Exciting Opportunities in Canada's 2023-24 Budget: Clean Technology, Electrification, and Energy Storage Incentives

As the world moves towards electrification, governments around the globe are implementing measures to accelerate the transition to clean energy, sustainable technologies, and innovative solutions. In line with this trend, the Canadian federal government has recently released its 2023-24 budget, which unveils significant tax measures and credits aimed at promoting electrification, clean technology manufacturing, and energy storage projects.

For businesses involved in these rapidly evolving industries, the budget presents an exciting opportunity to advance their projects and contribute to a greener future. In this blog post, we will outline the key tax measures from the proposed Canadian federal budget that are relevant to electrification, clean technology manufacturing, and energy storage projects.

Investment Tax Credit for Clean Technology Manufacturing (Clean Tech Manufacturing ITC)

The budget proposes a 30% refundable investment tax credit for clean technology manufacturing and processing, as well as critical mineral extraction and processing. This incentive targets investments by corporations in depreciable property used primarily for eligible activities, which includes machinery, equipment, and related control systems used in manufacturing and processing.

Some of the eligible activities related to clean technology manufacturing and processing include:

• Manufacturing of renewable energy equipment. (solar, wind, water, geothermal)
• Manufacturing of nuclear energy equipment and fuel rods.
• Processing or recycling of nuclear fuels and heavy water.
• Manufacturing of electrical energy storage equipment. (e.g., grid-scale storage)
• Manufacturing of equipment for air- and ground-source heat pump systems.
• Manufacturing of zero-emission vehicles and related components. (e.g., batteries, fuel cells, recharging systems)
• Manufacturing of equipment used to produce hydrogen from electrolysis.
• Manufacturing or processing of upstream components exclusively designed for other eligible clean technology manufacturing and processing activities.

Additionally, eligible activities include extraction and certain processing activities related to critical minerals essential for clean technology supply chains, such as lithium, cobalt, nickel, graphite, copper, and rare earth elements.

The investment tax credit is expected to cost $4.5 billion over five years, starting in 2023-24, and an additional $6.6 billion from 2028-29 to 2034-35. The credit will apply to property that is acquired and becomes available for use on or after January 1, 2024, and will no longer be in effect after 2034, subject to a phase-out starting in 2032.

Investment Tax Credit for Clean Electricity (Clean Electricity ITC)

The budget introduces a 15% refundable clean electricity investment tax credit for eligible investments in non-emitting electricity generation systems, abated natural gas-fired electricity generation, stationary electricity storage systems that do not use fossil fuels in operation, and equipment for the transmission of electricity between provinces and territories. Both new projects and refurbishments of existing facilities are eligible.

Notably, this credit applies to battery energy storage applications. The Clean Electricity ITC is available from the day of the 2024 budget for projects that did not begin construction before the 2023 budget announcement and will not be available after 2034. Additionally, the ITC has labor prerequisites involving wages and apprenticeship that must be fulfilled to qualify for the entire 15% credit; otherwise, the base credit will be reduced to 5%.

Difference between Clean Electricity ITC (2023) and Clean Technology ITC (2022)

Although previously announced in Budget 2022, with further detail released in the fall of 2022, it is crucial to recognize the Clean Technology Investment Tax Credit and how it differs from the Clean Electricity Investment Tax Credit. While both programs offer tax credits on investments in renewable energy and storage, the Clean Technology ITC offers a maximum credit amount of 30%, double that of the Clean Electricity ITC at 15%. More importantly, is that the Clean Technology ITC is exclusive to taxable entities, while the Clean Electricity ITC expands eligibility to include both taxable and non-taxable entities. The Clean Electricity ITC appears to also be available to a wider array of projects and technologies, based on initial details from the Government of Canada. In comparison to the Clean Technology ITC, which limits eligibility to wind, solar, geothermal and energy storage systems, the Clean Electricity ITC allows eligible entities to seek credit on transmission projects. Over the coming months, we expect further clarification on these key details. Nonetheless, it is evident that the future of renewable energy and energy storage systems in Canada looks exceedingly promising.

Securing Major Battery Manufacturing in Canada

The rapid global shift towards electric vehicles presents a significant opportunity for Canada to secure its place in the rapidly developing supply chains for electric vehicle manufacturing, according to a recent report from Government of Canada. This includes battery manufacturing and the critical minerals and high-value midstream components that play an essential role in their production. These segments of the electric vehicle supply chain have the potential to create and secure high-quality jobs for Canadian workers for generations to come.

Recognizing Canada's potential to be a global leader in battery manufacturing, Volkswagen announced on March 13, 2023, that its subsidiary, PowerCo, will build its first overseas 'gigafactory' in St. Thomas, Ontario. This massive battery manufacturing facility will represent a significant portion of the North American battery manufacturing sector, cementing Canada's place in the North American and global battery value chains.

The projected costs of this agreement have been fully accounted for in Budget 2023. Further details and announcements are expected to follow in the coming weeks after the finalization of the agreement by Volkswagen.

This investment in clean technology and a critical minerals supply chain, along with the establishment of a major battery manufacturing facility, demonstrates Canada's commitment to securing its place in the global clean energy transition. By capitalizing on these opportunities and leveraging the tax credits and incentives outlined in the 2023-24 budget, businesses in the electrification, clean technology manufacturing, and energy storage sectors can advance their projects and contribute to a cleaner, more sustainable future for Canada.

As the budget's implementation progresses, we encourage stakeholders in the clean technology, electrification, and energy storage sectors to explore these opportunities and leverage them to advance their projects and businesses. For more information on this topic, please refer to the references listed below:

https://www.budget.canada.ca/2023/report-rapport/tm-mf-en.html

https://www.pwc.com/ca/en/services/tax/budgets/2023/2023-federal-budget-analysis.html

https://www.budget.canada.ca/2023/report-rapport/chap3-en.html