Additional Design Features of the Investment Tax Credit for Carbon Capture, Utilization and Storage: Recovery Mechanism, Climate Risk Disclosure, and Knowledge Sharing

Budget 2022 proposed the final design of an investment tax credit for Carbon Capture, Utilization, and Storage (the CCUS Tax Credit), and indicated that design features with respect to the recovery of the CCUS Tax Credit, climate risk disclosure and knowledge sharing would follow.

Budget 2022 proposed the final design of an investment tax credit for Carbon Capture, Utilization, and Storage (the CCUS Tax Credit), and indicated that design features with respect to the recovery of the CCUS Tax Credit, climate risk disclosure and knowledge sharing would follow. This backgrounder proposes specific design features for the recovery mechanism, climate risk disclosures and knowledge sharing requirements associated with the CCUS Tax Credit.

Legislating the proposed design features will require consequential legislative amendments to the draft legislative proposals for the CCUS Tax Credit that have concurrently been released for consultation.

Recovery Mechanism

Where eligible equipment is part of a project that plans to store CO₂ through both eligible and ineligible uses, the CCUS Tax Credit would be reduced based on the proportion of CO₂ expected to go to ineligible uses. 

The recovery mechanism ensures that the investment tax credit (ITC) is provided to the extent that CO₂ is going to eligible uses. At this time, only dedicated geological storage and storage in concrete are proposed to be eligible uses.

Determination of ITC Amounts

The ITC amount for a project would be determined by the type of equipment modified by the ratio of CO₂ expected to be stored via eligible uses (although storage and use equipment would be expected to solely support eligible uses).

Specifically, CCUS ITC amounts would be determined by multiplying the eligible expenditures incurred by an "eligible use factor". The "eligible use factor" would be calculated by taking the proportion of the amount of captured CO₂ going to eligible uses versus ineligible uses that is planned over the first 20 years of the project, as specified in the project plan. The determination would be calculated using an equal weighting of 5-year assessment periods, based on the weighted average of ineligible uses to eligible uses that is planned for each period.

To facilitate the determination of ITC amounts, as well as the recovery mechanism, each project would be required to provide, as part of its project plans, information that details the expected amount of CO₂ going to eligible and ineligible uses over the first 20 years of operation.

The expected eligible use ratio would be required to be greater than or equal to 10 per cent in every year in order for the project to be eligible for the ITC. Projects must plan to operate for at least 20 years in order to be eligible for the CCUS Tax Credit.

Recovery Mechanism

Once projects begin to operate, they would be assessed at five-year intervals for the first 20 years in which they operate (the "20-year recovery period"), to determine if a recovery of the CCUS Tax Credit is warranted. Projects would be required to provide information on the actual amount of CO₂ going to eligible and ineligible uses for each year.

A recovery would be calculated if the portion of CO₂ actually going to ineligible uses is more than five percentage points higher than the weighted average set out in the project plan for that five-year period (i.e., the basis on which the CCUS Tax Credit was paid). In this case, the ITC amount would be re-calculated based on the actual amount of CO₂ going to eligible uses versus ineligible uses, and the difference between this ITC amount and the original ITC amount provided would be recovered.

Projects that do not maintain an eligible use ratio of at least 10 per cent in each year over the course of a 5-year assessment period would have the ITC recovered in respect of that 5-year assessment period and all other remaining 5-year assessment periods.

If a recovery were due for a 5‑year assessment period, the payment of the recovery amount would be spread equally over the five following years.

Illustrative examples of the recovery mechanism are provided at the end of this backgrounder.

Extraordinary Circumstances and Shutdowns

In the event of extraordinary circumstances that affect the eligible use ratio, particular time periods may be excluded from a 5-year assessment period, at the discretion of the Minister of National Revenue. For example, a breakdown of transportation or storage equipment that leads to less CO₂ stored in eligible uses than planned. The time period over which a CCUS capture facility is shutdown would not be included in the recovery calculation, until such time that the operation of the CCUS capture facility resumed. The 20-year recovery period would not be impacted by periods in which extraordinary circumstances or a shutdown occur.

Interest Charge

The Canada Revenue Agency's prescribed rate of interest for amounts owing would apply to amounts to be recovered. The calculation of interest would begin in the tax year the project begins operating.

Climate Risk Disclosure

Corporations would be required to produce an annual Climate Risk Disclosure (CRD) report beginning in respect of the tax year in which an ITC is first claimed through the first 20 years of operations. All corporate partners in a partnership would need to produce a CRD report. Corporations with projects that expect to have less than $20 million of eligible expenses over the life of the project would be exempt from this requirement. Reports would be required 9 months after the taxpayer's tax year-end and would need to be made public by the taxpayer (e.g., on their website).

The report would need to cover the four criteria set out by the Task Force on Climate-Related Financial Disclosures: governance, strategy, risk management, and metrics and targets. It would also need to set out how corporate governance, strategies, policies and practices contribute to achieving Canada's commitments under the Paris Agreement and goal of net-zero by 2050.

If a taxpayer fails to meet the CRD requirement in respect of any year, they would be required to pay a penalty equivalent to the lesser of 4 per cent of the cumulative amount of the ITC that has been claimed at that time or $1 million. This penalty would be applied in respect of each year that this obligation is not met, up to the end of the first 20 years of operations.

Knowledge Sharing

CCUS projects with eligible expenses of $250 million or greater over the life of the project (based on project plans) would be required to contribute to public knowledge sharing in Canada.

Taxpayers would be required to make available for public dissemination a knowledge sharing report. A report would be required following the commissioning of the CCUS facility and for the five following years. Details surrounding the content requirements of the knowledge sharing report would be developed and provided by Natural Resources Canada.

The penalty for not producing a knowledge-sharing report in respect of the commissioning of the CCUS facility or the five subsequent annual reports would be $2 million for each report not produced.

Examples of Recovery Mechanism

The plans for a capture project provide that it would capture CO₂ that will be stored in eligible and ineligible uses according to the schedule set out below. ITC amounts would be determined using the amount of eligible expenses, the ITC rate, and an equal weighting of the 5-year assessment periods and the eligible use ratio that is planned for each 5-year period.

Assuming the project had $200 million of eligible expenses and an ITC rate of 50 per cent, it would receive ITCs worth about $73 million ($50 million X 50% X 67% + $50 million X 50% X 75% X 3).

During year four in which the project operates, CO₂ stored in eligible uses is lower than planned. However, the percentage point difference between the actual and planned 5-year eligible use ratio is less than 5 percentage points, so there is no recovery in respect of that period.

During years thirteen to fifteen, CO₂ stored in eligible uses is less than planned. As the percentage point difference in the eligible use ratio is larger than 5 percentage points in the third 5-year period, the ITC in respect of that period is subject to a recovery. The recovery is calculated as the difference between the ITC that was paid in respect of that 5-year period ($18.75 million) and the ITC that would have been paid based on the actual 5-year eligible use ratio ($15 million). The recovery of the ITC is calculated as $3.75 million ($18.75-$15 million).  The amount would be subject to an interest charge, and both the recovery and the interest charge would be payable over the five years following the end of the third assessment period.

During the fourteenth year in which the project operates, the eligible use ratio is less than the 10% minimum threshold. As such, $37.5 million of ITC paid out in respect of the third and fourth 5-year periods is recovered (i.e., $18.75 million + $18.75 million). The amount would be subject to an interest charge, and payable over the five years following the end of the third assessment period.