Canada’s proposed clean technology manufacturing investment tax credit

Overview of the clean technology manufacturing ITC

The clean technology manufacturing ITC draft legislative proposals are generally consistent with the previous announcements relating to the credit by the federal government. The purpose of the credit, as provided for in proposed subsection 127.49(19), is to encourage the investment of capital in Canada for qualified zero-emission technology manufacturing activities, the extraction and processing of six key critical minerals, and similar recycling and synthetic graphite activities (see “Clean technology manufacturing use” below).

The ITC will be refundable and available to qualifying taxpayers that make eligible investments in certain clean technology manufacturing property that is acquired and available for use on or after 1 January 2024 and before 2035 for eligible clean technology manufacturing use. The tax credit rate varies depending on the year in which the property is acquired and becomes available for use (see “Clean technology manufacturing ITC rates” below).  

The credit is available in respect of the capital cost of certain eligible equipment that qualifies as clean technology manufacturing property, as described below. Eligible equipment will include certain property described in capital cost allowance (CCA) Classes 8, 10, 12, 41, 38, 43, 43.1, 43.2, 53 and 56, which have declining-balance-basis CCA rates ranging between 20% and 100%. Eligible equipment included in these CCA classes will also be eligible for enhanced first-year depreciation under the accelerated investment incentive if acquired and available for use before 2028.  

The legislative proposals include several definitions that are relevant for the purposes of determining the clean technology manufacturing ITC of a taxpayer. 

Qualifying taxpayers 

A qualifying taxpayer is defined as a taxable Canadian corporation. Thus, the definition ensures that the clean technology manufacturing ITC is only available to taxable Canadian corporations and taxable Canadian corporations that are members of partnerships that acquire eligible clean technology manufacturing property.

For a qualifying taxpayer that is a member of a partnership, the amount of ITCs allocated to each partner must be reasonable in the circumstances, in light of the capital invested in or work performed for the partnership by each member.

Clean technology manufacturing use

To qualify for the clean technology manufacturing ITC, an investment must be made in eligible property for a clean technology manufacturing use, as defined in proposed subsection 127.49(1).

More specifically, there are two categories of use that may qualify for purposes of the credit:

• Property used all or substantially all in performing certain qualified zero-emission technology manufacturing activities defined in section 5202 of the Income Tax Regulations.
  • Examples include manufacturing or processing of energy conversion equipment (e.g., solar, wind, water and geothermal equipment), manufacturing or processing of electrical energy storage equipment used for storage of renewable energy, and manufacturing or processing related to zero-emission vehicles (including integral components such as batteries, fuel cells and charging stations).
• Property used in qualifying mineral activities producing all or substantially all qualifying materials (i.e., lithium, cobalt, nickel, copper, rare earth elements and graphite) as defined in proposed subsection 127.49(1) of the Act.
  • Examples of qualifying mineral activities include extraction and certain mineral processing activities, both before and after the prime metal stage or its equivalent, related to qualifying materials, as well as certain recycling activities.

Property eligible for the clean technology manufacturing ITC

Eligible property for purposes of clean technology manufacturing use can be classified into the following five categories:

i.  Certain machinery and equipment used for manufacturing or processing, including industrial robots used to manufacture electric vehicles and vats used in the processing of cathode active materials. For example, this category includes:

• Property that is used directly or indirectly, in Canada, primarily in the “manufacturing or processing” of goods for sale, as described in Class 53; and
• Clean technology property included in Class 43.1 and 43.2 that would otherwise be included in the above.

ii.  Certain tangible property attached to a building or other structure that is used primarily for manufacturing or processing or that is required for machinery or equipment (e.g., a ventilation system used to remove chemical fumes or specialized electrical wiring used to supply power to solar panel manufacturing equipment). For example, this category includes:

• Tangible property attached to a structure and acquired primarily for the purpose of servicing, supporting or providing access to or egress from machinery or equipment, or manufacturing or processing, as described, with modifications, in Class 8 (b); and
• Clean technology property included in Class 43.1 and 43.2 that would otherwise be included in the above.

iii.   Certain property used for mineral extraction and processing (e.g., equipment used to crush rock containing copper ore or kilns used to calcinate nickel ore). Other examples include:

• Property acquired for the purpose of gaining or producing income from a mine and that is a structure included in Class 8 or machinery or equipment, as described in Class 10 (k)(i) and (k)(ii); and
• Clean technology property included in Class 43.1 and 43.2 that would otherwise be included in the above.

iv.   Certain specialized tooling (e.g., moulds used to cast copper ingots at smelters or cutting parts of a machine used to cut solar cells). Examples include:

• Dies, jigs, patterns, moulds or lasts, or the cutting or shaping parts in a machine, included in Class 12 (d) or (j).

v.   Non-road vehicles and automotive equipment (e.g., electric vehicles designed for use in factories or hydrogen-powered vehicles designed for extracting rock from mine sites). For example, this category includes:

• Zero-emission vehicles described in Class 56; and 
• Automotive equipment and trailers, excluding property designed or adapted for use on streets and highways, as described in Class 10 (a) or (e). 

In addition, the eligible equipment described above must also meet the following conditions to qualify as clean technology manufacturing property that is eligible for the ITC: 

• It must be situated in and intended to be used exclusively in Canada.  
• It must be new property (i.e., not previously used equipment; this requirement ensures that the credit is only available for new equipment). 
• If it is to be leased by the taxpayer, it must be leased:
  • To another person that is a qualifying taxpayer or to a partnership of which all the members are taxable Canadian corporations (and not an individual); and
  • In the ordinary course of carrying on business in Canada by the taxpayer whose principal business is selling or servicing property of that type or is a leasing or moneylending (or similar) business. 

Excluded property

Certain property is specifically carved out from property that may qualify for the clean technology manufacturing ITC. The draft legislative proposals define excluded property as any property used in the production of battery cells or modules if the production has benefitted from, or can reasonably be expected to benefit from, support under a contribution agreement with the Government of Canada.

Clean technology manufacturing ITC rates 

Qualifying clean technology manufacturing property is eligible for an ITC at the following rates, depending on the time of acquisition. Similar to other ITCs addressed in section 127 of the Act, the equipment is deemed to have been acquired by the taxpayer in the year in which the property becomes available for use. Property acquired before 1 January 2024 and after 31 December 2034, as well as property acquired prior to 1 January 2024 that becomes available for use after 1 January 2024, will not be eligible for the ITC.