Calculating the ITC base
The capital cost base on which the ITC is calculated must be adjusted for any other ITCs applicable to the property under section 127. In addition, the clean technology ITC cannot be claimed on property that is eligible for the CCUS tax credit.
Where the taxpayer has received assistance, either from the government or non-government organizations, the ITC is calculated on the cost base of the equipment net of any financial assistance received.
If a portion of the cost of the property capitalized remains unpaid after 180 days from the end of the fiscal year in which it became available for use, the capital cost of the property must be reduced by the unpaid amount. The amount can later be added back to the capital cost upon payment of the outstanding balance.
Time limit for ITC application
Proposed subsection 127.45(3) places a time limit on filing the prescribed form necessary to be eligible for the clean technology ITC. Specifically, the prescribed form must be filed on or before the day that is one year after the taxpayer’s filing due date for the year. A consequential change to subsection 220(2.2) removes the CRA’s discretion to wave this requirement.
Recapture of credit
A recapture of the credit received will apply if the property is converted to a non-eligible use, disposed of or exported from Canada within 20 years of the date it was acquired. The amount of the credit repayable will be calculated by multiplying the ITC by the amount of the proceeds of disposition in an arm’s length transaction, or the fair market value of the property when it is sold to a non-arm’s length party or converted to a non-eligible use, as a percentage of the capital cost of the property on which the ITC had been claimed.
The recapture of the credit does not apply where the property is transferred to a related party (that is also a qualifying taxpayer) and that “purchaser” will use that property for qualifying clean technology purposes.
Labour requirements
The draft legislation also proposes that certain labour requirements be achieved in order to fully maximize the incentive available under the clean technology ITC. If the labour requirements are not met, the maximum credit rate is reduced by 10 percentage points.
To meet the labour requirements, the ITC claimant must elect in prescribed form and manner for each installation taxation year (i.e., a taxation year during which preparation or installation of the clean technology property occurs). The reduced ITC rates (see table above) will automatically apply in situations where the taxpayer has not elected in the prescribed manner to meet the prevailing wage and apprenticeship requirements for an installation taxation year.
Prevailing wage requirements
The taxpayer must meet the following labour requirements to qualify for the full incentive:
- Each covered worker must be compensated for their labour in accordance with the worker’s relevant collective agreement. If no collective agreement exists, the amount of compensation must be at least equal to the amount specified in the most comparable agreement that is relevant to the given worker’s experience level, tasks and location (calculated on a per-hour or similar basis). This condition is referred to hereinafter as the “prevailing wage requirement”.
- The ITC claimant must confirm in writing (in prescribed form and manner) that the prevailing wage requirement (described above) is met with respect to their own covered workers and that a reasonable effort was taken to verify that covered workers employed by others involved in the installation of clean technology property also meet the prevailing wage requirement.
- The ITC claimant is also required to take steps to ensure that all covered workers are aware of the requirements by posting notices that are clearly visible and accessible or by electronic means. The ITC claimant must also provide a plain language explanation of what the prevailing wage requirements mean for workers and instructions as to how to report any failures to meet these standards.
For these purposes, a covered worker means an individual:
- Who is engaged in the installation of the clean technology property at the designated work site;
- Whose work duties are primarily manual or physical in nature; and
- Who is not an administrative, clerical or executive employee, or a business visitor to Canada (within the meaning of section 187 of the Immigration and Refugee Protection Regulations).
Apprenticeship requirements
In addition to the prevailing wage requirements set out above, the ITC claimant must make reasonable efforts to ensure that Red Seal registered apprentices work at least 10% of the overall Red Seal registered trades time on the installation of the clean technology property. If a labour law or other agreement restricts the use of apprentices, then the ITC claimant must make every effort to ensure the highest percentage of labour hours is achieved.
In addition, the ITC claimant must attest in prescribed form and manner that it has met the apprenticeship requirements in respect of covered workers at the designated work site.
Note, Red Seal trade is a designation managed by the Canadian Council of Directors of Apprenticeship under the Red Seal Program.
Penalties for non-compliance with labour requirements
The proposed legislation includes a penalty in the form of an additional tax amount payable when the taxpayer has claimed the ITC based on electing to satisfy the labour conditions but fails to meet the requirements. The penalty is calculated as $20 for every day a covered person was not paid the prevailing wage rate during the installation year and, with respect to the apprenticeship requirements, $100 for every hour the total apprenticeship time falls below the specified hours. The amounts used to calculate the penalty will be indexed to inflation after 2023.
Gross negligence
If the incentive claimant has claimed the regular ITC rate based on meeting the labour requirements (as outlined in the table above) and it is later determined that the claimant knowingly (or in circumstances amounting to gross negligence) did not satisfy the conditions, the taxpayer must pay back the portion of the incentive they were not eligible for, as well as a penalty equal to half of that ineligible amount.
Corrective measure
If the ITC claimant receives a notification from the CRA specifying that it did not meet the prevailing wage requirement set out above, the claimant may provide a “top-up” amount, plus interest, to each covered worker for the shortfall in pay to remain in compliance with the requirements. The claimant must pay the top-up amount (including interest) within one year after receipt of the notification (unless the CRA considers a longer period to be acceptable in the circumstances).
If the top-up amount is not paid to any particular covered worker, a penalty equal to 120% of the top-up amount will apply.
Exceptions
The labour requirements do not apply to ITC claims for the acquisition of off-road zero-emission vehicles or to the acquisition and installation of low-carbon heat equipment.
Conclusion
The clean technology ITC, along with the CCUS ITC, is one of several new proposed ITCs aimed at helping Canada transition to a clean economy. These two credits are the first for which detailed draft legislative proposals have been released. Draft legislative proposals on the clean hydrogen, clean electricity and clean technology manufacturing ITCs are expected in the coming months.
Learn more
For more information, contact your EY or EY Law tax advisor, or one of the following professionals:
Toronto
Dharmesh Gandhi
+1 416 932 5755 | dharmesh.gandhi@ca.ey.com
Martin McLaughlin
+1 416 932 5751 | martin.mclaughlin@ca.ey.com
Quebec
Julia Bolpois
+1 514 879 2709 | julia.bolpois@ca.ey.com
Atlantic Canada
Brett Copeland
+1 902 421 6261 | brett.copeland@ca.ey.com
Prairies
Korey Conroy
+1 403 956 5778 | korey.conroy@ca.ey.com
British Columbia
Sean Verret
+1 604 891 8341 | sean.verret@ca.ey.com
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- See EY Tax Alert 2022 Issue No. 42, Federal Fall Economic Statement 2022.
- See EY Tax Alert 2023 Issue No. 20, Federal budget 2023-24.
- Excluded equipment is defined in proposed subsection 127.45(1) and includes, for example, auxiliary heating or electrical generating equipment that uses fossil fuel, distribution equipment, and buildings or structures (other than a structure whose sole function is to support or house concentrated solar energy equipment).