Skip to main content

Canadian Clean Investment Tax Credits aim to keep business in Canada amid global green incentive race

By Stephanie Gilman

Published March 1, 2024 • 5 Min Read

With Canada’s new tax credits holding the potential to shape the country’s green landscape and create domestic leaders in this field, businesses and investors will be watching closely to see how things unfold.

Canada’s recently announced Clean Investment Tax Credits have added to the growing conversation about the country’s path toward a sustainable future. These incentives, which aim to accelerate investments in clean energy and green technology, come amid a global race to fight climate change, with the US Inflation Reduction Act (IRA) already making waves south of the border.

With Canada’s new tax credits holding the potential to shape the country’s green landscape and create domestic leaders in this field, businesses and investors will be watching closely to see how things unfold. George Stefan, a partner on the tax team at BDO Canada, sees these credits as a strategic response to the IRA, aimed at preventing Canadian companies from migrating south to reap the rewards of a wider range of tax benefits.

“Given how easy it is for a business to move its operations from Canada to the U.S., there would be a slew of companies leaving the country now if there were no Canadian incentives for business owners to look forward to,” Stefan says.

However, Stefan emphasizes the need for a Canadian-specific approach, one that acknowledges the country’s distinct reliance on natural resources compared to the U.S.’s manufacturing-heavy economy. As he notes, “Canada is a resource-rich country, and the incentives will need to reflect that. So while we’re trying to achieve a similar goal as the States, which is really retaining and attracting capital investments, the focus has to be different.”

And with natural resource-based projects comes the critical need for an increase and enhancement in infrastructure—something the incentives offered through the IRA in the U.S. don’t necessarily need to account for.

“You’re not going to drill in the middle of Toronto or Vancouver,” Stefan says, “and you can’t place a wind farm in the middle of the city. So you have to build new infrastructure.”

Although the Canadian government put funding programs in place years ago to support infrastructure growth, Stefan says the pace has been extremely slow. He stresses the need for larger incentives to compensate investors for the extra challenges of working across Canada’s expansive terrain.

“Our government needs to make these incentives more attractive to entice companies to invest in Canadian projects,” he says. “Otherwise, they’re going to take their money elsewhere.”

Stefan says one potential hurdle to the success of the rollout of these new incentives could be a lack of clarity and certainty surrounding the application and disbursement of the tax credits.

“If incentives aren’t available for another year or two, this will create business fatigue,” he warns. “Companies will tire of waiting and be more tempted by the IRA tax credits that already exist.”

In addition to timely rollouts, Stefan says clear instructions will be key in attracting investors.

“The government needs to eliminate barriers. Clear rules and requirements make investing more attractive,” he says, noting that his peers in the U.S. were pleasantly surprised by the clarity provided in the IRA, and Canada would be wise to follow its lead.

The Inflation Reduction Act’s tax incentives have also spurred a new marketplace where smaller companies investing in green energy can transfer their tax credits to larger, tax-liable corporations. It’s a win-win scenario—small companies secure funding needed for green projects, and bigger businesses offset their tax burdens.

The U.S. market for these credits has already taken off, and it serves as a model for Canada to consider. According to Stefan, the Canadian government hasn’t yet announced what its transfer system will look like, but based on their previous actions, it appears they favour a cap-and-trade framework.

“Eventually, there will need to be something in place to provide some way to monetize these incentives,” he says.

With financial institutions playing a crucial role in facilitating green tax credit transactions in the States, there may be opportunities for Canada’s banks to get involved with whatever system does ultimately emerge. But Stefan says he hasn’t heard any of the big banks express a willingness to dive into the waters of clean-tech financing.

“To be innovative in professional services, you want to be the guy in the blue ocean,” he explains, referring to the blue ocean strategy which focuses on creating new markets rather than competing in existing ones. “But it looks like all the major banks are waiting for a red ocean situation.”

Although the possibility of a booming financial trading marketplace in Canada isn’t yet certain, Stefan believes the potential economic benefits of the Clean Investment Tax Credits are significant. He says the benefits will come from not only the increase in foreign capital investments but retaining skilled labour.

“A lot of these businesses would have gone down south, which is what happens when times are tough in Canada,” Stefan explains. “By having these investment tax credits, it creates an incentive to stay and undertake initiatives that will keep talent at home and create new jobs.”

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

Share This Article


ESG Tax Tips