Labour Requirements for Canada’s Clean Energy Investment Tax Credits
Investment Tax Credits (“ITCs”) are a powerful instrument that the Canadian government uses to incentivize businesses to invest in specific projects and activities. These credits can significantly reduce a company’s tax liability, making it an attractive option for businesses looking to expand or diversify their operations.
In the dynamic and ever-evolving landscape of Canadian tax law, the federal government’s 2022 Fall Economic Statement introduced significant opportunities through new clean energy ITCs. In particular, the government established two targeted measures aimed at promoting clean technologies and clean hydrogen projects, which align with Canada’s commitment to environmental sustainability. However, both ITCs are contingent on specific labour requirements that businesses must adhere to starting October 1, 2023, to qualify for any tax benefits. This article explores the qualifying labour obligations that are necessary for securing clean energy ITCs as well as any ramifications for non-compliance.
Labour Requirements for Investment Tax Credits
Closely resembling the U.S.’s Inflation Reduction Act, the 2022 Fall Economic Statement demonstrates Canada’s intention to include labour requirements as prerequisites for obtaining clean energy ITCs. In essence, businesses must satisfy certain criteria related to the employment of eligible individuals to fully leverage and maximize these incentives. These labour requirements encompass both employees and contractors that are primarily engaged in manual or physical labour and consist of the payment of prevailing wages and the establishment of apprenticeship training opportunities.
(a) Wage Requirements
In adherence with the eligibility criteria, individuals or entities seeking to claim the ITC must make elections in the prescribed form for every taxation year where clean technology property is prepared or installed. To qualify for the new ITCs, taxpayers/corporations must meet the following wage and labour-related prerequisites:
- Workers must receive compensation in accordance with their collective agreement. In cases where no such collective agreement exists, compensation should, at the very least, be equivalent to the local labour market conditions or prevailing wage rate specified in the most comparable agreement relevant to the worker’s experience level, duties, and jurisdiction, calculated on an hourly or equivalent basis. In Québec, eligible collective agreements would be those negotiated under applicable provincial legislation.
- The ITC claimant must affirm in writing, following the prescribed procedure, that they have satisfied the prevailing wage requirement for their covered workers. They must also confirm that reasonable efforts were made to verify that covered workers engaged by others in the installation of clean technology property were similarly compliant with the prevailing wage requirement.
- The ITC claimant bears the obligation to ensure that all covered workers are well-informed about these requirements, which can be achieved through prominent physical or electronic notices that are easily accessible to workers. Additionally, the claimant must provide a straightforward explanation outlining the implications of prevailing wage requirements for workers and offer guidance on reporting instances of non-compliance with these standards.
Within this context, a “covered worker” denotes an individual who is:
- engaged in the installation of clean technology property at the specified work location;
- predominantly performing manual or physical tasks as part of their job responsibilities; and
- not classified as an administrative, supervisory, clerical, or executive employee, nor considered a business visitor to Canada, as stipulated in Section 187 of the Immigration and Refugee Protection Regulations.
(b) Apprenticeship Requirements
In addition to the prevailing wage requirements, the ITC claimant is obligated to take reasonable measures to ensure that at least 10% of the total hours that would typically be performed by a Red Seal trade worker in the installation of clean technologies are carried out by Red Seal registered apprentices. Should any laws or agreements place constraints on the utilization of apprentices, the ITC claimant should take efforts to maximize labour hours within these limitations. Furthermore, the ITC claimant must provide evidence, in the prescribed form, demonstrating adherence to apprenticeship requirements concerning covered workers at the designated work site.
Non-Compliance with the Labour Requirements
Failure to file an election may result in a 10% reduction of the maximum credit rate. Moreover, the proposed legislation introduces a penalty mechanism in the form of an additional tax obligation, payable if a taxpayer who initially claimed the ITC based on labour conditions falls short of meeting the prerequisites. The penalty is computed at a rate of $20 for each day during the installation year when a covered individual was not compensated in accordance with the prevailing wage rate. With respect to the apprenticeship requirements, the penalty amounts to $100 for every hour that the total apprenticeship time falls below the stipulated hours.
Should a taxpayer fail to satisfy the labour conditions, they will be notified by the Minister and be afforded an opportunity to rectify the deficiency by paying top-up amounts with interest to workers as well as any penalties to the Receiver General.
The 2022 Fall Economic Statement has introduced exciting opportunities for businesses across a wide range of industries to access the clean energy ITCs as Canada transitions to cleaner economy. However, navigating the associated labour requirements is essential to ensure compliance and to receive any benefits from these incentives. Businesses should not only understand their labour obligations but also maintain detailed records to support their claims.
Since many details regarding the IPC’s remain outstanding, it is advisable for businesses to conduct their due diligence and consult with tax lawyers or other professionals who can provide guidance on satisfying the labour requirements for ITCs, ensuring that they take full advantage of these valuable incentives while contributing to Canada’s environmental sustainability goals.
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.