Act on tax incentive programs to accelerate innovation

Authored by: Korey Conroy, Associate Partner, Business Tax Incentives, EY Canada

Cecile Arendas, Senior Manager, Business Tax Incentives, EY Canada

The breadth of Canadian federal tax credits now available holds tremendous potential for businesses that are ready to spark innovation or to make meaningful progress on solutions already in development.

• How can organizations unlock tax incentive programs to harness their potential?
• What leading practices should startups follow to understand and action the opportunities these incentive programs provide?

The ability to channel incentives into meaningful progress is already redefining Canada’s tech landscape. Carbon Lock Tech is a shining example. Focused on converting organic waste into stable, sequestered carbon, the company looked to partner with municipalities poised to benefit most from their technological solutions. Despite best efforts at the local government level, finding the financing and strategic partners needed to pilot the tech has proven difficult. Offers of space or funding have emerged, only to evaporate in the final hours due to budgeting or process constraints.

That theme carries over into proposed private sector pilot partnerships, where the risk of potential revenue loss — say, through operations going offline for even a day — is a common deterrent. Still, Carbon Lock Tech has persevered, mining provincial and federal incentive programs for the capital needed to advance their technology. Chief Executive Officer Kevin Danner says these funding programs have made all the difference in his startup’s progress — and the company plans to capitalize on this latest tranche of support to generate more positive technology investment decisions.

“It’s not easy to start a business — and even harder to start a cleantech company. The grants and tax credits that we’ve been able to access so far have helped to extend the time and space needed to advance our carbonization technologies and commercialization strategies,” says Kevin.

What’s more, because some incentive programs offer refunds to private sector partners, they can help pave the way for greater cross-industry and cross-sector innovation. Foresight Canada, a leading cleantech accelerator, says programs that effectively de-risk the piloting process for private companies is a real boon. They see the increasing need for incentive programs and credits that can be applied at varying stages of the startup and innovation lifecycle, serving to condense timelines to first revenue. Success, though, lies in understanding and accessing what’s available to begin with.

“Canada creates the most per-capita greenhouse gas emissions of any G7 country. That's why government involvement to incentivize the transition to a low-carbon economy — as well as support systems to help cleantech innovators leverage these incentives — is imperative,” says Stephen Wilson, Vice-President, Partnerships at Foresight Canada. “By fostering the development and scaling of made-in-Canada climate solutions, we'll see a strong and prosperous Canadian sustainability sector and an accelerated path to achieving net-zero targets.”

While provincial support varies, Canadian startups like Carbon Lock Tech that are actively investing in cleantech and climate-focused solutions will soon be able to tap into the following national programs:¹

• Investment tax credit for clean technology manufacturing: A 30% refundable tax credit on the cost of capital equipment purchased for clean technology manufacturing and processing as well as critical mineral extraction.
• Investment tax credit for clean hydrogen: A refundable tax credit of up to 40% of the cost of purchasing and installing eligible equipment for projects that produce hydrogen from electrolysis or natural gas, provided emissions are abated using carbon capture and storage.
• Investment tax credit for clean electricity: A 15% refundable tax credit for eligible investments in non-emitting electricity generation systems, abated natural gas-fired electricity generation and stationary electricity storage systems that do not use fossil fuels.
• Investment tax credit for clean technologies: A 30% refundable tax credit for investments in clean technologies, including electricity generating stations, stationary electricity storage systems that do not use fossil fuels, low-carbon heat equipment and industrial zero-emission vehicles, geothermal energy systems.
• Investment Tax Credit for Carbon Capture Utilization and Storage (CCUS). A refundable tax credit of up to 60% of the cost of purchasing and installing equipment that is used solely to capture, transport, store or use carbon dioxide as part of a qualified CCUS project in Canada.

That said, it’s not enough to know about these incentives. Harnessing their potential requires both an intimate understanding of the incentives landscape and an actionable strategy that optimizes all levels of incentives support.

We suggest keeping these three leading practices in mind as start-ups work through the process:

1.       Track everything. Your technology development journey must be detailed and focused to effectively support an incentive claim. That means tracking everything from the steps taken to the time spent and dollars invested at each stage of your innovation process. Creating a clear tracking framework or dashboard to keep these details in check is essential for compliance and helping you benefit from the full lift of available funding.

2.       Engage stakeholders. Ensure your key stakeholders are aware of the incentives available for your project to encourage investments, funding and partnerships. Many incentives are designed to support both technology developers and adopters, and a collective awareness can often be the catalyst that brings pilot projects forward. Considering all current and future parties in your incentives strategy now will reduce barriers later.

3.       Scan continuously. Like innovation itself, incentive programs are never static. They evolve. The same is true of the requirements and guidelines that govern them. Make it a priority to regularly check for updates to requirements or entirely new incentives to stay continually aligned to program needs.

“Government support for clean technologies and energy transition has never been greater,” says Cecile Arendas, Senior Manager in the Incentives Tax practice at EY Canada. “Greater support also adds complexity and compliance burdens, however, and these can slow the pace of innovation. We help innovators build a right-sized, scalable incentives strategy that supports them from application to acceptance.”