Taxation requirements and Investment Tax Credits for Independent Power Producer Renewable Energy Projects in Saskatchewan

June 13, 2023 | By Chad Eggerman, Janelle Anderson, and Fatima Ahmed

This article provides a high-level overview of the taxation requirements and the potential applicability of investment tax credits for an independent power producer (“IPP”) renewable energy project in the Province of Saskatchewan­­, Canada, including the following topics:

  • Goods and Services Tax (GST);
  • Harmonized Sales Tax (HST);
  • Provincial Sales Tax (PST);
  • Property Tax;
  • Income Tax;
  • Holdbacks and Payment Requirements;
  • Investment Tax Credits (ITCs) announced in Federal Budget 2023; and
  • Additional supports announced in Federal Budget 2023 for renewable energy projects.

Although the focus of this article is Saskatchewan, many of the above topics are Federal taxation requirements, ITCs or programs and will therefore apply in other provinces in Canada, particularly in neighbouring Alberta where IPPs often develop projects in parallel.

Goods and Services Tax (GST) / Harmonized Sales Tax (HST)

GST applies to supplies of most goods and services as well as many supplies of real property and intangible personal property.

The current GST rate in all provinces and territories in Canada is 5%. GST is charged separately (at 5%) from the provincial or territorial sales tax in British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and the Yukon. GST is the only sales tax charged in Alberta, Yukon, Northwest Territories, and Nunavut. GST and PST are combined and charged as HST at 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.

An accountant or qualified financial advisor is best placed to assist IPPs if they wish to claim input tax credits on GST/HST paid during commercial activities, such as the development and construction of a renewable energy project.

Provincial Sales Tax (PST)

PST applies to most goods and services consumed or used in Saskatchewan, although there are specific exceptions. PST applies to goods and services purchased in Saskatchewan, those imported for consumption or use in Saskatchewan, and to both new and used goods.

PST applies to IPP renewable energy projects in Saskatchewan. Saskatchewan currently does not offer significant tax credits, rebates or any other incentives related to PST on the costs a developer incurs to develop and build a utility-scale renewable energy project within the province. Various entities are undertaking government relations work and advocating to have the PST removed from the development and construction of such projects. Consequently, since the applicability of PST may change, IPPs are suggested to monitor the progress of these advocacy efforts.

Property Tax

Property taxes are charged at the municipal level. Since most utility-scale renewable energy projects in Saskatchewan are located outside of large population centres, the Rural Municipality is often the property taxing authority. The Rural Municipality is a defined entity pursuant to The Municipalities Act (Saskatchewan) commonly referred to as an “RM”.

RMs calculate and charge renewable energy project owners property taxes based on the following three factors: (a) mill rate, (b) minimum tax, and (c) base tax. Developers can estimate their property tax through online resources or through the help of an accountant or qualified financial advisor. Property tax assessments can be appealed and Procido LLP has assisted renewable energy developers with their assessment appeals in the past. Contact us if you require assistance in this regard.

Income Tax

Income taxes can vary and are subject to a range of potentially applicable credits and reductions based on the structure and control of the legal entity and nature of activities that are undertaken.  An accountant or qualified financial advisor can assist with a specific calculation of income taxes applicable to a renewable energy project.

The federal general corporate income tax rate in 2023 is 15%. Recently enacted legislation temporarily reduces the federal general corporate income tax rate on eligible income from eligible zero-emission technology manufacturing and processing activities by 50%, lowering the federal general corporate income tax rate to 7.5% for taxation years beginning in 2022. Budget 2023 proposes an expansion of this measure to include additional eligible manufacturing activities beginning in 2024 and a three-year extension on this measure. Beginning in 2032, this rate will gradually raise back to the status quo by 2035.

Provincial or territorial income taxes apply in addition to federal income taxes. Income is allocated to a province and territory by using a two-factor formula based on gross revenue and on salaries and wages. The provincial general corporate income tax rate in Saskatchewan is 12%.

Holdbacks & Payment Requirements

There are three potentially applicable holdback and compliance requirements.

15% Non-resident Contractor Holdback: There is a 15% holdback for non-resident contractors; the non-resident contractor needs to apply to get this remittance back from the CRA.

10% Builders’ Lien Holdback: A 10% builders lien holdback can also be applicable to all invoices from contractors to owners, which owners must withhold and then release after substantial completion of the renewable energy project. Contact us to learn more about how to manage the builders’ lien holdback for your project in Saskatchewan.

Prompt Payment Regime Compliance: Saskatchewan has a prompt payment regime that requires payment from owners to contractors and subcontractors in strict time frames and in defined forms. It is important to note that the prompt payment regime in Saskatchewan is different from the prompt payment regime in other provinces. Subject to some exceptions, compliance with this prompt payment regime is necessary in Saskatchewan. Contact us to learn more about the application of this regime to any specific project.

