In life two things are certain: death and taxes. Although taxes might not be everyone’s favourite topic, when it comes to renewable energy – it’s worth paying attention to it.
In an effort to increase the speed of renewables adoption, governments have a history of providing various forms of incentives to the green energy sector in the form of tax incentives, rebates, and other inducements. For example, in Ontario, many would be familiar with the former Feed-In-Tariff (“FiT”) Program, whereby the government provided above-market rates for individuals and companies to install solar panels supplying renewable energy to the grid.
While around the world FiT programs have largely fallen by the wayside, the new wave of government incentives is largely driven from a tax perspective for those looking to invest in renewables. The most prominent global example is the recent US Inflation Reduction Act (“IRA”).
After much political maneuvering, the IRA was passed by Congress and became effective in August 2022. It was passed in the aftermath of the COVID 19 pandemic with the aim of curbing inflation while addressing several strategic policy priorities. The IRA introduced sweeping incentives for renewable energy, carbon reduction, and other sustainable infrastructure projects. The IRA incentives are so strong that there are already signs that global renewable energy developers have pivoted capital flows to invest in the US market, and away from alternative markets.
To preserve Canadian competitiveness and to attract capital flows, in the Fall Economic Statement mini-budget released on November 3rd, the Federal government announced a suite of new incentives for green infrastructure with similar elements. The flagship measure of the policy is the Clean Technologies Investment Tax Credit (“ITC”). The ITC is a refundable tax credit equal to 30%of the capital cost of eligible projects. Specifically, eligible projects fall into four categories: 1) Clean Electricity Generation Systems, 2) Stationary Electricity Storage Systems, 3) Low-Carbon Heating Equipment, and 4) Industrial Zero-Emission Vehicles.
In the context of real estate development, the new tax credit creates several opportunities. On-site solar PV and battery storage are both eligible under the first category. Solar, which already enabled industrial and commercial building owners to benefit from on-site energy generation, will become substantially more economical. Furthermore, the tax credit starts to make batteries, which are excellent for peak shaving and resiliency, more economical despite their relatively high expense.
The third category also directly applies to real estate developers focused on the energy transition. Both air-source and ground-source heat pumps are covered under the new credits. These types of heat pumps are typically integrated into geothermal systems in multi-residential projects and air-source heat pumps used to electrify space heating and cooling applications in industrial buildings.
The fourth category provides incentives for fleet charging infrastructure, enabling landlords to install further green building features and attract logistics tenants.
The new credits announced under the fall economic statement also join some existing tax incentive programs to encourage renewables development. Namely, renewable generation is eligible for accelerated capital cost allowance (accelerated depreciation), which provides a financial benefit through deferred taxation. Along with the CCA for hard costs, certain soft costs associated with the projects can be eligible as Canadian Renewable and Conservation Expenses (CRCE). CRCE’s can be deducted in full or caried forward indefinitely for us in future years.
Phew! We did it, folks. Tax!
The world needs to decarbonize, and global governments recognize the need to provide both the carrot (incentives) and the stick (minimum requirements).
If you would like to learn on how to leverage this opportunity to improve your real estate returns while achieving decarbonization objectives, our team at Springbank Energy would be pleased to assist.