As discussed in our previous blog, on June 20, 2024, Bill C-59 received royal assent and has now come into force. Bill C-59 implements a handful of measures announced in the federal government's 2023 Fall Economic Statement and 2023 Budget, released November 21, 2023 and March 28, 2023, respectively.
Included with these measures is the Carbon Capture Utilization and Storage Income Tax Credit (the "CCUS-ITC"), which seeks to encourage investment in expanding CCUS capacity across Canada.
In addition to the CCUS-ITC, Bill C-59 also establishes income tax credits for clean technology, clean hydrogen, clean technology manufacturing and clean electricity.
This blog provides an overview of the key components of the CCUS-ITC.
Overview of the CCUS-ITC
Key components are summarized as follows:
- Qualifying taxpayers: Canadian taxable corporations that incur "qualified CCUS expenditures" for a "qualified CCUS project" that supports a CCUS process are eligible for the CCUS-ITC. CCUS projects must be planned to operate for at least 20 years and provide at least 10% eligible CO2 use per year. The taxpayer must submit a formal project plan including front end engineering design studies meeting certain requirements to the Ministry of Natural Resources (the "Ministry"). The Ministry will then submit an initial project evaluation and require the taxpayer to be subject to various reporting requirements, including submitting knowledge sharing reports and climate risk disclosure for projects with qualified CCUS expenditures of $250 million+. Qualified CCUS projects do not include projects operated to service a unit with a commissioning date before April 8, 2022 or that are undertaken to comply with emission standards that apply under the Reduction of Carbon Dioxide Emissions from Coal-fired Generation of Electricity Regulations.
- Amount of CCUS-ITC: The credit rates of the CCUS-ITC depends on the type of CCUS project and the year in which the expenditure occurs and the property is acquired, as follows:
| Project type | Credit rate 2022-2030 | Credit rate 2031-2040 |
| Direct air capture | 60% | 30% |
| Other CCUS projects | 50% | 25% |
| Transportation, storage and use | 37.5% | 18.75% |
- To incentivize prompt action, credit rates are reduced by 50% for the period from 2031 through 2040.
- Eligible expenditures: Eligible expenditures are predominantly those occurring in advance of the "first day of commercial operations" of the CCUS project. Eligible expenditures after the date of first commercial operation are limited to 10% of the project's total qualifying expenditures. Preliminary CCUS project work activity is not eligible for the CCUS-ITC and only new property is eligible. The start date of eligible expenditures is January 1, 2022, with the value of the CCUS-ITC credit decreasing by 50% starting January 1, 2031 and ending December 31, 2040. Expenditures must relate to the qualified CCUS project and be either a carbon capture expenditure, carbon transportation expenditure, carbon storage expenditure or a carbon use expenditure.
- Eligible jurisdictions: CCUS projects must be in jurisdictions which have adequate regulatory requirements in place. Current provinces with approved regulatory regimes include British Columbia, Alberta and Saskatchewan. There remains the question of whether the recent changes to Manitoba's CCUS regulatory framework may result in Manitoba CCUS projects being eligible for the CCUS-ITC.
- Labour requirements: The CCUS-ITC is accompanied by labour requirements such as ensuring that prevailing wage and apprenticeship conditions are met, which may reduce the CCUS-ITC credit rate by 10% if the taxpayer does not comply with such conditions.
- Clawback: The CCUS-ITC may be recovered if the projected eligible use percentage (the ratio of the quantity of the CO2 that is stored or used in an eligible use such as dedicated geological storage to the total quantity of the CO2 stored) of the captured CO2 is not met at the end of each project period.
Takeaways
The CCUS-ITC is a long-anticipated and much welcomed incentive to increase the economic viability of CCUS projects in Canada. With it comes further and renewed government support for CCUS projects, including in relation to meeting greenhouse gas emissions reduction targets.
MLT Aikins has extensive experience advising on energy projects, including CCUS projects, across Western Canada. Contact one of our energy lawyers to learn more.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.