Carbon Capture, Utilization, and Storage Investment Tax Credit

Transcript

Slide 1 – Title Page

• Hello! Thank you for joining today’s presentation on the Carbon Capture, Utilization and Storage Investment Tax Credit.
• Before we begin, I’d like to encourage you to visit the Clean Economy Investment Tax Credits pages on Canada.ca. There, you’ll find all the information, links, and resources you need to help you with your Clean Economy Investment Tax Credit claim.

Slide 2 – Contact us

• We want to ensure you can access the support you need in a timely manner. Following today’s presentation, if you have any questions or concerns regarding your projects or claims, please contact our Fraser Valley and Interior Tax Services Office.
• I would like to highlight that the contact at this office is not a general CRA phone line. You will be able to connect with Clean Economy specialists that have the knowledge, tools, and resources to answer your specific questions.

Slide 3 – Subscribe to our mailing list

• For up-to-date information on the Clean Economy program, including news, legislative updates, and information on upcoming webinars, scan the QR code to subscribe to our electronic mailing list.

Slide 4 – Growing a clean economy

• Before we get into more detail on the Carbon Capture, Utilization and Storage Investment Tax Credit, commonly referred to as the CCUS ITC, I’ll give you a little background on the Clean Economy ITCs.
• Beginning in 2021, the Federal Government announced a series of six refundable Clean Economy Investment Tax Credits. These credits are intended to help Canada transition to clean energy while growing the economy and supporting green innovation. They will also provide businesses and other investors with the certainty they need to invest and build in Canada.
• The Government of Canada expects to provide more than $93 billion in tax incentives by 2034.
• At this time, eligible businesses can claim four of these credits, which include:
  • Clean Technology
  • Clean Technology Manufacturing
  • Carbon Capture, Utilization, and Storage
  • Clean Hydrogen
• The other two credits that have been announced but are not yet available to claim are the Clean Electricity, and the Electric Vehicle Supply Chain ITCs

Slide 5 – Roles and responsibilities

• The CRA is responsible for determining the number of CCUS and Clean Hydrogen projects in a project submission, completing audits on high-risk files, as well as administering the credits and delivering the payment amounts.
• Depending on the specific ITC, a claimant would file their ITC claim with their annual T2 Corporation Income Tax Return or their T3 Trust Income Tax and Information Return.
• Once the claim has been submitted, the CRA then audits the tax credit claim to determine the eligibility of expenses. If the claimant has elected to meet the labour requirements, the CRA will also ensure that all requirements have been met, in order to receive the regular tax credit rate. Upon completing the audit of the tax credit claim, the CRA will deliver the credit payment, or in the case where there is tax owing, the credit will be used to reduce the amount owed.
• We would also like to highlight the important role that Natural Resources Canada has in the administration of certain Clean Economy ITCs.
• NRCan’s responsibilities vary depending on the ITC, as indicated in this table.

Slide 6 – A closer look at the Carbon Capture, Utilization, and Storage ITC

• Now let’s take a closer look at the CCUS ITC.

Slide 7 – What is the Carbon Capture, Utilization, and Storage ITC?

• The CCUS ITC is a refundable tax credit that applies to eligible expenditures incurred for a qualified CCUS project, from January 1, 2022, to December 31, 2040.
• In general, the rate may be up to 60% for qualified CCUS expenditures incurred from January 1, 2022, to December 31, 2030.
• From 2031 to 2040, the rate may be up to 30%.
• The specific rate for your qualified CCUS expenditures will depend on the category of expenditure as well as the date the expenditure was incurred.
• You can avoid claiming the reduced tax credit rate by choosing to meet certain labour requirements, which I will expand on later in the presentation.

Slide 8 – CCUS regular rates

• The regular rates vary from 37.5% for transportation, storage and utilization equipment, all the way up to 60% for direct air capture equipment.
• The date the expenditure was incurred is important. ITC rates will be half of their original amount between 2031 and 2040, as seen on the next slide.

