum group metals
  • Uranium

The specified minerals are used, in particular, in the production of batteries and permanent magnets, both of which are used in zero-emission vehicles or are necessary in the production and processing of advanced materials, clean technology, or semi-conductors.

For expenses to be eligible, a qualified person would have to certify that the expenditures, that are intended to be renounced to flow through share investors, will be incurred as part of an exploration project that targets these specified minerals. These expenses cannot be deducted under both the CMETC and the existing mineral exploration credit (METC).

The CMETC would apply to expenditures renounced under eligible flow through share agreements entered into after 7 April 2022 and on or before 31 March 2027.

Measure announced in the 2021 Federal Fall Economic and Fiscal Update

Air quality improvement tax credit

To encourage businesses to invest in better air filtration to improve indoor air quality at their facilities, a refundable credit would be available in respect of qualifying expenditures attributable to air quality improvements incurred between 1 September 2021 and 31 December 2022. In short, entities eligible for this credit include unincorporated sole proprietors and Canadian controlled private corporations with taxable capital employed in Canada of less than $15 million* in the tax year immediately preceding the tax year in which the qualifying expenditure is incurred. Qualifying expenditures would be limited to $10,000 per qualifying location and $50,000 across all qualifying locations. The credit rate would be 25%.

*$=Canadian dollar

Measure announced in the 2022 Québec budget

Refundable tax credit for the production of biofuel in Québec

Québec proposes to offer the refundable tax credit for the production of biofuels in Québec for the period 1 April 2023 - 31 March 2033. This credit is intended to provide financial assistance to companies that produce biofuels in Québec for sale and use in Québec.

In general, eligible biofuel would have to be produced from either organic material, residual materials, carbon monoxide (CO) or carbon dioxide (CO2). The amount of the credit would depend on the carbon intensity reduction of that biofuel relative to the gasoline or diesel fuel it replaces.

Harmonization measures announced in Information Bulletin 2022-4

The Ministère des Finances du Québec on 9 June 2022 announced an intention to harmonize with the following federal measures:

  • The addition of capital cost allowance classes for carbon capture, utilization, and storage equipment, the eligibility of such classes for the accelerated investment incentive and the addition of classes of intangible exploration expenses and development expenses associated with storing CO2; and
  • The eligibility of air-source heat pumps for the clean energy equipment CCA classes (Classes 43.1 and 43.2).

However, it was announced that it would not harmonize with the following measures:

  • The introduction of the investment tax credit for carbon capture, utilization and storage (CCUS)
  • The introduction of a critical mineral exploration tax credit
  • The tax rate reduction for zero emission technology manufacturers

Zero-emissions vehicles

The federal and Québec governments offer various programs to encourage the acquisition of electric vehicles (including iZEV and Roulez vert). Individuals and businesses can benefit from discounts on the purchase or rental of new or used zero-emission vehicles (or amortize the purchase price). Various types of vehicles are covered by these programs, including motorcycles. Financial assistance is also available for the installation of charging stations.

KPMG observation

For assistance in overcoming significant climate transition challenges, businesses can count on these measures to begin their transition now. It is foreseeable that a green shift will require, over the next few years, considerable and sustained effort from all stakeholders.

Read an August 2022 report prepared by the KPMG member firm in Canada


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