Budget 2023: Clean Technology Investment Tax Credit for Geothermal Energy

The 2023 Federal Budget proposes some significant funding initiatives, including over $20B over six years for tax credits to promote investment in green technologies.

These measures are intended to help Canada build its clean economy, meet its 2030 greenhouse gas emissions reduction targets and drive the creation of high paying jobs. The measures are also a response to the United States' Inflation Reduction Act's (IRA) clean growth incentives, which some see as a challenge to Canada's ability to compete in the industries that will drive Canada's clean economy.

The 2022 FES introduced the Clean Tech Tax Credit equal to 30 per cent of the capital cost of investments in certain class 43.1, 43.2 and 56 property. The types of assets eligible for the Clean Tech Tax Credit include equipment used to generate electricity from solar, wind and water energy, stationary electricity storage equipment, low-carbon heat equipment and industrial non-road zero-emission vehicles.

Budget 2023 proposes to expand eligibility of the Clean Tech Tax Credit to include geothermal energy systems that are eligible for Class 43.1. This includes piping, pumps, heat exchangers, steam separators, and electrical generating equipment, but not equipment used for geothermal energy projects that will co-produce oil, gas, or other fossil fuels. Budget 2023 also proposes to modify the phase-out schedule of the Clean Tech Tax Credit announced in the 2022 FES, so that the credit rate would remain at 30 per cent for property that becomes available for use in 2032 and 2033 and would be reduced to 15 per cent in 2034.

The rate of the Clean Tech Tax Credit is also reduced by 10 per cent (to 20 per cent) if the labour requirements are not met.

Budget 2023 also introduces the new refundable Clean Tech Manufacturing Tax Credit for clean technology manufacturing and processing, and critical mineral extraction and processing, for up to 30 per cent of the capital cost of certain depreciable property that is used all or substantially for eligible activities. Eligible property includes machinery and equipment, including certain industrial vehicles, as well as related control systems. 

Eligible activities include:

  • Manufacturing of certain renewable energy equipment (solar, wind, water, or geothermal);

  • Manufacturing of nuclear energy equipment;

  • Processing or recycling of nuclear fuels and heavy water;

  • manufacturing of nuclear fuel rods;

  • Manufacturing of electrical energy storage equipment used to provide grid-scale storage; or other ancillary services;

  • Manufacturing of equipment for air- and ground-source heat pump systems;

  • Manufacturing of zero-emission vehicles, including conversions of on-road vehicles;

  • Manufacturing of batteries, fuel cells, recharging systems, and hydrogen refuelling stations for zero-emission vehicles;

  • Manufacturing of equipment used to produce hydrogen from electrolysis; and

  • Manufacturing or processing of upstream components, sub-assemblies, and materials provided that the output would be purpose-built or designed exclusively to be integral to other eligible clean technology manufacturing and processing activities, such as anode and cathode materials used for electric vehicle batteries

Eligible activities would also include the extraction and certain processing activities related to six critical minerals essential for clean technology supply chains: lithium, cobalt, nickel, graphite, copper, and rare earth elements. This could include activities both before and after the prime metal stage or its equivalent. This inclusion shows the Government's focus on these critical minerals and echoes the scope of the Critical Mineral Exploration Tax Credit introduced in Budget 2022.

Tax integrity rules would apply to recover a portion of the Clean Tech Manufacturing Tax Credit if the eligible property is subject to a change in use or sold within a certain period of time. Unlike the Section 45X Advanced Manufacturing Production Tax Credit available in the US under the IRA, the Clean Tech Manufacturing Tax Credit is not subject to any production levels but rather on the purchase of the relevant equipment.