Canada to introduce renewables tax credits for the first time

The move comes amid government concerns ‘Canada risks being left behind’ by the IRA in the US, according to its fall economic statement.

The Canadian government is introducing tax incentives for clean energy projects for the first time as it fears “being left behind” by the passing of the Inflation Reduction Act in the United States.

Introduced in the Canadian government’s Fall Economic Statement last week, the move will see an investment tax credit of up to 30 percent for renewable energy projects such as solar, wind and small hydro, battery storage facilities, low-carbon heat, hydrogen and small modular nuclear reactors. The tax credits are expected to cost the government C$6.7 billion ($5 billion; €5 billion) over a five-year period, starting from its inclusion in the budget from spring 2023. A phaseout of the credit is slated for the start of 2032.

It’s the first time renewable energy has received such subsidies in Canada and the government explained in its Fall Economic Statement that August’s passing of the IRA in the US was an important factor in the move.

“Importantly, the IRA’s “Buy North American” policy for critical minerals and electric vehicle tax credits is also good news for Canadian workers and Canadian companies,” the government stated. “But 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. Without new measures to keep pace with the IRA, Canada risks being left behind.”

“This will go some way to making Canadian [clean energy] projects more attractive,” Ryan Rabinovitch, tax partner at Canadian law firm Fasken, told Infrastructure Investor. “The fact you can get an extra tax credit is going to make it more profitable.”

The measure adds to an existing accelerated clean energy equipment depreciation regime, which is the only existing tax incentive for renewables.

“I think the thinking was more to offer something to make projects more attractive,” added Rabinovitch.

Unlike the US legislation, there will be no incentives extended to the fossil fuel industry as part of the bill. There will be efforts, though, to replicate the IRA’s carbon intensity tiers to guide the level of support to clean hydrogen projects.

“My personal sense is that whatever happens in the US gets extensive coverage here and the IRA is no exception,” explained Rabinovitch. “There was also a new tax on share buybacks, like in the US. There is a desire to be doing what the others are doing.”