Update on Canada’s Clean Economy Investment Tax Credits

 
Aimed at attracting private investment into the clean energy sector, the ITCs are structured as a refundable tax credit that can offset a significant portion of the costs incurred in building clean energy projects in Canada (15% to 60% of eligible costs of a clean energy project). The ITCs are particularly appealing when compared to more traditional incentives, such as accelerated depreciation, because project sponsors will receive their refunds earlier in a project’s lifecycle, rather than as an offset or reduction of taxes payable over the course of an entire project lifecycle.

Bill C-15 enacted

Bill C-15 (Budget 2025 Implementation Act, No. 1) received Royal Assent on March 26, 2026, enacting the Clean Electricity ITC and extending the full credit rates for the Carbon Capture, Utilization, and Storage ITC by five years.

The currently available ITCs now include: (1) the Carbon Capture, Utilization, and Storage ITC, (2) the Clean Technology ITC (which generally includes traditional renewable power generation as well as related storage systems), (3) the Clean Hydrogen ITC, (4) the Clean Technology Manufacturing ITC, and (5) the Clean Electricity ITC.

Potential for domestic content requirements

As announced in Budget 2025¹, the Department of Finance conducted public consultations from February 13 to March 13 with respect to introducing domestic content requirements (e.g., a mandate that a certain percentage of the materials and products used in a clean energy project be produced or manufactured within Canada for the project to qualify for the ITCs) for the Clean Technology and Clean Electricity investment tax credits². The public consultations included certain key questions for consideration regarding the possible design and scope of the requirements, as well as asking for feedback on how such requirements would positively and negatively impact businesses. The potential introduction of domestic content requirements reflects the same policy direction as the Federal Government's “Buy Canada Policy”, which will require federal departments and agencies to give preference to Canadian suppliers, services, and materials, including steel, aluminum, and wood, during procurement.

It remains to be seen whether the requirements will ultimately be introduced and, if they are, what form they might take and when they would come into effect. If introduced, domestic content requirements could end up being a double-edged sword, creating greater opportunities for Canadian businesses but also potentially resulting in higher project costs and longer timelines.

ITC eligibility

Generally, eligible claimants are taxable Canadian corporations and partnerships with taxable Canadian corporations as members. Tax-exempts are excluded from claiming most ITCs but are generally eligible to claim the Clean Electricity ITC.

Budget 2025 provided further updates on eligibility requirements for the ITCs:

• The Clean Electricity ITC applies as of April 16, 2024 to projects that began construction on or after March 28, 2023.
• The Clean Technology ITC applies as of November 21, 2023 to “systems that produce electricity, heat, or both electricity and heat from waste biomass”, and to small nuclear energy properties as of March 28, 2023.
• The Clean Technology Manufacturing ITC applies as of January 1, 2024 for “qualifying equipment used in eligible polymetallic mining projects”.
• The Clean Hydrogen ITC applies as of December 16, 2024, for hydrogen produced from methane pyrolysis.
• The full credit rates of the Carbon Capture, Utilization, and Storage ITC will be available until 2035 (instead of 2030 as originally enacted), and the reduced credit rates will apply from 2036 to the end of 2040.
• The Clean Technology Manufacturing ITC will apply to additional critical minerals, including antimony, indium, gallium, germanium, and scandium.

Administration of the ITCs

While the policy goals underlying the Clean Economy ITCs, which include incentivizing investment in clean energy and getting projects built in Canada, are laudable, it remains to be seen whether these objectives will be hindered by how the Canada Revenue Agency (CRA) will administer the incentives in practice. Thus far, we have seen that the CRA has taken a rigorous approach to pre-auditing ITC claims prior to paying claimants. While a robust verification process is understandable, given the refundable nature of these credits, significant delays (in some cases exceeding one year) have emerged as a practical consequence. Such delays introduce uncertainty and timing risk that may, in some cases, impact the ability of project sponsors to obtain financing. Lenders and investors understandably factor in the risk that anticipated ITC refunds may be delayed or reduced as a result of an audit, which can increase financing costs and complicate project economics. As the ITC program matures, stakeholders will be watching closely to see whether the CRA's administration strikes an appropriate balance between protecting the integrity of the tax system and facilitating the investment that these ITCs were designed to attract.

What comes next?

The ITCs are vital to Canada's clean energy future, but their ultimate impact will depend on how key issues, including those surrounding the potential domestic content requirements and CRA administration, are resolved. Stakeholders should monitor these developments closely.