Does Budget 2024 sufficiently encourage industrials to innovate?

Executive summary

Tax measures for energy, automotive and manufacturing sectors were announced as part of Canada’s 2024 Federal Budget.

The 2024 Canadian Federal Budget announced several measures and changes which will impact middle-market companies in the energy, automotive and manufacturing sectors. While the pointed environmental incentives seem to encourage capital investment in the industrials sector, declining productivity remains an issue and broader policy changes may be warranted.

Background

Many recent government initiatives have focused on encouraging capital investment in green manufacturing initiatives. While these credits vary in application, their central theme is to provide tax incentive to invest in efficient and environmentally conscious technology. Budget 2024 is no exception and aims to reinforce initiatives introduced in the past, continue creating more of these measures, and provide clarity of application.

Accelerated capital cost allowance for productivity-enhancing assets

Capital cost allowance (CCA) allows businesses to deduct the cost of depreciable assets over several years according to prescribed rates, allowing industrials companies to leverage the assets from equipment and intellectual property intensive operations to offset income.

For property acquired after April 15, 2024, Budget 2024 introduces a 100% CCA deduction in the acquisition year, provided it is available for use for use by Jan. 1, 2027, for the following CCA asset classes:

• Class 44: Patents or rights to use patented information for a limited or unlimited period.
• Class 46: Data network infrastructure equipment and related systems software.
• Class 50: General-purpose electronic data-processing equipment and systems software.

Electric vehicle supply chain investment tax credit

The government has announced new support for Canada’s automotive industry to attract more investments in electric vehicles (EV) manufacturing. Budget 2024 proposes a 10% EV supply chain tax credit on the cost of buildings used in key segments of the EV supply chain. To be eligible, the taxpayer either alone, or as a member of a group of related taxpayers, must claim the previously announced clean technology manufacturing tax credit (CTMITC) across all three of the following supply chain segments,

• EV assembly
• EV battery production; and,
• cathode active material production.

or qualify for the credit with an unrelated corporation.

The credit will apply to buildings acquired after Dec. 31, 2023 and will be fully phase out after 2034.

Budget unveils clean electricity investment tax credit details

Budget 2024 announces the details of the clean electricity investment tax credit. This credit will be beneficial for industrials companies as it applies to equipment used to generate electricity from “green” sources (e.g., solar, water, geothermal, or natural gas with carbon capture and storage) as well as to store and to transmit electricity between provinces and territories.

The credit is equal to 15% of the capital cost of eligible property. It can be claimed by Canadian corporations, including municipally owned corporations, who own eligible property either directly or through a partnership. With some exceptions, the credit applies to property acquired and available for use after Apr. 15, 2024. The credit will be phased out by the end of 2034.

There will be a 10% credit rate reduction where claimants do not fulfill proposed labour requirements related to wages and the use of unionized and apprentice labour. Taxpayers are limited to claiming one clean economy tax credit per expenditure but may claim multiple credits on the same project.

Clean technology manufacturing investment tax credit

Last year’s budget proposed the CTMITC, a credit equal to up to 30% of the cost of investments in eligible property used for zero-emission technology manufacturing activities or in qualifying mineral activities. Budget 2024 recognizes that production of qualifying materials (i.e., copper, nickel, cobalt, lithium, graphite, and rare earth elements) may result in the production of multiple metals at once, and therefore recommends changes expanding the ability to claim the credit.

These changes are:

• clarifying that the value of qualifying materials that will be used to assess the extent to which property is used or is expected to be used for qualifying mineral activities;
• expanding eligible expenditures to include investments in eligible property used in qualifying mineral activities that are expected to produce primarily qualifying materials at mine or well sites; and,
• adjust the calculation of recapture of the credit to account for a five-year historical average mineral price to limit the impact of market volatility.

This credit is proposed to apply to property that is acquired and becomes available for use after Dec. 1, 2023.

Second phase of SR&ED tax incentives consultations

The scientific research and experimental development (SR&ED) program offers tax credits to companies engaged eligible activities such as development of process improvements, new products, or custom equipment.

Budget 2024 announced a second phase of consultations to modernize the program exploring specific policy parameters, including extending eligibility for the enhanced 35% SR&ED credit to Canadian public companies. In addition, Budget 2024 proposes to invest $600 million over four years, starting in 2025-26, to fund enhancements to the SR&ED program.

Non-tax measures

Artificial intelligence

Budget 2024 announced a $2.4 billion funding package to position Canadian companies to take advantage of developments in artificial intelligence (AI) including $200 million over five years to accelerate AI adoption in critical sectors such clean technology and manufacturing.

Impact assessment and regulatory processes

Budget 2023 announced the government’s intention to improve impact assessment and permitting processes to better support clean electricity, the critical minerals supply chain, and other major projects. Specific proposals towards this goal were announced in Budget 2024 including a three-year target for nuclear project reviews and enhance coordination across orders of government.

Industrials need broad-based policy solutions

Budget 2024 proposes some welcome measures for industrials companies including a commitment to finalize applicable legislative frameworks and expand clean economy tax credits. Introduction of the new EV supply chain credit, although targeted for large, vertically integrated automotive manufacturers, will likely attract more investments in the EV supply chain. This should create adjacent growth for suppliers, bolster construction, as well as foster advanced manufacturing and technology development. Additionally, accelerated CCA deductions for productivity-enhancing assets and $2.4 billion of targeted funding for AI strategy will support development of AI-based solutions and higher adoption of advanced technology by manufacturers. This coupled along with investment in the SR&ED program will hopefully lead to more capital investment in the sector.

Budget 2024 is consistent with previously announced measures aimed at developing certain, targeted areas of the industrials sector. However, with declining productivity and stagnating capital investments, the industrials sector may benefit from a more comprehensive industrial policy aimed at advancing broad-based innovation and investments in productivity-enhancing equipment and technologies. For instance, the government should consider broadening manufacturing tax initiatives to address investments in all types of advanced equipment and intellectual property used in the manufacturing process. Additionally, the government should focus on streamlining permitting and regulatory approval processes and accelerating investments in the build-out and modernization of infrastructure.

Overall, while these changes are clearly a positive for the industrials sector, many of these measures are complicated and specific. Industrials companies looking to implement tax planning will need to understand and model applications for credits to maximize their return from the clean economy tax credits.