This article was written in partnership with our friends at Fasken.

For years Canada has been falling behind its G7 neighbours in addressing climate change.

In fact, as a nation, we’ve historically never reached our climate targets. Continuously in last place and lacking the level of urgency required to address this crisis, many want to know how the government is going to overcome our hurdles—financially, regulatorily, and motivationally.

To tackle climate change without grinding our economy to a halt, the solution is innovation—but innovation means nothing without large-scale adoption. A lack of cleantech adoption is one of the most pressing issues Canada is facing in the net zero transition. What is the federal government doing to ensure both innovation and adoption? With the introduction of additional tax credits and amendments to existing incentives introduced in the new federal budget, we can at least say that climate change is still on the government’s radar.

But, when it comes to the climate crisis, can we afford to say “at least”? 

Alex Pankratz, Fasken tax lawyer and professional accountant, spoke with Foresight to discuss the clean energy investment tax credits (ITCs) that have been introduced by the federal government over the last few years, including:

1. How they could impact cleantech solutions-providers and larger corporations;
2. How companies can take advantage of these incentives;
3. The challenges they might face; and
4. His best advice for those looking to use these credits.

What are ITCs?

There are five ITCs that were announced prior to the 2024 budget, and one tax credit unveiled in April 2024, making six refundable tax credits in total, all aimed at addressing climate challenges:

• The Carbon Capture, Utilization and Storage (CCUS) ITC (Budget 2022)
• The Clean Technology ITC (Fall Economic Statement 2022)
• The Clean Electricity ITC (Budget 2023)
• The Clean Hydrogen ITC (Budget 2023)
• The Clean Technology Manufacturing ITC (Budget 2023)
• The Electrical Vehicle (EV) Supply Chain (Budget 2024)

Check out this bulletin by Fasken for a detailed overview.

These are refundable investment tax credits that offset a portion of the cost of developing clean energy projects—if the amount of a tax credit that an investor is eligible for exceeds the investor’s tax otherwise payable, the investor will receive a refund. The Parliamentary Budget Officer estimates that almost half a trillion dollars in investment could be eligible for these six ITCs and that the ITCs may cost the federal government $103 billion in aggregate. These are significant amounts with the potential to make a major impact. Because of the large dollar amounts involved, these ITCs are generating a lot of attention.

Who will benefit most? 

The incentives are not designed to favor any specific sector. Both entrepreneurs and SMEs are interested in these incentives, as well as cleantech manufacturers, such as those producing wind turbines, and traditional industries like cement and energy. This is another unique aspect of the ITCs: they are intended to support both suppliers and end-users. They are meant to attract interest from people in different stages of the supply chain.

What makes these credits especially desirable is that they’re handed out independent of earned project income, so investors receive them earlier in the project when traditional ROI is at its lowest. This approach contrasts with incentives like accelerated depreciation or non-refundable tax credits, which take longer for investors to fully realize. However, while these credits are garnering interest from both smaller companies and larger enterprises, it is important to note that capital-intensive industries are going to get the most out of them because these tax credits are geared towards capital-intensive projects. Nevertheless, SMEs can still receive a significant reduction. The bigger the investment, the bigger the return.

Challenges:

There are a few main concerns with these incentives:

1. Limitations

Some of these tax credits are exclusively available to taxable Canadian corporations, either directly or as members of partnerships. As a result, other types of investors may not be eligible, which could deter their involvement.

2. Complexity

The complexity in ensuring that these credits are available in respect of a particular project requires thorough and careful planning far in advance. For example determining the appropriate financing structure early on will be important to claimants that are partners in a partnership that makes an eligible investment. Partners are only eligible to obtain these ITCs to the extent of their at-risk amount—which is their equity participation in the project.

3. Uncertainty

Even if a project is designed to receive these tax credits, there is a possibility that some tax credits may need to be repaid. For example, the initially anticipated results may no longer be projected or may not be achieved. Or the tax credit claim may have been more than the taxpayer was entitled to. This is where insurance companies have started getting involved. Entrepreneurs have started asking: “What if the tax credit I assumed I was going to receive is no longer available to me because my business did not meet its projections, but investors are expecting a return I might not be able to provide?”

When considering the best advice for companies seeking to utilize these tax credits, thorough planning is of high importance. The credits are highly complex and It's essential to thoroughly consider all eligibility requirements. Consulting with engineers, labour lawyers, and other experts may be necessary to fully understand your eligibility.

All of these ITCs are intended to promote the growth of Canada's green economy and help drive the country to net zero by 2050. The government investing an estimated $100 billion in clean energy projects is a big step in the right direction. 

But does this money go towards removing adoption barriers and giving large-scale adoption enough of a push? The business community doesn’t think so.

A study conducted by KPMG prior to the 2024 budget revealed that out of 534 SMBs, 83 percent believed Canada needs to do more to compete with US climate policies. This includes introducing more funding, programs, and tax incentives. The ITCs introduced in the last few budgets prioritize attracting investment, supporting Canadian innovation, and creating jobs, and may help address some of these demands. One of the greatest threats to adoption is industries’ reluctance to take on the risk when it comes to investing in cleantech solutions. Carbon pricing policies have been a key driver in reducing the country’s emissions, but immediate policy solutions should also focus on driving down the risk for industries to invest in cleantech. The government should play a role in mitigating this risk to make investing in cleantech an easier and more confident financial decision. 

A recent study by researchers and economists examined the last 25 years of climate policies across multiple countries. The findings demonstrated that climate policies yield the best results when implemented together, leading to significant economic and environmental benefits. In Canada, carbon pricing has been crucial in reducing emissions, and these ITCs—when combined with carbon policies—could be highly impactful. But is this enough? The study revealed that even if all countries replicated past successes, efforts would need to be increased by more than fourfold to close the emissions gap. This underscores the profound impact that today’s policies will have on our future.

We are just over five years away from 2030, and the time for drastic change and widespread cleantech adoption is now. 440 Megatonnes, a project of the Canadian Climate Institute, notes:

“The decisions governments make today will ultimately determine how close Canada gets to the 2030 target, and how well-positioned the country is to meet future targets and remain competitive in a rapidly decarbonizing world.”