2024 U.S. elections: Potential impacts on the Canadian clean energy sector

Following the Nov. 5, 2024, U.S. elections, Donald Trump and the Republicans were re-elected into office, securing a unified Congress. This political shift may lead to changes in future U.S. tax policies. This article focuses on how potential changes to U.S. federal clean energy policies under the new administration may provide a competitive advantage for Canada through the enactment of new Canadian energy incentives. Canada might respond by broadening its scope of clean energy tax policies to make current and future tax credits more accessible to businesses, which could involve adjusting existing policies and finalizing pending legislation on clean energy tax credits.

U.S. Policies

According to the Republican party’s most recent winning platform, the focus appears to be on supporting the coal and oil industry, including a possible repeal or modifications to the clean energy incentives in the Inflation Reduction Act (IRA). As a result of Donald Trump winning the presidential electoral vote, the Canadian government will need to keep a keen eye on any future changes made to the IRA.

Canada, along with other countries, may also see an increase on tariffs with Trump’s administration, as the Republicans expressed an interest in potentially imposing a universal tariff on imports. With these potential U.S. tax policy changes, Canadian tax policy makers may benefit from revisiting the current clean energy incentives and credits.

To gain a further understanding of President-elect Donald Trump’s proposed policy changes, please refer to this article on how businesses can plan for tax changes under the new administration in 2025.

Canada’s current economic standing

The Canadian government has introduced six clean economy investment tax credits (ITC) to promote clean energy initiatives. They are designed to develop and adopt clean energy projects in sectors such as manufacturing, mineral extraction and processing, energy generation and electric vehicles (EV).

The following four of the six credits are in force:

1. The Clean Technology ITC: up to 30 per cent refundable ITC on eligible property including equipment used to generate electricity from solar, wind, water and geothermal energy acquired and available for use from March 28, 2023 and before 2034. The credit will be phased out by 2034.
2. The Clean Technology Manufacturing (CTM) ITC: 30 per cent refundable ITC on eligible property including machinery and equipment to manufacture technology to produce or store renewable energy acquired for use in 2024 to 2031. The credit will gradually be reduced from 30 per cent to 5 per cent in 2032 and will be phased out by 2034. 
3. The Clean Hydrogen ITC: up to 40 per cent refundable ITC on eligible property including equipment related to production of hydrogen or clean ammonia acquired and available for use from March 29, 2023 and before 2033. The credit will be phased out by 2035. 
4. The Carbon Capture, Utilization and Storage (CCUS) ITC: up to 60 per cent refundable ITC on eligible expenditures incurred in qualified carbon capture, transportation, storage and utilization for expenditures incurred between 2022 and 2030. The credit will be phased out by 2041.

The remaining two credits awaiting further legislative guidance:

1. The Clean Electricity ITC: 15 per cent refundable ITC on eligible property including equipment used to generate electricity from green sources acquired and available for use between April 16, 2024 and 2034. The credit will be phased out by 2034.
2. The EV Supply Chain ITC: 10 per cent refundable ITC on eligible property acquired and available for use on or after Jan. 1, 2024. Credit will be reduced to five per cent by 2033 and will be phased out in 2034.

Entities in the clean energy sector may also benefit from the proposed Canadian Entrepreneurs' Incentive (CEI). The CEI reduces the capital gains inclusion rate for eligible entrepreneurs including, tech entrepreneurs who are selling their business to 33.33 per cent from the 50 per cent for capital gains $250,000 or less, and 66.67 per cent for capital gains greater than $250,000. This favourable inclusion rate is subject to a phased-in lifetime maximum limit of $2 million. With the CEI being widely applicable to select eligible corporations and industries, corporations in the technology and manufacturing sectors with clean energy projects may be eligible for this benefit on eventual sale and may incentivize future investments in new clean energy ventures while strengthening innovation and entrepreneurship in Canada.

Both the clean economy ITCs and CEI are relatively new initiatives, so their influence on the market is unclear. Nonetheless, they could provide significant tax savings and competitive advantage to Canadian clean energy businesses.

Illustrative example

To better illustrate the financial impact of the CEI and the clean economy ITC, consider the following example.

Jacob is an entrepreneur in the tech sector and has incorporated TechCorp, a Canadian corporation on Oct. 1, 2024. TechCorp has invested $400,000 in property that is eligible for the clean technology ITC and $600,000 in property eligible for CTM ITC. These properties were acquired and available for use from incorporation. The following table illustrates the refundable tax that TechCorp can receive from this investment:

Illustration 1

Jacob eventually decides to sell his qualified small business corporation shares to a larger tech firm earning $2 million in capital gains from the sale. The full $2 million in eligible CEI capital gains has been phased in. The following illustrates the tax benefit an entrepreneur can utilize if they meet the CEI requirements:

Illustration 2

In the year of sale, this would result in the corporation receiving a combined refundable ITC of $300,000 (per Illustration 1) and a significant increase in personal tax savings of $1,333,400 (per Illustration 2), compared to $708,275 if the gains were taxed in Jacobs’ hands without the CEI benefit. This would provide a combined tax savings, both individually and corporately of $1,633,400, which can be retained for future capital investment or personal use.

Looking ahead

As noted above, there have been myriad clean energy taxes both proposed and enacted by the Canadian government that has established Canada as a frontrunner within the clean energy industry. The U.S. electoral results may provide Canada an inherent competitive advantage within the clean energy industry as Trump may repeal the IRA further disincentivizing future U.S. investments in clean energy.

Moving forward, Canadian tax policymakers may be incentivized to push through the legislation for the remaining two proposed ITCs to encourage domestic and foreign investment in the clean energy space. Foreign investment from global partners in the fight against climate change, may favour Canada’s clean energy space as the credits are attractive in a capital-intensive industry. Furthermore, policymakers may consider broadening the scope of existing and future clean tax credits to make entry into the industry more accessible and promote healthy competition within the sector. 

On the contrary, Canadian markets should be cognizant of the potential implications of any U.S. policy changes that may no longer incentivize consumers to purchase EVs and clean technologies. President-elect Trump’s pro-oil platform, coupled with the proposed repeal to the IRA and increase in tariffs may impact the cost of goods and decrease the overall consumer demand for EVs. In response, Canadian producers may find a decrease in supply and the economy could expect a hit to its gross domestic product (GDP). On the flip-side, large U.S. based companies with international Environmental, Social and Governance (ESG) strategies may find Canada as an attractive jurisdiction to invest in clean energy. The Canadian clean energy sector could further leverage this as an opportunity to explore other international markets. Canada may benefit from trade with other countries, such as the signatories of the Paris Agreement, that share similar goals related to climate change and clean energy. This change in strategy may not only improve Canada’s GDP, but better position Canada as a global leader in the future of clean energy.