Budget promises tax breaks for clean manufacturing

Authors: MLT Aikins ESG practice group

Tuesday’s federal budget introduced a tax break for companies investing in clean manufacturing, with an emphasis on investments in the electric vehicle (EV) supply chain.

The Clean Technology Manufacturing Investment Tax, a refundable tax credit covering 30% of the capital costs for investments in clean manufacturing, will apply to investments in equipment used to extract and process the critical minerals used in EVs, as well as equipment used in the entire EV supply chain.

The credit also applies to investments in renewable and nuclear energy, as well as other technologies that will help Canada achieve its net zero targets.

What investments are eligible?

The new tax credit will cover investments in machinery and equipment used for:

  • extracting, processing and recycling critical minerals used in EVs – particularly lithium, cobalt, nickel, graphite, copper and rare earth elements
  • manufacturing renewable and nuclear energy equipment
  • processing and recycling nuclear fuels and heavy water
  • manufacturing grid-scale electrical energy storage equipment
  • manufacturing zero-emission vehicles
  • manufacturing upstream components such as cathode materials and EV batteries

The tax credit applies to property that is acquired or becomes available for use on or after January 1, 2024, and will be phased out by 2034.

EVs a key component of emissions reduction plan

Last March, the federal government released its 2030 Emissions Reduction Plan, the first such plan issued under the Canadian Net-Zero Emissions Accountability Act.

Encouraging Canadians to switch to EVs featured prominently in the government’s plan to slash emissions 40 – 45% below 2005 levels by the year 2030 – and the Clean Technology Manufacturing Investment Tax is a step toward achieving that goal.

The budget noted that Canada’s abundance of critical minerals would be a “critical component” of EV value chains and integrating battery production and automotive manufacturing could make the country an attractive investment for EV assembly and parts manufacturing.

As we discussed in a previous article, the federal government and the provinces have been positioning themselves to capitalize on the growing need for critical and strategic minerals – and we’re starting to see the payoff. Earlier this month, Volkswagen subsidiary PowerCo announced its plans to build its first overseas EV battery manufacturing facility in St. Thomas, ON.

Leading the transition to a net-zero economy

The lawyers at MLT Aikins have wide-ranging experience advising clients in the mining and energy sectors on cutting-edge projects leading the transition to a net zero economy. If you have questions about any of the clean-energy measures included in the federal budget, we’d be happy to assist you. Contact a member of our Mining & Natural Resources, Energy or ESG teams to learn how we can help.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.