Proposed federal investment tax credit for carbon capture, utilization and storage — update

The following provides an overview of the draft legislative proposals under the Act and the Regulations, and the specific design features detailed in the backgrounder.

Overview

The CCUS investment tax credit draft legislative proposals are generally consistent with the previous announcements by the federal government. The investment tax credit will be refundable and available to businesses that incur qualified CCUS expenditures after 2021 and before 2040. The tax credit rates are outlined below (see CCUS investment tax credit rates).

Qualified CCUS expenditures will include the cost of acquiring eligible equipment used in qualified CCUS projects. Eligible equipment, as described below, will include equipment that is used solely to capture, transport, store or use carbon dioxide (CO₂) as part of a qualified CCUS project and is situated in Canada. This equipment will be included in new capital cost allowance (CCA) Classes 57 and 58, which will have 8% and 20% declining-balance-basis CCA rates, respectively, and will be eligible for enhanced first-year depreciation under the accelerated investment incentive.

The legislative proposals include several definitions that are relevant for the purposes of determining the CCUS investment tax credit of a taxpayer.

Qualified CCUS project

Broadly speaking, a qualified CCUS project is a project that supports one or more parts of a CCUS process by capturing CO₂ that would otherwise be released in the atmosphere, or from ambient air, transporting the captured carbon, or storing or using the captured carbon.

To be eligible for the CCUS investment tax credit, a qualified CCUS project must meet the following conditions:

• It is expected to support the capture of CO₂ in Canada that would otherwise be released into the atmosphere or is captured directly from ambient air;
• An initial project evaluation has been completed by the Minister of Natural Resources based on a submitted CCUS project plan. This project plan must generally include a front‑end engineering study for the project, an estimate of the quantity of captured carbon that will be used for eligible and ineligible uses by calendar year, and any additional information required by the Minister of Natural Resources, which has not yet been confirmed;
• In each of the first 20 years of the project, at least 10% of the quantity of captured carbon is utilized in an “eligible use”. Broadly speaking, an “eligible use” is currently defined as captured CO₂ that is stored in, or otherwise used for, dedicated geological storage or for producing concrete where at least 60% of the CO₂ injected into the concrete is expected to be mineralized and permanently stored in the concrete.
• The project complies with all federal, provincial and municipal environmental laws, by‑laws and regulations; and
• If the project is undertaken on a facility that existed prior to 7 April 2022, the project was not undertaken for the purpose of complying with emission standards regulations that apply to coal-fired energy generation facilities.

A CCUS project can support the capture of CO₂ in Canada by incorporating one or more parts of a CCUS process, such as:

• Capturing CO₂ from a single site and transporting it up to the point it connects to a transportation hub;
• Transporting carbon captured from multiple sites (i.e., a transportation hub);
• Storing or using captured carbon;
• Capturing CO₂ from a single site, transporting the captured carbon, and storing or using the captured carbon; and
• Transporting and storing or using carbon captured from a transportation and storage hub.

Qualified CCUS expenditures

The definitions of the different types of qualified expenditures are relevant in computing the amount of CCUS investment tax credit a taxpayer may claim since the type of expenditures will determine the rate of the CCUS investment tax credit.

CCUS expenditures are considered to be qualified expenditures for the purposes of the CCUS investment tax credit if they are incurred after 1 January 2022 and qualify under one of the four following categories:

• Qualified carbon capture expenditure
  • Property included in paragraph (a) of CCA Class 57, including property described in paragraphs (d), (e) or (f) if related to equipment in paragraph (a) (see New CCA classes below for further details).
  • The portion of qualified carbon capture expenditures is determined by the proportion of captured carbon that the qualified CCUS project is expected to support for storage or use in eligible uses compared to ineligible uses during the first 20 years of the project based on the project plan, determined in five-year assessment periods.
• Qualified carbon transportation expenditure
  • Property included in paragraph (b) of CCA Class 57, including property described in paragraphs (d), (e) or (f) if related to equipment in paragraph (b) (see New CCA classes below for further details).
  • The portion of qualified carbon transportation expenditures is determined by the proportion of captured carbon that the CCUS project is expected to support for storage or use in eligible uses compared to ineligible uses during the first 20 years of the project based on the project plan, determined in five-year assessment periods.
• Qualified carbon storage expenditure
  • Property included in paragraph (c) of CCA Class 57, including property described in paragraphs (d), (e) or (f) if related to equipment in paragraph (c) (see New CCA classes below for further details).
  • The property must also be expected, based on the qualified CCUS project’s plan, to support storage of captured carbon solely in a dedicated geological storage. Initially, the CCUS investment tax credit earned on qualified carbon storage expenditures will only be available to CCUS projects that store the CO₂ in Saskatchewan or Alberta.
• Qualified carbon use expenditure
  • Property included in CCA Class 58 (see New CCA classes below for further details) and is expected, based on the qualified CCUS project’s plan, to support storage or use of captured carbon solely to produce concrete in a qualified concrete storage process. A qualified concrete storage process is a process that demonstrates that at least 60% of the captured carbon that is injected into concrete is expected to be mineralized and permanently stored in the concrete.

In all cases, the property must be situated in Canada and verified in writing as a qualified CCUS expenditure by the Minister of Natural Resources.

Qualified CCUS expenditures are further reduced for any amount in respect of an expenditure that:

• Is incurred by the taxpayer before 2022 or after 2040;
• Is incurred to acquire property that was previously used by any person or partnership, or for which a CCUS tax credit was previously deducted or claimed (or sought to be deducted or claimed) by any person in respect of the property to which the expenditure relates;
• Represents a pre-feasibility or feasibility study, or a front-end engineering study;
• Is capitalized in respect of the cost of borrowed money under section 21 of the Act; or
• Remains unpaid 180 days after the end of the taxation year in which the expenditure was incurred.¹

In addition, qualified CCUS expenditures are reduced by any non-government assistance amounts received or receivable in respect of the qualified CCUS expenditures for the year.

CCUS investment tax credit rates

Qualified CCUS expenditures are eligible for the investment tax credit at the following rates, depending on the type and timing of the expenditure: