Key highlights from the 2021 federal budget directly affecting Canada’s electric and zero-emission vehicle sector.
On April 19, the Federal Government released its first budget in two years (“Budget 2021”). Like the Ontario Budget unveiled last month, Budget 2021 contains significant commitments to help Canadian automotive companies transition to a greener, lower carbon future by supporting the burgeoning electric and zero-emission vehicle sector in Canada.
The potential for these newly announced programs to benefit the growth of Canada’s electric and zero-emission vehicle manufacturing sector is significant.
Reduced Corporate Tax for Zero-Emission Technology Manufacturing
Perhaps the most significant benefit of Budget 2021 to the sector is the 50% reduction in the corporate tax rate for businesses that manufacture zero-emission technologies, including electric cars, buses and trucks, batteries and fuel cells, vehicle charging systems, and certain hydrogen-fuel products. This key measure will take effect January 1, 2022, and the Department of Finance will conduct regular reviews to determine if new technologies should benefit from this important tax measure.
The reduced corporate tax rate will apply to companies solely focused on manufacturing zero-emission technologies, as well as more diversified businesses in which only a part of the company is focused on such technologies. Eligible income subject to the reduced tax rate will be calculated based on the company’s total adjusted income multiplied by the total labour and capital costs used in eligible activities. One caveat is that at least 10% of a company’s gross revenues must come from eligible activities (i.e., manufacturing zero-emission technologies) for it to be eligible for the reduced rate for any portion of its business.
Recognizing that reducing corporate taxes benefits only those companies mature enough to have taxable profits, the federal government has committed to not fully phase out this measure until January 1, 2032, so that emerging companies developing these technologies and lines of business can benefit as they begin to see profits over the next decade.
Investments in Batteries and Clean Fuels
Budget 2021 continues the trend of Canadian governments investing in the full supply chain of electric and zero-emission vehicles.
To support battery technologies, Budget 2021 includes programs that will coordinate policy on the mining of critical minerals used in the production of batteries, which will be harmonized with existing agreements with the United States on critical minerals. The federal government will also be launching funding programs for further research on advanced critical mineral processing and refining techniques.
Clean fuels are also the subject of significant investments. Budget 2021 allocates $1.5 billion over five years to support the production and distribution of low-carbon and zero-emission fuels, including hydrogen and biomass fuels. These investments extend some of the commitments and plans articulated in the federal government’s Hydrogen Strategy for Canada, released in December 2020.
Changes to Expense Schedules Under the Tax Code
Some of the Government’s proposed changes to the tax code will also help make investments by electric and zero-emission vehicle businesses in their technologies, equipment, and intellectual property more cost-effective in the short term. The two most beneficial provisions for companies working in the automotive sector are:
- Accelerated Capital Cost Allowance for Clean Energy Equipment: Capital cost allowances typically allow taxpayers to gradually deduct the value of equipment (depreciable property) over the course of its useful life, based on pre-set rates. Budget 2021 modifies the depreciation schedules of certain classes of assets relating to clean energy equipment to allow for immediate expensing, thereby allowing companies investing in such equipment to realize the tax benefit of their investment in the first year, rather than over much longer time horizons. Specifically included in these asset classes is “equipment used to dispense hydrogen for use in hydrogen-powered automotive equipment and vehicles”, which will encourage investment in alternative fuel technologies.
- Immediate Expensing: Canadian-controlled private corporations—typically smaller companies that are subject to rules concerning ownership and control—will be able to immediately expense up to $1.5 million a year of eligible short-term and medium-term capital investments, thus accelerating the tax benefit their investments create. This program will allow smaller companies to invest in building their businesses. This is beneficial for Canada’s many innovative zero-emission transportation companies, including those focused on various elements of the supply chain, as they build their technologies.
These announcements in Budget 2021 are another strong signal that Canada wants to be a key launchpad for electric and other zero-emission vehicle technologies. The government is investing in the cleantech automotive sector and laying the groundwork for a wholesale transition to these technologies, creating significant opportunities for both existing and upcoming businesses in the sector.
Within the next few weeks, the government will formally introduce a budget bill expected to bring the above measures into law. It will also be holding consultations with stakeholders on matters such as the calculation of eligible income under the reduced corporate tax rate for zero-emission technology manufacturing.
Stakeholders wishing to better understand how these changes will affect their businesses, or who want to make their opinions known to the government during the consultations, should contact the authors to discuss how Fasken can assist.