Slide 9 – CCUS rates as of 2031

• CCUS rates for qualified CCUS expenditures incurred from 2031 to 2040 vary from 18.75% to 30%.

Slide 10 – Who can claim?

• To claim the CCUS ITC, you must be a taxable Canadian corporation, which includes those that are members of a partnership.
• You must also have a qualified CCUS project for which qualified CCUS expenditures are incurred from January 1, 2022, to December 31, 2040.

Slide 11 – What is a CCUS project

• When we talk about a CCUS project, we consider it to be a project that intends to support a CCUS process, which includes:
  • Capturing CO2 that would otherwise be released into the atmosphere
  • Capturing CO2 directly from the ambient air
  • Transporting captured CO2, and
  • Storing or using captured CO2

Slide 12 – Qualified CCUS projects and expenditures

• To be considered a qualified CCUS project, the project must meet the following conditions:
  • Number 1: Based on the project's most recent project plan, it is expected to support the capture of CO2 in Canada for a period that is at least equal to the total CCUS project review period for the project. To note, the project review period is approximately 20 calendar years.
  • Number 2: Based on the project’s most recent project plan, its projected eligible use percentage of captured CO2, equals or exceeds 10% in each of the following periods:
    • If the first project period begins after September of a calendar year, the period beginning on the first day of commercial operations and ending on December 31 of the following calendar year, and
    • Each calendar year of the project’s total CCUS project review period, other than a period that includes a year that I just referred to
  • Number 3: An initial project plan evaluation must have been issued by NRCan for the project
• In terms of qualified CCUS expenditures, there are four categories:
  • Qualified carbon capture expenditures
  • Qualified carbon transportation expenditures
  • Qualified carbon use expenditures or,
  • Qualified carbon storage expenditures
• To be eligible for this credit, qualified expenditures must be:
  • For a qualified CCUS project, and
  • Incurred to acquire property described in capital cost allowance Class 57 or Class 58, or as described in the definition of dual-use equipment
• For more information on capital cost allowance classes and qualified CCUS projects and expenditures, please visit our web pages on Canada.ca.

Slide 13 – How to claim: Submitting your project plan to NRCan

• As previously highlighted in this presentation, the implementation and administration of the CCUS ITC is a collaborative effort involving multiple departments including the Canada Revenue Agency, Finance Canada, Environment and Climate Change Canada, and NRCan.

Slide 14 – NRCAN

• In general, NRCan’s legislated roles and responsibilities include:
  • Managing the intake of project plans,
  • Conducting in-depth technical reviews to assess project and capital equipment eligibility,
  • Implementing the knowledge sharing provision of the CCUS ITC, and
  • Providing technical and administrative support to CRA.
• NRCan has published a Technical Guidance Document which, according to legislation, applies conclusively with respect to engineering and scientific matters. This guide is to assist taxpayers in the preparation of their project plan submissions.
• NRCan also hosts the web-based intake portal to manage the intake of these project plans.
• NRCan reviews the information provided and verifies that
  • the process described in the project plan meets the legislated definition of a CCUS process;
  • They also provide project information and advice to CRA for their project determination; and
  • verify that the property being claimed meets the definition of Class 57 and 58 property as per Schedule two to the Income Tax Regulations, or the definition of dual-use equipment as per subsection 127.44 of the Income Tax Act
•  NRCan issues an Initial Project Plan Evaluation based on this verification. The Initial Project Evaluation is required by CRA, before an ITC claim can be filed by the taxpayer.
• NRCan also implements annual progress reporting to support the claims and audits by CRA.
• The last legislated role I would like to highlight here is the implementation of the Knowledge Sharing provision of the CCUS ITC legislation which constitutes receiving and publishing of Knowledge Sharing Reports for projects that meets a certain threshold. These reports will be publicly available.

Slide 15 – NRCAN

• In order to claim the CCUS ITC, you must be issued an initial project evaluation by NRCan for each qualified CCUS project.
• To be issued an initial project evaluation, you must carry out the following steps:
  • You need to complete a Front-End Engineering and Design, or FEED study
  • And, you must submit your project plan to NRCan.
• It may be useful to complete a pre-screening questionnaire to confirm eligibility prior to submitting a project plan. This pre-screening questionnaire is not part of the submission and can be completed at any time.
• You can also register with NRCan’s secure project plan submission portal at any time. Once you access the portal, directions and instructions on how to submit your project plan will be provided.

Slide 16 – Project plan submission documentation

• NRCan assesses project plan submissions that include one of the following document packages.
  • A FEED equivalent engineering study
  • A FEED study
  • Or construction ready documentation with a complete detailed engineering design package.
• The document package you submit should align with the level of maturity of the project.
• For example, if the project is at the design stage or has not yet reached a Final Investment Decision, a FEED study or a FEED equivalent engineering study must be completed.
• If the project is under construction and incurring expenditures, instead of the FEED package, the official engineering documents must be provided. In other words, the final detailed engineering designs with the required engineering approvals and stamps.
• Please refer to the CCUS ITC web pages on Canada dot ca, for the details on required documents for a complete project plan submission.

Slide 17 – How to claim: The submission and evaluation process

• Now we’ll discuss how to submit your claim to the CRA.
• Once your project has started, and funds have been expended, you will file your CCUS ITC claim with the CRA.

Slide 18 – CCUS claims process

• Here we have a simplified process map for the CCUS ITC.
• A claimant would start by referencing NRCan’s Technical Guidance Document to better understand their eligibility and get an idea of what could potentially qualify. NRCan maintains a dedicated inbox to respond to your technical questions. The inbox address will be provided at the end of this presentation.
• Next, a claimant would submit their CCUS project plan to NRCan.
• NRCan screens the project plan and the CRA determines the number of CCUS projects in the submission and issues a project plan determination of one or multiple projects.
• Before a full project review can be completed, the claimant must submit CRA’s project plan determination decision to NRCan via the intake portal.
• Once NRCan has completed their technical review of the project plan, they will issue the taxpayer an Initial Project Evaluation. We are now at the check mark on your screen.
  • The Project Evaluation consists of a cover letter and a verified CCUS tax credit property list.
  • This is your verification that the CCUS property submitted in your project plan is class 57, 58 or dual-use.
• Finally, the CRA audits the tax credit claim which is filed with the claimant’s annual T2 return, makes a determination and delivers the credit payment, or in the case where there is tax owing, the credit is used to reduce the amount owed.

Slide 19 – How to claim: Corporations

• The requirements are slightly different depending on whether you’re an individual corporation or a member of a partnership.
• All corporations can claim the Clean Economy ITCs when they file their T2 annual return, using the method normally used to file.
• For individual corporations, there are two items that must be attached to the T2:
• The first is Schedule 31, the investment tax credit schedule for corporations.
• If you are claiming the CCUS credit, you’ll complete line 200 of Schedule 31.
• The second item that you must attach to your T2 is Schedule 78 for the CCUS ITC, which you’ll use to calculate your ITC. On that form, you are required to provide details related to the calculation of the ITC, information about the labour requirements, including your election and attestation, and details on part 12.7 addition to tax.
• Please note that until an electronic software version of Schedule 78 is available, you must attach a copy of the PDF form with your return.

Slide 20 – How to claim: Partnerships

• A partnership that allocates the CCUS ITC to its corporate members must complete a T5013 Statement of Partnership Income form, and provide it to each member of the partnership.
• Partnerships will also be required to complete T5013 Schedule 78 on which you’ll need to provide each member’s allocated share for the year of the ITC, details on the calculation of the ITC, the labour requirements election, attestation, and addition to tax, and the Part 12.7 addition to tax.
• Each member of the partnership must include with their T2 corporation income tax return, the T5013, T2 Schedule 31, and a copy of the notification in writing for any allocated amounts related to the CCUS ITC that they received from the partnership.

Slide 21 – Other requirements

• And finally, I’ll briefly discuss some additional information and requirements when claiming a CCUS ITC.

Slide 22 – Labour requirements

• As previously mentioned, there are certain labour requirements that apply to three of the available Clean Economy credits, including the CCUS credit.
• Two key aspects of the labour requirements are the prevailing wage requirements and the apprenticeship requirements.
• The prevailing wage requirements are generally met by compensating covered workers at a designated work site, with an eligible collective agreement that applies to the workers.
• Covered workers are individuals, other than a trust, who are engaged in the preparation or installation of specified property at a designated worksite and whose work is primarily manual or physical in nature.
• The apprenticeship requirements can be met by making reasonable efforts to ensure that apprentices registered in a Red Seal trade work at least 10% of the total hours worked annually by Red Seal workers at a designated work site of the claimant.
• For both requirements, work concerns the preparation or installation of specified property.
• These labour requirements also:
  • Apply to specified property prepared or installed on or after November 28, 2023 and
  • Do not apply to a clean economy credit claimed for the acquisition of off-road zero emission vehicles, or the acquisition and installation of low carbon heat equipment

Slide 23 – Communicating the prevailing wage requirements

• One of the steps in meeting the prevailing wage requirements is to communicate these requirements to Covered workers
• As the incentive claimant, you must communicate to covered workers that a designated work site is subject to the prevailing wage requirements, and you must also inform covered workers how they can report to the CRA any failure to pay prevailing wages.
• This information must be communicated by electronic means, or in a notice or poster.
• It has to be readily available and accessible to and by covered workers, and it has to be written in a plain language format that clearly explains what the prevailing wage requirement means for workers.

Slide 24 – How the labour requirements affect the credit rate

• If you elect to meet the labour requirements, you can claim the CCUS ITC at the regular tax credit rate.
• As a reminder, only claimants that elect to meet and attest that they have met the labour requirements will be able to access the regular rate for each of these credits.
• If you choose not to meet the labour requirements, you will still be eligible to claim the credit you have selected, but at a reduced tax credit rate of 10 percentage points less than the regular tax credit rate.
• So, for example, if the regular tax credit rate for the CCUS ITC is 60% and you chose not to meet the labour requirements, the reduced tax credit rate would be 50%.
• It is your responsibility as the claimant to attest on an annual basis that you have met the labour requirements.

Slide 25 – Consequences for non-compliance

• There are consequences for not complying with the labour requirements if you have elected and attested to meet them, and claimed the credit at the regular rate.
• If you do not meet the prevailing wage requirements, you will be liable to pay a dollar amount per day for each day in the installation taxation year, for each covered worker that was not paid the prevailing wage.
• This amount will be $20 in 2023, and will be adjusted for inflation in each calendar year after 2023.
• You may also be liable to pay a corrective measure in the form of a top-up amount to each covered worker.
• If you do not meet the apprenticeship requirement, you will be liable to pay a dollar amount multiplied by the difference between the total hours of labour that were required to be performed by apprentices registered in a Red Seal trade, and the total hours of labour that were actually performed by apprentices registered in Red Seal trades, plus any other hours of labour for which you met the apprenticeship requirements. The dollar amount is $50 in 2023 and will be adjusted for inflation in each calendar year after 2023.

Slide 26 – Claiming one or more Clean Economy ITCs

• When it comes to claiming multiple clean economy ITCs, there are some points to keep in mind.
• Generally, you can claim only one of the clean economy ITCs for the same eligible property.
• For example, you cannot claim the CCUS ITC if you claim the Clean Technology ITC on the particular property.
• However, you may claim multiple clean economy ITCs for the same project, if the project includes different types of eligible property.

