Clean Energy CIT Reduction: Measures to Grow Canada’s Clean Economy
Enhancing the Reduced Tax Rates for Zero-Emission Technology Manufacturers
With a growing global concern regarding climate change, the Canadian Government is increasing its efforts to encourage economic development that is intrinsically linked to the use of green and zero-emissions energy. The current Canadian Government has been an outspoken advocate regarding the need to transition to renewable types of energy and is interviewing this concern with tax credits and notably, reduced tax rates.
In 2021 the Canadian Federal Government released its Budget 2021 to explain its goal of reaching a net-zero emissions by 2050. The goal of the Budget was to reduce – by half – the general corporate and small business tax rates for businesses that manufacture zero-emissions technologies.
As part of the Budget 2023, the Federal Government proposed to extend these rates until 2035; leading up to this year, the tax rates will gradually return to the status quo without any expected reductions.
Adjusted Corporate Income Tax Rate (CIT)
The adjusted CIT rate on eligible technology manufacturing and processing activities will be reduced by half. The following are the adjusted rates:
| Small Businesses CIT = 9 % | Small Business CIT with eligibility = 4.5% |
| General CIT = 15 % | General CIT with eligibility = 7.5% |
Eligibility Calculation
The CIT adjusted rate will be applied to income that derives from a company’s manufacturing and processing (M&P) income that would otherwise be subject to the normal CIT rates.
To be eligible for this reduced tax rate the following calculation is used in the determination. The eligible income (listed below) is calculated based on the proportion of the taxpayer’s total labour and capital costs that are used in the eligible zero-emission technology M&P activities. Notably, if the proportion is 90% or more it will be deemed to be 100%.
Eligible M&P Activities
As of Budget 2023, the following activities are eligible for meeting the reduced CIT:
The manufacturing of:
- solar, wind or water energy conversion equipment;
- geothermal energy equipment;
- equipment for a ground source heat pump system; manufacturing of electrical energy storage equipment used for storage of renewable energy;
- zero-emission vehicles;
- batteries and fuel cells for zero-emission vehicles;
- electric vehicle charging systems and hydrogen refuelling stations for vehicles;
- equipment used for the production of hydrogen by electrolysis of water; and
- nuclear energy equipment and nuclear fuel rods.
The production of:
- hydrogen by electrolysis of water;
- solid, liquid or gaseous fuel from either carbon dioxide or specified waste material;
- nuclear fuel processing or recycling; and
- heavy water processing or recycling.
Going Forward
It is important to pay attention and keep informed regarding any updates the Canadian government may impose regarding what will and can be considered eligible M&P activities. It will be imperative whenever Budget 2024 is released to grasp any changes to these activities and the reduced tax rate. With the global concern regarding climate change, it is necessary to keep informed of any changes and developments of renewable and zero-emission technologies that corporations, individuals, and other parties can use for their own tax benefit.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Matthew Pollock
