Canada's tax system has traditionally favoured oil, natural gas and mining projects by encouraging exploration and development and treating their expenses favourably. In a turnabout, some of the tax breaks enjoyed by these industries are being tightened, while the renewable energy industry is to receive certain tax benefits.
"Officials in the department of finance and their colleagues at NRCan (Natural Resources Canada) are to be congratulated for responding to industry requests that the tax playing field in the energy sector be levelised," says Jeff Passmore, president of the Canadian Wind Energy Association (CanWEA). He describes the budget as a huge step forward for Canada. "Now we can get on with creating the jobs and the economic wealth that previously this sector has had to leave undeveloped," he says.
Two incentives
The budget proposes to improve renewable energy project financing in two ways. One is by relaxing "energy property" rules so that all energy projects can claim capital cost allowance deductions against income. Formerly "energy property" was an oil, natural gas or mining project and the special tax deductions were only available to these industries, or certain businesses using an energy property. "This change will encourage more investments in renewable energy and energy conservation projects and will increase the environmental benefits and job creation associated with them," states the budget document.
The second improvement expands the eligibility for "flow-through shares." Once again these tax-based financing incentives were formerly only available to the oil, gas and mining sectors. They allowed corporations to treat certain resource expenditures favourably in exchange for the sale of their shares. In this arrangement, an investor in these sectors provides funds to a corporation that uses them to incur Canadian Exploration Expenses, Canadian Development Expenses, or Canadian Oil and Gas Property Expenses. The investor in turn receives shares issued by the corporation. Now, a new category of expenses, "Canadian Renewable and Conservation Expenses" (CRCE), will be fully tax deductible and can be flowed through to shareholders.
CRCEs will improve access to financing when new renewable energy projects start up, making life easier for capital intensive projects like wind plant which, until they have had time to generate enough income, cannot utilise income tax deductions. The new deductible expenses include the costs of renewable energy project feasibility studies, and other pre-construction development expenses.
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