Canada’s CCUS ITC amendments: Strong progress, refinements still needed

Authors: Breanne O’Reilly and Mac Walton (International CCS Knowledge Centre) and Scott Masson, Thomas Collopy and Randy Brunet (MLT Aikins)

Canada’s Carbon Capture, Utilization and Storage (CCUS) Investment Tax Credit (ITC) remains one of the most impactful industrial decarbonization policies in the country. For large-scale carbon management projects, the ITC does not simply improve economics, it can determine whether a project advances to final investment decision (FID).

Recent amendments introduced through Bill C-15 and the January 2026 legislative proposals show the government’s proposed responses to implementation challenges. Most of the changes are constructive. Some materially strengthen the bankability of potential CCUS projects. Others introduce new constraints which could affect CCUS projects currently in development.

The amendments come at a critical time, when several key policies related to carbon pricing systems and other emission reduction measures are being negotiated by provincial and federal governments.

While the amendments represent meaningful progress, further refinements would better align the ITC with construction realities, infrastructure development and market deployment.

The nature of the changes

At a high level, the ITC amendments expand timelines, clarify eligible expenditures, improve long-term risk allocation and tighten eligibility for certain dual-use equipment.

The most visible change is the five-year extension of the highest ITC rates from 2030 to 2035. This preserves the 60% credit for Direct Air Capture, 50% for point-source capture and 37.5% for transportation and storage through 2035, with step-downs beginning in 2036. In today’s environment of geopolitical and supply chain uncertainty, this extension was necessary. Without it, many high-quality CCUS projects that have completed feasibility and FEED studies were unlikely to proceed.

The recent inclusion of excavation directly tied to eligible CCUS property also corrects a practical gap in the original framework. Carbon transportation and storage infrastructure is inherently subsurface and capital-intensive. Aligning the ITC with construction realities strengthens project economics and reduces unnecessary cost distinctions.

The January 2026 legislative proposals further improve risk allocation by introducing relief for bona fide carbon reversals. If CO₂ is released from dedicated geological storage for reasons outside an operator’s control, the release would be deemed an eligible use and would not trigger an ITC clawback. From a financing perspective, long-term storage carries residual risk, and this proposal reduces repayment risk.

Overall, the ITC amendments collectively strengthen the CCUS incentive framework. However, one proposed legislative change narrows the eligibility of dual-use heat and power equipment. Heat and power equipment support both industrial activities and CCUS facilities. Dual-use equipment is proportionally supported by the CCUS ITC and the Clean Hydrogen ITC, with the proportion of energy used to support the CCUS project being eligible for the CCUS ITC and the rest not.

Based on a CRA interpretation in 2025, dual-use equipment that sells electricity over-the-grid in a fixed contract to another CCUS project would be able to increase the CCUS ITC eligibility of that equipment.

The proposed legislative amendments would limit eligible dual-use energy equipment to systems directly supporting a CCUS project within its boundary and reverse the prior “over-the-wires” interpretation. Under the revised approach, equipment supplying electricity via the grid – even if ultimately used for another CCUS or carbon removal facility – would not qualify for any ITCs.

For some potential CCUS projects, this change is significant. Facilities with constrained heat and power availability, such as cement production or power generators facing opportunity costs in redirecting electricity to capture operations, may be particularly affected.

Refinements still needed

With billions of dollars in CCUS-related capital decisions pending before 2035, several additional refinements would further strengthen the ITC.

First, eligibility should be tied to demonstrated construction rather than equipment installation. The ITC currently hinges on fixed installation deadlines. In a constrained global supply chain environment, long-lead items, rare materials and labour availability can create timing risks beyond a developer’s control. A construction-based trigger, tied to commencement of construction, continuous work and a defined investment threshold would better align with policy intent. The United States 45Q regime provides a useful precedent. Such an approach would reduce execution risk while preserving fiscal discipline.

Second, durable removal pathways should be treated consistently. Direct Air Capture receives a 60% ITC rate in recognition of its removal value. Bioenergy and waste-energy carbon capture can also generate durable removals, yet not all removal pathways are treated equally by the ITC. Aligning the highest ITC rate with verified durable removals would better reflect climate value and reduce technological distortion.

Third, CO₂ enhanced oil recovery (EOR) should be recognized as an eligible use under the ITC. Its exclusion remains a policy gap. The November 2025 Memorandum of Understanding between Alberta and Canada commits to extending federal supports to encourage large-scale CCUS investments, including EOR. However, as noted in an earlier Insight from MLT Aikins, the legislative amendment necessary to implement that commitment has not yet been made.

CO₂-EOR is not a novel or experimental pathway. It is already utilized in several commercial CCUS projects in Canada. Where net storage is verified and permanence standards are met, EOR can provide large-scale geological storage, create an early commercial market for captured CO₂ and support the development of transport and storage infrastructure. Saskatchewan’s incentive framework and Alberta’s TIER system and incentive program already contemplate EOR operations. Aligning the federal ITC with those provincial incentives would create greater coherence across jurisdictions and support CCUS infrastructure buildout. From a legislative standpoint and as discussed in the earlier Insight, EOR ITC inclusion would require removing EOR from the list of ineligible uses and recognizing it alongside geological storage and concrete production as an eligible use.

Another helpful element which could be implemented from the United States 45Q regime would be to create a pathway to improve additional uses, on a case-by-case basis. Utilization cases could be presented to the government with a detailed life cycle assessment, allowing Natural Resources Canada and Environment, Climate Change and Nature Canada to review and make a recommendation to Finance Canada. This change would allow developers to pursue the option that makes the most sense for them and still ensures emissions reductions.

Finally, Canada needs to find a way to retain “over-the-wires” dual-use flexibility for the CCUS ITC. Recognizing support for this could be viewed as subsidizing general grid electricity, a more calibrated approach would preserve policy integrity without materially undermining integrated industrial design. Canada should explore targeted guardrails rather than categorical exclusion. Refining the dual-use factor, limiting certain equipment types or introducing design-based thresholds would maintain fiscal integrity while allowing efficient industrial integration. Existing Natural Resources Canada review processes could ensure that equipment primarily supports CCUS objectives for it to be eligible for the ITC.

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The International CCS Knowledge Centre provides independent, expert advisory services to de-risk and advance CCUS projects. For a deeper analysis of the ITC and expert commentary on emerging policy shifts, explore the knowledge and insights page.

MLT Aikins has extensive experience advising on CCUS projects across Western Canada. Contact one of our energy lawyers to learn more.

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