5 minute read 12 Dec. 2023
EY - Clean tech incentives

How Canada’s cleantech incentives will promote the critical minerals industry

Authors
Michael Sabatino

EY Canada Mining & Metals Tax Leader

Canadian Chartered Professional Accountant. Frequent contributor to mining publications. Sports lover and avid fly fisher.

Martin Mclaughlin

Partner, SR&ED, Incentives and Capital Investments, EY Canada

Seasoned advisor on accessing cash tax savings. Inclusive leader. Lifelong learner.

Contributors

Sean Verret

5 minute read 12 Dec. 2023
Related topics Mining and metals Climate change and sustainability SR&ED and business incentives
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Mining sector must seize the opportunity to unlock value from the booming critical minerals and electric vehicle/battery value chain in Canada

In brief:

  • Canada is actively pushing towards developing a strong clean energy value chain through the implementation of tax incentives and strategic funding initiatives.
  • Cleantech incentives may accelerate domestic and foreign investment in the critical minerals and EV battery value chain across Canada.
  • Mining players can leverage the policy benefits to collaborate across industries, diversify their businesses, and meet decarbonization goals.

Demand for critical minerals has surged in recent years driven largely by the energy transition. This has demanded the rapid development of new mining projects. Priority metals such as lithium, copper, cobalt, nickel and rare earth elements are gaining more traction due to their application in electric vehicle (EV) batteries.

Canada has a strong potential to grow in this segment by leveraging its leading position in lithium, cobalt, and nickel reserves.1 In 2022, the sector witnessed a 31% year-over-year increase in critical mineral export value, compared to an 8% growth in the total metal trade.2,3

The Canadian Government announced several measures in its most recent fall economic statement and latest budget to support Canada’s energy transition to a clean economy. The incentives are designed to create a growth-conducive environment for the critical mineral industry in three ways:

  • Tax benefits will accelerate investments in the critical minerals value chain from mining to processing and recycling.
  • The policies will attract foreign participation in developing EV infrastructure as companies look for opportunities to diversify supply chains.
  • Investments in brine-based projects are expected to rise, with players getting additional advantage through flow-through shares and tax credits.

How EY can help

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What’s in it for miners?

The incentives comprise tax credits and strategic funds for promoting investment in critical minerals and clean energy technology.4

Investment tax credit for clean technology manufacturing

  • The proposed refundable tax credit of 30% for equipment used in the manufacture of clean technologies includes the cost of investments in new machinery and equipment used to extract, process and recycle minerals that are critical to clean technologies.

Extension of flow-through shares and critical minerals exploration tax credit to brine-based lithium projects

  • Flow-through shares represent a unique tax incentive tool used in Canada for financing operational expenses across the mining industry. In 2023, the benefit of flow-through shares and the critical mineral exploration tax credit was extended to lithium from brines, which was excluded until this year.

Dual benefits of flow-through shares for miners and investors

4380775 Clean Tech Incentives Desktop Graphics
  • Show image description#Hide image description
    Mining players

    Issues new equity shares to finance eligible exploration and development expenses

    Expenses can be passed or “flow-through” on to the investor

    Flow-through shares (FTS)
    Investors

    Investors can claim 100% tax deduction on the amount invested for eligible expenses*

    Additionally, individual investors can claim a 30% tax credit on the investment for the exploration of critical minerals

    * Both individual investors and corporations are eligible for this tax deduction

    Source: EY Knowledge analysis of data from Canada.gov

Support for clean technology projects through allocation of dedicated funds

  • Critical minerals infrastructure fund: CA$1.5b allocated for the development of energy and transportation projects needed for production of critical minerals.
  • Strategic innovation fund: CA$1.5b allocated for projects related to clean technologies such as renewables, hydrogen and CCUS, critical minerals extraction and processing, and industrial transformation. An additional CA$500m was also allocated for the development and application of clean energy specifically.

There are several other dedicated clean energy measures that will indirectly raise the demand for critical minerals.

Clean energy-related tax credits announced5

Clean energy-related tax credits
  • Show image description#Hide image description
    1 - 30% clean technology investment tax credit

    For investment in eligible clean technology equipment.

    2 - 15-40% investment tax credit for hydrogen

    For clean hydrogen and ammonia production projects.

    3 - 15% clean electricity investment tax credit

    For clean electricity generation system (solar, wind, hydro).

    4 - Tax credit for carbon capture utilization & storage (CCUS)

    For investment in dual-use equipment used for CCUS.
     

    Note:  Eligibility criteria varies for tax credits, for details please refer to Department of Finance

    Source: EY Knowledge analysis of data from Department of Finance, Canada

Key implications of cleantech incentives on the mining industry

The financial incentives are aimed at boosting capital funding for new critical mining projects and stimulate growth in related industries, such as EV battery manufacturing.

4380775 Clean Tech Incentives Desktop Graphics
  • Show image description#Hide image description
    Accelerating investment in the critical mineral value chain
    • Emphasis on increasing production of critical minerals is growing in Canada, especially for the key minerals used in batteries.
    • Government financial incentives will make critical mineral projects less risky for investors.
    • These measures will promote investments across mining, processing, recycling and supporting infrastructure for critical minerals.
    Increasing foreign investment in EV infrastructure development
    • EV players are looking to diversify battery manufacturing supply chains and are seeking countries with stable policy environments.
    • Canada’s well-established policy framework and availability of battery minerals make it attractive to global players.
    • This will encourage more foreign investment, especially in the EV/battery industry, further boosting demand for critical minerals.
    Rising interest in brine-based lithium projects
    • Hard rock-based lithium production currently dominates in Canada. However, brine-based lithium has the potential to grow.
    • Canada is well positioned to leverage the existing oil wells, infrastructure and workforce in the western provinces to extract lithium from brine.
    • Flow-through shares and credits provided in the recent federal budget will incentivize exploration in brine-based lithium projects.

    Source: EY Knowledge analysis

What actions miners can take?

Increase investment in critical mineral projects/restart projects once halted

Canada already has some production levels of nickel, copper and cobalt. However, commercial production of lithium and rare earth elements has been minimal so far. With improved earnings after a recent rise in lithium prices, miners are considering projects restarts — for instance, Nemaska’s plan to relaunch its Québec lithium mine after four years of insolvency.6 The incentives provide an opportunity for miners to further direct capital towards growing production and developing unexplored markets.

Increase integration with value chain players

Miners can increase business value with cross-sector collaborations across the value chain. Offtake agreements between miners and automakers and technology partnerships between miners and mining services providers are already on the rise in Canada.

Moreover, lithium M&A activities have also increased in recent months. For instance, Pristine Lithium acquired three lithium brine projects in Saskatchewan from Lithium Bank Resources, and Metal Energy acquired the Source Rock lithium brine project in Ontario.7

Decarbonize operations by investing in clean technology equipment

Canada offers a 30% tax credit for investment into clean technology equipment such as solar and wind electricity generation systems, electricity storage and non-road industrial zero-emission vehicles. Mining companies can capitalize on this to install renewable energy systems at their sites, invest in electric mining vehicles for operations, and explore other clean energy technologies such as battery storage that does not use fossil fuels in its operation, which will improve operational efficiency and help them meet their decarbonization targets.  

Summary

The tax incentives will open new avenues for Canada’s critical mineral industry through new project development, technological collaborations and fresh capital inflows. Moreover, the clean energy benefits will provide an opportunity for miners to diversify their portfolios into adjacent cleantech businesses.

Looking ahead, with strong demand outlook, the country has the potential to elevate its global importance as a critical mineral hub, providing a favourable business environment to investors looking for stable alternatives amid rising resource nationalism and geopolitical instability.

About this article

Authors
Michael Sabatino

EY Canada Mining & Metals Tax Leader

Canadian Chartered Professional Accountant. Frequent contributor to mining publications. Sports lover and avid fly fisher.

Martin Mclaughlin

Partner, SR&ED, Incentives and Capital Investments, EY Canada

Seasoned advisor on accessing cash tax savings. Inclusive leader. Lifelong learner.

Contributors

Sean Verret

Related topics Mining and metals Climate change and sustainability SR&ED and business incentives
Upvote