Canada announces investment tax credits for green technologies

The recently released 2022 Fall Economic Statement introduces investment tax credits (ITC) for clean technologies and clean hydrogen that will help spur the transition to net-zero energy and make Canada more competitive with the United States.

“Following the adoption of the Inflation Reduction Act in the United States, the need for a competitive clan technology tax credit in Canada is more important than ever,” the government said in its Statement.

The clean-tech tax credits will be offered to those who invest in net-zero technologies, battery storage and clean hydrogen. The move follows passage of the Inflation Reduction Act in the U.S., which was signed into law in August by President Joe Biden. The IRA includes a 10-year extension of the ITC at 30% of the cost of the installed equipment, stepping down to 26% in 2033 and 22% in 2034. Years of uncertainty about the ITC created instability in the clean energy sector in the U.S., but the ten-year extension is seen as the kind of assurance that U.S. investors need in order to embrace clean technologies.

“While the IRA will undoubtedly accelerate the ongoing transition to a net-zero North American economy, it also offers enormous financial supports to firms that locate their production in the United States – from electric vehicle battery production, to hydrogen, to biofuels, and beyond,” the government said in the economic update. “Without new measures to keep pace with the IRA, Canada risks being left behind.”

The new 30% Canadian tax credit will apply to investments in renewable energy generation and storage, as well as in as low-carbon heating and zero-emission industrial vehicles. The Canadian government also plans a tax credit for hydrogen production, the design of which has yet to be determined.

The tax credit is just an initial part of Canada’s response. The Canadian government also proposed a 2% tax on corporate stock buybacks, that is meant to “encourage corporations to reinvest their profits in their workers and business,” the Statement said.

It is estimated that the tax will generate $1.5 billion over five years and will come into force on Jan. 1, 2023. It will also launch a growth fund, first announced in April, by the end of the year with a capitalization of $15 billion to help mitigate the risks private investors take on when investing in new technologies and infrastructure.

In next year’s budget, Canada will introduce new measures to increase advanced manufacturing competitiveness, the document said.

“What Canadian workers need is a government with a real, robust industrial policy; a government committed to investing in the net-zero transition, to bringing in new private investment, and to helping create good-paying jobs from coast-to-coast-to-coast,” said Chrystia Freeland, Deputy Prime Minister and Minister of Finance.