Slide 27 – How do various types of assistance impact the ITCs?

• For CCUS, only non-government financial assistance may have an impact on the capital cost of the property, which would have an impact on the ITC amount.
• If you have received non-government financial assistance, you should contact us at the Fraser Valley and Interior Tax Services Office to discuss your project or claim.

Slide 28 – After you claim

• After you submit your ITC claim, the CRA may ask you to provide supporting documents to verify expenses and confirm that you have met all requirements, including those for the labour requirements.
• After the CRA reviews the additional documents, they will provide you with a written summary of the review findings. If the CRA determines that no changes need to be made, then no further action is required.
• If the CRA determines that changes need to be made to the claim, you will have 30 days to respond to the written summary of the review findings before the changes are confirmed, and your return is assessed or reassessed.
• If your CCUS ITC claim is accepted as filed, you will be notified of your notice of assessment or reassessment.

Slide 29 – Reporting responsibilities

• All projects that are issued a project evaluation by NRCan are required to complete annual progress reports. These reports collect information to support claims and audits by CRA.
• An annual progress report will be available to taxpayers, through the NRCan portal, when they are issued their initial project evaluation.
• The report will request:
  • Project milestone updates
  • Information on changes to the project and
  • Anticipated annual claims to the CRA
• Depending on the amount of qualified CCUS expenditures that your qualified project is expected to incur, you may need to complete additional reports for the CRA and NRCan.•If you have ownership interest, directly or indirectly, in a qualified CCUS project that is expected to incur $20 million or more of qualified CCUS expenditures,based on the most recent project evaluation, you must produce and publish, in prescribed manner, an annual climate risk disclosure report for the CRA.
• The first report must be published for the first taxation year in which a CCUS ITC is claimed. Subsequent reports must be published for each taxation year that ends before the twenty-first calendar year after the end of the taxation year which includes the first day of commercial operations of the CCUS project.
• You are required to provide knowledge sharing reports publicly if your qualified CCUS project:
  • Is expected to incur $250 million or more of qualified CCUS expenditures over the life of the project, or
  • If your qualified CCUS project has incurred $250 million or more of qualified CCUS expenditures before the first day of commercial operations of the CCUS project.
• These knowledge sharing reports will be published to a Government of Canada website, by NRCan.
• Due dates for these reports depend on the project start-up date, and whether this is the first report ornot. For specific details on your reporting responsibilities, please visit our web pages on Canada.ca.

Slide 30 – Income inclusion

• Normally, claiming an ITC requires you to add the ITC amount to your income if there is no reduction in the undepreciated capital cost, or UCC, of the property.
• However, pursuant to paragraph 12(1)(t) of the Income Tax Act, a claimant may choose not to reduce the UCC balance of the property, and instead include the ITC amount claimed, in their income.
• In this example here, a company purchases $1 million dollars of eligible CCUS property, and qualifies for the regular ITC rate of 60%, which equals $600 thousand dollars.
• If there is a reduction in the UCC balance, that $600 thousand would reduce the capital cost of the property to $400 thousand dollars.
• If, however, there is no reduction in the UCC balance, and the claimant includes the ITC amount in their income, as in option 2, the capital cost of the property would remain at $1 million, resulting in a higher capital cost allowance base.

Slide 31 – Thank you

• We want to assure you that the CRA is here to help you on your clean economy journey. We can answer any questions related to labour requirements and claiming the credit. To reach us, please contact our Fraser Valley and Interior Tax Services Office weekdays from 8 am to 4 pm Pacific Time. This is a dedicated line that allows you to connect with Clean Economy specialists that have the tools, resources and knowledge base to answer your specific questions.
• For all other guidance, we encourage you to reach out to Natural Resources Canada.
• If you’d like to learn more about the clean economy credits, you can visit our website at Canada.ca slash clean economy credits.
• And that concludes today’s presentation on the CCUS ITC.