Investment Tax Credits

The Federal Government announced several Investment Tax Credits (“ITCs”) in Budget 2023. These ITCs aim to support the adoption of, and investment in, clean energy technologies within Canada. Many details remain outstanding and draft legislation implementing these proposals has not yet been released. The below summary outlines known details of ITCs that may be applicable to a renewable energy project in Saskatchewan, along with limitations and risk factors for consideration. Typically, only one ITC may be claimed with respect to any particular property, but different ITCs may be claimable on different expenditures within the same project.

Clean Electricity Investment Tax Credit (the “CE Credit”): This credit is proposed as a refundable tax credit equal to 15% of eligible investment in clean electricity projects. The CE Credit applies to projects that did not commence construction prior to March 28, 2023, and will remain in effect through 2034. The CE Credit is proposed to apply to a range of eligible investments, including the following:

  • investments in non-emitting electricity generation systems (such as wind, concentrated solar, solar photovoltaic, hydro, wave, tidal, and nuclear);
  • abated natural gas-fired electricity generation (subject to an emissions intensity threshold compatible with a net-zero electricity grid by 2035);
  • stationary electricity storage systems that do not use fossil fuels in operation (including batteries, pumped hydroelectric storage, and compressed air storage); and
  • equipment for the transmission of electricity between provinces and territories.

The CE Credit is proposed to be available to taxable and non-taxable entities, including entities owned or partially owned by First Nations. Eligibility for the full CE Credit is proposed to be dependent on adherence to the Labour Requirements (discussed further below). Failure to comply with the Labour Requirements would reduce the CR Credit to 5%. The CE Credit is subject to the Competent Authority Commitments (also discussed further below).

Clean Technology Investment Tax Credit (the “CT Credit”): The CT Credit is proposed as a refundable tax credit equal to 30% of the capital cost of eligible equipment. It applies to projects that did not commence construction prior to March 28, 2023, and will remain in effect through 2033, reduced to 15% in 2034, and no longer applicable after 2034. Eligible equipment includes the following:

  • renewable electricity generation systems (solar, wind, water, and geothermal, excluding equipment that will co-produce oil, gas, or other fossil fuels);
  • stationary electricity storage systems;
  • low-carbon heat and electricity equipment; and
  • industrial zero-emission vehicles.

The CT Credit is proposed to be available to taxable entities only. Similar to the CE Credit, adherence to the Labour Requirements is required to remain eligible for the full CT Credit rate. Failure to comply with the Labour Requirements would reduce the CT Credit rate to 20%. The CT Credit is not currently proposed to be subject to the Competent Authority Commitments.

Clean Manufacturing Investment Tax Credit (the “CM Credit”): The CM Credit is proposed as a 30% refundable tax credit for investment in machinery and equipment used to manufacture clean technology and extract and process relevant critical minerals. The CM credit applies to property acquired and available for use on or after January 1, 2024, and will remain in effect until 2031, reduced to 20% in 2032, 10% in 2033, 5% in 2034, and no longer applicable after 2034. This tax credit can be claimed for the following activities:

  • manufacturing renewable energy equipment (solar, wind, water, or geothermal);
  • manufacturing nuclear energy equipment;
  • processing or recycling nuclear fuels and heavy water;
  • manufacturing nuclear fuel rods;
  • manufacturing electrical energy storage equipment used to provide utility-scale storage or other ancillary services;
  • manufacturing equipment for air- and ground-source heat pump systems;
  • manufacturing zero-emission vehicles;
  • manufacturing batteries, fuel cells, recharging systems, and hydrogen refuelling stations for zero-emission vehicles;
  • manufacturing equipment used to produce hydrogen from electrolysis;
  • manufacturing or processing upstream components, sub-assemblies and materials provided they are built or designed exclusively for other eligible clean technology manufacturing and processing activities; and
  • extraction and processing activities for critical minerals essential for clean technology (lithium, cobalt, nickel, graphite, copper, and rare earth elements).

The CM Credit is proposed to be available for taxable entities only. The CM Credit is not proposed to be subject to the Labour Requirements or Competent Authority Commitments.

Clean Hydrogen Investment Tax Credit (the “CH Credit”): The CH credit is a refundable investment tax credit available for eligible costs for projects that produce hydrogen through their production process. The CH credit is only available in respect of projects where hydrogen is the only by-product, or makes up substantially all of the by-products, of the production process. The CH Credit will provide a variable rate for eligible project costs between 15-40% dependent on the carbon intensity of the production process (measured as kg of carbon dioxide equivalent per kg of hydrogen produced). The CH credit also offers 15% tax credit for equipment used to convert hydrogen into ammonia for transportation.

The CH credit will be applicable to property acquired and available for use in Canada after March 28, 2023, until 2023, reduced by 50% for property available for use in 2034, and no longer applicable after 2034. Eligibility for the full CH Credit is proposed to be dependent on adherence to the Labour Requirements. Failure to comply with the Labour Requirements would reduce the CH Credit by 10%.

