Understanding the Labour Requirements for Investment Tax Credits: A Guide to Clean Tech, Hydrogen, and Clean Electricity ITCs

Understanding the Labour Requirements for Investment Tax Credits - A Guide to Clean Tech, Hydrogen, and Clean Electricity ITCs

The Canadian government has recently announced its intention to attach labour requirements to certain investment tax credits (ITCs) as part of its efforts to promote clean technology, hydrogen, and clean electricity projects.

These labour requirements, which include prevailing wage and apprenticeship requirements, are aimed at ensuring that workers engaged in these projects are fairly compensated and receive the necessary training and skills development opportunities.

In this article, we will delve into the details of the labour requirements related to certain investment tax credits, including the Clean Tech ITC, Hydrogen ITC, and Clean Electricity ITC. We will discuss how these labour requirements impact businesses’ eligibility for tax credits, what businesses need to do to meet these requirements, and the implications of not meeting them. We will also explore the government’s plans to apply labour requirements to other investment tax credits in the future.

Labour Requirements for Clean Tech ITC, Hydrogen ITC, and Clean Electricity ITC

The 2022 Fall Economic Statement announced the government’s intention to attach prevailing wage and apprenticeship requirements, collectively referred to as “labour requirements”, to the proposed Clean Tech ITC, Hydrogen ITC, and Clean Electricity ITC. These requirements are aimed at ensuring that workers engaged in these projects are paid fair wages and have access to apprenticeship programs for skills development.

Clean Tech ITC

In order to qualify for the 30% tax credit rate under the Clean Tech ITC, businesses would need to meet the labour requirements. However, a reduced rate of 20% would be available for businesses that do not meet the labour requirements. This means that meeting the labour requirements is a key criterion for businesses to access the full tax credit rate.

Hydrogen ITC

Credit rates under the Hydrogen ITC vary across different CI (carbon intensity) tiers, as discussed in the government’s proposal. However, if a business does not meet the labour requirements, the credit rate for each CI tier will be reduced by ten percentage points. This highlights the significance of meeting the labour requirements for businesses seeking to benefit from the Hydrogen ITC.

Clean Electricity ITC

Similar to the Clean Tech ITC, businesses would need to meet the labour requirements in order to qualify for the 15% tax credit rate under the Clean Electricity ITC. A reduced rate of 5% would be available if the labour requirements are not met. Therefore, meeting the labour requirements is crucial for businesses aiming to access the full tax credit rate for the Clean Electricity ITC.

Phase-Out Periods

During the phase-out periods of the Clean Tech ITC and the Clean Hydrogen ITC, businesses that do not meet the labour requirements would face a reduction in the tax credit rate available by ten percentage points. This further emphasizes the importance of meeting the labour requirements throughout the entire duration of these investment tax credits.

CCUS ITC

The government also intends to apply labour requirements to the CCUS (Carbon Capture, Utilization, and Storage) ITC, although the details of these requirements will be announced at a later date. This indicates the government’s commitment to promoting fair labour practices in various sectors related to clean technologies.

Meeting the Prevailing Wage Requirement

Investment tax credits (ITCs) are incentives provided by governments to encourage investment in specific industries or technologies. In the clean tech, hydrogen, and clean electricity sectors, ITCs can play a significant role in promoting investment and development. However, these tax credits often come with labor requirements, including the prevailing wage requirement. Here’s a guide to understanding the labor requirements for investment tax credits in these industries:

  1. What is the prevailing wage requirement? The prevailing wage requirement is a labor requirement that may be attached to investment tax credits in the clean tech, hydrogen, and clean electricity sectors. It typically requires that projects receiving ITCs pay their workers a wage that is at least equal to the prevailing wage rate in the relevant geographic area. The prevailing wage rate is typically determined based on the wages paid to workers in similar occupations in the local labor market.
  1. Why is the prevailing wage requirement important for ITCs? The prevailing wage requirement is often included in ITCs to ensure that the tax incentives result in good-quality jobs and fair wages for workers in the clean tech, hydrogen, and clean electricity sectors. It aims to prevent the use of tax credits to support projects that exploit low-wage labor or undermine local labor standards. By requiring the payment of prevailing wages, the prevailing wage requirement seeks to promote fair labor practices and support the local workforce.
  1. How can businesses meet the prevailing wage requirement? To meet the prevailing wage requirement, businesses must ensure that their workers are paid at least the prevailing wage rate for their occupation and geographic area. This may involve conducting research to determine the applicable prevailing wage rates, as well as keeping accurate records of wages paid to workers. Compliance with the prevailing wage requirement may be subject to audits or other verification processes, so it’s important for businesses to maintain documentation and records to demonstrate compliance.
  1. What are the potential benefits of meeting the prevailing wage requirement? Meeting the prevailing wage requirement can have several potential benefits for businesses seeking to claim investment tax credits. These benefits may include:
  • Compliance with local labor laws and regulations, which can help businesses avoid penalties or legal disputes related to labor standards.
  • Enhanced reputation as a socially responsible business that supports fair labor practices and invests in the local workforce.
  • Improved community relations by contributing to the economic well-being of local workers and communities.
  • Access to additional incentives or funding opportunities that require compliance with prevailing wage requirements, such as government contracts or grants.
  1. Are there any challenges or considerations in meeting the prevailing wage requirement? Meeting the prevailing wage requirement can also pose challenges for businesses, including potential increased labor costs compared to market rates, administrative burden in tracking and documenting wages, and potential complexities in determining the applicable prevailing wage rates. It’s important for businesses to carefully review the specific requirements and guidance related to the prevailing wage requirement for the relevant investment tax credits and seek professional advice if needed.
  1. Conclusion: Understanding the labor requirements, including the prevailing wage requirement, for investment tax credits in the clean tech, hydrogen, and clean electricity sectors is crucial for businesses seeking to claim these incentives. Compliance with the prevailing wage requirement can have potential benefits, including compliance with local labor laws, enhanced reputation, improved community relations, and access to additional incentives. However, it may also pose challenges, and careful consideration and documentation are necessary to ensure compliance and maximize the potential benefits of investment tax credits in these industries.