Feds Propose Possible Domestic Content Requirements for Cleantech Investment Tax Credits
As reported previously, the most recent federal budget introduced Clean Technology Investment Tax Credits (CTITCs), which include a 30% tax credit for businesses that invest in heat pumps in their buildings.
HRAI made a submission in the original consultation (see attached document below) but, more recently, Finance Canada reached out to ask for more input on proposed amendments to the Clean Technology Investment Tax Credit (CTITC) that aim to protect Canadian businesses in the face of current eligibility conditions associated with US tax measures under the Inflation Reduction Act. The proposed approach would place restrictions on foreign content, protecting Canadian businesses in the same way the US wants to protect domestic producers.
Click HERE to see the Consultation questions.
HRAI’s comments on the proposed restrictions are reproduced below.
As stated in our submission on September 8th (attached), we applaud the federal government’s commitment to encouraging a transition to low carbon technologies in the built environment via financial tools like the clean technology investment tax credit. Our association has consistently advocated for such measures over the past several years, and our members believe this to be an extremely effective tool for effecting positive change in the marketplace.
Having said that, our members might have serious concerns if measures were introduced to limit the applicability of the CTITC to Canadian-based suppliers. While we fully understand the context and rationale for this approach, it must be noted that the vast majority of HVACR products sold in the Canadian market are produced in other countries. On the other hand, the companies that typically introduce, sell, install and service those products -- energy-efficient, low-carbon technologies (heat pumps, VRF, advanced controls) -- are almost exclusively Canadian-owned.
Depending on how the proposed restrictions would be defined, therefore, HRAI believes they could severely limit the effectiveness of CTITCs. Typically, the installation of low-carbon HVACR systems in commercial applications is done by commercial HVACR contractors, which are, for the most part, Canadian owned (though not exclusively). The products they sell, however, are almost 100% produced elsewhere, so the question becomes one of definition. A typical construction or retrofit project might break down as roughly 50% product costs and 50% labour/installation costs. How would the restrictions be applied? On a product basis or on a project basis?
HRAI and its membership has consistently advocated for regulatory harmonization between Canada and the US as concerns the flow of HVACR products, knowing that the market is really treated by product manufacturers as a North American market. It is unfortunate that the US government has opted to take a protectionist approach to the application of its tax credits, but for Canada to respond with similar measures would only have the effect of limiting uptake, at least as they apply to the products of our industry.
There might be variations to the approach that’s being contemplated that could avoid the concerns expressed above:
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If the “domestic content” requirement were limited to some part of the project, say 30% (or maybe even higher, subject to some market research), it is possible that most of the otherwise-eligible HVACR retrofit projects would still qualify, because the labour component of these projects will be primarily comprised of Canadian talent, employed by Canadian-owned businesses.
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Perhaps the program could be structured so that the rare project that offers products manufactured in Canada, delivered by a Canadian-owned contracting firm, might qualify the purchaser for a higher incentive – e.g. a 40% tax credit – along the same lines as the tiered approach that is being proposed for projects that use red seal trades (30%) versus those that do not (20%).
There may also be other approaches that would satisfy the desire to protect and promote Canadian businesses, but these are two that we think might work. Please contact the undersigned if you want to discuss this matter further or would like to engage directly on these questions with some of our members.
HRAI has not received a response to these comments, and it remains uncertain what the government’s decision will be on these new restrictions. Promised almost a year ago the CTITC tax measures, once finalized, will be retroactive to April 1, 2023.
For more information, contact Martin Luymes at 1-800-267-2231 ext. 235, or email mluymes@hrai.ca.
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