Canadian ITC Labour Requirements are about to go "live"
UPDATE: As of October 27, 2023 we have been hearing sounds that the Canadian ITC Labour Requirements may be tabled in a few weeks.
Following in the footsteps of the Inflation Reduction Act of 2022 which was signed into US law last August by President Biden, the Canadian government included several tax-based incentives in the 2022 Fall Economic Statement (“FES”) and followed up by including the proposed incentives in the 2023 federal budget.
Although we were expecting a lot more detailed guidelines, rules and regulations at this point, this is what we have learnt from the currently available information so far.
In December of 2022, the Dept of Finance delivered its 2022 Fall Economic Statement which proposed ~C$6.7 billion of refundable tax credits equal to 30% of the capital cost of investments (“ITCs”) in (clean) Electricity Generation Systems, Stationary Electricity Storage Systems, Low-Carbon Heat Equipment & Industrial zero-emission vehicles. An ITC was also proposed for Clean Hydrogen. The value of this ITC however, would depend on the level of CO2e emissions from the production of clean hydrogen.
To incentivise the creation of good jobs, certain labour conditions were identified and included in the requirements of some of the ITCs. This, in a nutshell, means if companies chose not to participate in the labour incentives, they will face a reduction of 10 percentage points of the proposed ITC for their qualified project(s).
These labour conditions included, (i) paying certain workers a prevailing wage based on local labour market conditions, and (ii) the creation of apprenticeship training opportunities.
In March of 2023, the Federal Budget introduced the ‘Made-in-Canada Plan’ where the following specified percentage details for the respective ITCs were announced.
*This includes electricity generation, electricity storage, solar heating, zero-emission vehicles, geothermal electricity generation, concentrated solar electricity generation and small modular nuclear reactor equipment.
Regardless of the ITC, a reduction of ten percentage points will be applied if the labour requirements are not met. During the phase-out periods of certain ITCs, failure to meet the Labour requirements will result in the elimination of the ITC entirely.
More details on the labour requirements were included in the Budget, and although they currently only apply to the proposed Clean Hydrogen and Clean Technology ITCs, it is intended that the labour requirements be also applied to the Clean Electricity ITC and Carbon Capture, Utilization, and Storage ITC. Details ‘at a later date’ have been promised.
On August 4, 2023, the Ministry of Finance released draft details on the above ITCs where proponents could provide comments to the ministry by September 8, 2023. (I’m sure many did and we have yet to hear back on those)
In any case, the application of the labour requirements is divided into two parts. The first part is geared toward ensuring workers, whose duties are primarily manual or physical in nature,
· Labourers, Crane Operators, Cable Installers/Joiners,
· Drill Operators, Electricians, Equipment Operators,
· Fitter/Welders, Graders, Journeymen,
· Riggers, Linesmen etc.,
are paid a fair wage for their labours. These fair wages are to be based on the prevailing wage of the local union compensation, benefits and personal contributions from the most recent, widely applicable multi-employer collective bargaining agreement, or corresponding project labour agreements, in the jurisdiction within which relevant labour is employed.
The second component of the requirements looks to encourage a continuation of the workforce through apprenticeship requirements. These requirements demand that at least ten percent (10%) of the tradesperson hours worked must be performed by registered apprentices in the Red Seal trades. The total amount of hours shall be subject to certain applicable labour laws or collective agreements that apply to the work being performed.
Red Seal trades are designated trades that are governed by regulations under the territorial and provincial apprenticeship Acts. Trades, relevant to the work required at a project site, include, but not limited to:
· Construction Craft Worker
· Construction Electrician
· Heavy Equipment Operator (Dozer, Excavator, Tractor-Loader, Backhoe)
· Crane (mobile/Tower) Operator
· Industrial Electricians
The Red Seal Program is managed by the Canadian Council of Director of Apprenticeship (“CCDA”).
Both the wage and apprenticeship requirements must be fully met to retain the full amount of the specific ITC. Failure to comply with either requirement will result in a reduction of the tax credit by ten percentage points. There may be however, a possibility to pay renumeration to workers and penalties to the Receiver General to resolve non-compliance. (there are some specific calculations proposed)
In any case, we strongly recommend setting a robust program to validate, collect evidence and ultimately demonstrate compliance to the labour requirements. As with most government programs, starting early and documenting one’s approach thoroughly will be a key success factor of a project.
Note that these labour requirements will apply to labour that is performed after the legislation is tabled sometime in 2023, early 2024
In conclusion, the Clean Technology ITC will be the route most project sponsors will follow. While there are details to be confirmed by the government it seems directionally understood that an ITC of 30% will be made available if labour requirements are met.
If a particular property is eligible for multiple tax credits, only one of the ITCs may be claimed. However multiple tax credits could be claimed by the same project if the project includes different types of eligible property.
Note that the Clean Technology ITC should not be confused with the Clean Electricity ITC which is another program that has yet to be fully defined by the government.
We expect further details to all the above will be provided, by the Ministry of Finance, in the coming months but we have already supporting EPCs and project sponsors manage compliance programs to gain the extra 10% ITC from Labour Requirements.
For more details please don’t hesitate to contact us!
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