Carbon Capture, Utilization and Storage Credit (the “CCUS Credit”): The CCUS Credit is offered towards the cost of purchasing or installing eligible equipment, if the equipment is used for an eligible use. Eligible equipment is defined as equipment that is part of an eligible CCUS project and which is used solely to capture, transport, store or use carbon dioxide in Canada. In this context, an eligible project is defined as a project that captures carbon dioxide from, or before release to, the atmosphere, and then compresses, transports, and uses the captured carbon dioxide for an eligible use. Eligible use implies the use of dedicated storage in concrete and/or geological storage.

During the years 2022-2030, the CCUS Tax Credit rates are as follows: 60 percent for capture equipment used in a direct air capture project; 50 percent for other capture equipment; and 37.5 percent for transportation, storage and use equipment.

During the years 2031-2040, the CCUS Tax Credit rates are as follows: 30 percent for capture equipment used in a direct air capture project; 25 percent for other capture equipment; and 18.75 percent for transportation, storage and use equipment.

The tax credit rates drop after 2030 in order to motivate quicker movement towards lower emissions. If a project consists of a combination of eligible and ineligible uses, then the CCUS Credit will be reduced according to the ratio between ineligible and eligible uses.

Labour Requirements: The Labour Requirements apply to the CE Credit, the CT Credit, and the CH Credit. These requirements come into effect on October 1, 2023. Prior to this date, the federal government plans to conduct consultations with labour unions and other stakeholders to refine these requirements. The proposed Labour Requirements include the following:

  1. The “Wage Requirement”: To ensure that wages paid to employees and contractors who are primarily engaged in manual and physical labour are at the prevailing level. The prevailing level is defined as at or above a “relevant wage” as specified in an “eligible collective agreement” – this amount can be derived from the most recent multi-employer collective bargaining agreement between a trade union and a group of employers, especially if this bargaining agreement can be considered the industry standard for the given trade in the particular region, province, or territory; and
  2. The “Apprenticeship Requirement”: To ensure that apprenticeship training opportunities are being created and that these opportunities account for no less than 10% of the total labour hours of “covered workers” on a particular project. In this context, “covered workers” refers to workers whose duties correspond to those performed by a journeyperson in a Red Seal trade.

    Competent Authority Commitments: Access to the CE Credit will require the following commitments by a “competent authority” (the “Competent Authority Commitments”):

    1. that the federal funding will be used to lower electricity bills (the “Electricity Cost Commitment”), and
    2. a commitment to achieve a net-zero electricity sector by 2035 (the “Net-Zero Commitment”).

    Additional details regarding these commitments and any other requirements are expected to emerge following consultations between the Federal Government and provincial and territorial counterparts.

    The Electricity Cost Commitment requires an understanding and analysis of the power supply and demand economics inherent in the provision of electricity in Saskatchewan. This factor requires a fulsome assessment of the financial model of the project and the financial model of the provision of electricity in Saskatchewan. It is important to note that a renewable energy project is not guaranteed to reduce the overall net cost of the provision of electricity in Saskatchewan. Further details on how the Federal Government intends to assess or substantiate this requirement are not yet available but could serve to disentitle the investment if the project does not meet the requirements.

    The Net-Zero Commitment is a political risk factor for the availability of the CE Credit, as the Government of Saskatchewan has not yet made a commitment to achieve a net-zero electricity sector by 2035. However, SaskPower has made a commitment to reduce greenhouse-gas emissions by at least 50% from 2005 levels by 2030, and to reach net-zero GHG emissions by 2050. The Government of Saskatchewan has historically been cautious of Federal Government policies that can be perceived as “overreaching” and infringing upon provincial jurisdictional authority. If this requirement survives the final version of this proposed CE Credit, it could serve to disentitle investments made for projects in Saskatchewan that would otherwise meet the eligibility criteria if the Government of Saskatchewan does not align its commitments to that of the Federal Government.

    Additional Supports for Renewable Energy Projects

    Some additional mechanisms through which Budget 2023 aims to support renewable energy projects are as follows:

      • Net zero Transmission Project Support: A consultation is expected to take place that will aim to explore the “best means” to support intra-provincial transmission to support Canada’s net zero grid objectives.
      • Canadian Infrastructure Bank: $20 billion CAD is allocated in support of clean electricity investments, including at least $10 billion CAD dedicated to the Clean Power priority area and at least $10 billion CAD dedicated to the Green Infrastructure priority area.
      • Recapitalization of SREPs: $3 billion CAD is allocated to the Smart Renewables and Electrification Pathways (SREPs) program, which will support regional priorities and Indigenous led projects.
      • Canada Growth Fund: Budget 2023 expressed an enhanced commitment to carbon price stability through introduction of new tools in the Canada Growth Fund managed by the Public Sector Pension Investment Board.

      Please contact Chad Eggerman or Janelle Anderson or any other member of the Procido LLP Renewable Energy Practice Group for more information on any of the items mentioned in this article.

      Disclaimer

      This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. Do not rely on this information to make tax decisions about your project without first consulting an accountant or qualified financial advisor. This information is not meant as legal opinion or advice. Contact Procido LLP (www.procido.com) if you require legal advice on the topic discussed in this article.

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