The renewable west: investment tax credits

Craig Maurice (00:05): With an abundance of wind and sunshine, Western Canada in particular, Alberta, remain a leader in the renewable space in Canada. According to the Canadian Renewable Energy Association, a staggering 92% of renewable projects in Canada were sourced in Alberta last year. And tax incentives are a really critical aspect of the renewable space and the government's intent to sort of promote the transition to a green economy.

Steve Marshall (00:29): So, in order to not fall behind in this space, over the past few years, the Canadian federal government has announced, and in some cases is close to enacting, its own regime for tax incentives to promote what it calls “Canada's clean economy”. These incentives are structured somewhat uniquely in the form of specific, refundable investment tax credits that can help offset a portion of the cost of developing certain renewable projects.

Craig Maurice (00:55): And we expect that this proposed regime is going to be far more effective than prior efforts to incentivize the industry. Because these are truly refundable credits, project sponsors are going to see cash coming from the government earlier in the project lifecycle, and not dependent on income earned over the course of the project.

And so, historical approaches like accelerated depreciation or non-refundable investment tax credits just took more time to realize the benefits, whereas this is much more front-end loaded and obviously pretty critical. In the renewable space, there's really three buckets that are relevant to renewable projects. The broadest is the Clean Tech investment tax credit. but there's also Clean Electricity investment tax credit and a Clean Hydrogen tax credit. And in many cases, this can result in refundable tax credits up to 30% of the project costs, which is obviously pretty sizable.

Steve Marshall (01:49): So, who can claim them? Credits are available to taxable Canadian corporations and partnerships that have taxable Canadian corporations as members. This doesn't mean that foreign investors cannot get the benefit of tax credits, it simply limits the structures that they can invest through. Effectively, they need to come in through, Canadian subsidiary with respect to tax exempt. Although the ITC restrict the ability of tax exempts in some cases from claiming the announced Clean Electricity ITC, as Craig mentioned, is proposed to be available.

In typical structures in the renewable space, what we've seen historically is largely in the form of limited partnerships with a nominal general partner. But many participants are grappling with the fact that these typical structures, the proposed rules have specific restrictions on how much of the ITC generated at the partnership level can be claimed by limited partners. Simplified, a limited partner is generally restricted to claiming only the amounts that they have “at risk”. In practice, these rules have led to discussions on how to best structure project investment to maximize the tax credits.

Craig Maurice (02:51): One of the interesting aspects of the Canadian tax incentives is where they sort of originated and back in 2022, the US proposed their renewable incentives through the Inflation Reduction Act. And Canada really responded to those knowing that they had to keep pace and remain competitive in the space.

But not only did we sort of mirror the fact that these were refundable investment tax credits, we've also picked up some of the more unique aspects of the US rules, including some very unprecedented labour requirements, apprenticeship training requirements, and prevailing wage requirements. Because these are really novel concepts for Canadian tax incentives, there remains a fair bit of uncertainty as to how these things will be tracked, maintained, audited and the like.

The key is, given the size of these incentives, what we're really seeing is a tipping point where projects are on the verge of being economic or non-economic, and these credits can make the difference in that regard and turn a project that was otherwise uneconomic into a viable project just given the size of the credits.

So overall, we expect these tax incentives to remain a really critical component of this space for the foreseeable future. And we anticipate both sponsors, financiers and the like are going to need to really be cognizant of these tax incentives and consider them carefully earlier on in the project’s cycle than they might otherwise have.