25 March 2025 External T.I. 2024-1039131E5 - CCUS - "actual eligible use percentage"

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: In determining "actual eligible use percentage" under subsection 211.92(1) of a CCUS project, is the quantity of captured carbon that the CCUS project supports for storage or use in eligible use and ineligible use determined with reference to measurements of captured carbon within the boundaries of the particular project or with reference to measurements of captured carbon from locations upstream or downstream of the particular project?

Position: The actual eligible use percentage of a CCUS project is determined by reference to measurements of the end use of the captured carbon, irrespective of the particular project boundaries.

Reasons: Textual, contextual, and purposive analysis of the relevant provisions.

XXXXXXXXXX									2024-103913
										Michael Sims

March 25, 2025

Dear XXXXXXXXXX:

Re: CCUS Investment Tax Credit – “actual eligible use percentage”

This is in reply to your letter of October 4, 2024 and our (Wharram/Sims) follow-up conversation of January 14, 2025, wherein you enquired about the determination of the “actual eligible use percentage” in the carbon capture, utilization, and storage (“CCUS”) regime.

This technical interpretation provides general comments about the provisions of the Income Tax Act (footnote 1) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Overview

The following hypothetical scenario was outlined for the purposes of this analysis:

1) Aco, Bco, and Cco are “taxable Canadian corporations”, as defined in subsection 89(1) of the Act, and deal at arm’s length with each other.

2) Aco proposes to construct, own, and operate a carbon capture facility to capture carbon dioxide emissions from its industrial facilities.

3) Bco proposes to construct, own, and operate pipeline infrastructure to transport captured carbon dioxide from a number of industrial facilities, including Aco’s, to a carbon sequestration hub.

4) Cco proposes to develop, own, and operate a carbon sequestration hub where the captured carbon dioxide is permanently stored in “dedicated geological storage”, as defined in subsection 127.44(1) of the Act.

5) Each of Aco’s carbon capture project, Bco’s carbon transportation project, and Cco’s sequestration hub are considered separate “CCUS projects”, as defined in subsection 127.44(1) of the Act.

6) Bco and Cco will separately charge tolls to users under long-term agreements to provide transportation and storage services to customers.

7) Aco has negotiated agreements with Bco and Cco to secure transportation and storage capacity for all of the projected carbon dioxide volumes to be captured from Aco’s industrial facilities. The respective duration of these arrangements is not less than the “total CCUS project review period”, as defined in subsection 127.44(1) of the Act, for Aco’s capture project.

8) Aco will be able to measure the volume of “captured carbon”, as defined in subsection 127.44(1) of the Act, at various points in its carbon capture process, with a final measurement at a location proximate to the interconnect of Aco’s carbon capture facilities and Bco’s pipeline network (the “Pipeline Interconnect”).

9) In Aco’s “project plan”, as defined in subsection 127.44(1) of the Act, Aco projects that all of the captured carbon from its carbon capture facilities will be delivered to the Pipeline Interconnect for transport to Cco’s sequestration hub (excluding estimated incidental fugitive emissions made in the ordinary course of operations).

10) Bco will be able to measure the amount of captured carbon received from customers at various points on the pipeline network and the amount of captured carbon delivered to the custody of Cco at the interconnect of the pipeline and the sequestration hub (the “Sequestration Interconnect”).

11) In Bco’s project plan, Bco projects that all of the captured carbon received from customers, including Aco, will be delivered to Cco at the Sequestration Interconnect for storage in dedicated geological storage (excluding estimated incidental fugitive emissions made in the ordinary course of operations).

12) Cco will be able to measure the quantity of captured carbon received from Bco at the Sequestration Interconnect and the quantity of captured carbon injected into its underground carbon sequestration wells (the “Underground Injection Point”).

13) In Cco’s project plan, Cco projects that all of the captured carbon received from Bco will be injected into its underground sequestration reservoirs for storage in dedicated geological storage (excluding estimated incidental fugitive emissions made in the ordinary course of operations).

14) Aco, Bco, and Cco each determine that the projected eligible use percentage for its respective CCUS project is 100%, which is approved in the initial project evaluations issued by NRCan for those projects. The projected eligible use percentage is supported by the contractual arrangements entered into between Aco, Bco, and Cco, which detail that all of the captured carbon will ultimately be delivered for storage in dedicated geological storage.

15) In Aco’s “first project period”, as defined in subsection 211.92(1) of the Act, Aco delivered all of the captured carbon from its industrial facilities to the Pipeline Interconnect (excluding incidental fugitive emissions made in the ordinary course of operations).

16) During the same period, significant unanticipated fugitive emissions of captured carbon occurred on Bco’s pipeline transportation network. Such emissions are not considered incidental emissions made in the ordinary course of operations and are not for the purposes of system integrity or safety, such that the emissions of the captured carbon into the atmosphere would be considered an “ineligible use”, as defined in subsection 127.44(1) of the Act.

17) Bco does not meet the conditions set out in subsection 211.92(6) of the Act such that the safe harbour rule for extraordinary circumstances in subsection 211.92(7) does not apply to Bco.

18) During the same period, Cco sequesters all of the captured carbon received from Bco at the Sequestration Interconnect (excluding incidental fugitive emissions made in the ordinary course of operations).

Issue

Based on the foregoing scenario, you enquired as to how the “actual eligible use percentage” of a CCUS project, as set out in subsection 211.92(1), should be determined. In particular, you asked whether the quantity of captured carbon that Aco’s CCUS project supports for storage or use in eligible use and ineligible use is determined with reference to measurements of captured carbon within the boundaries of Aco’s particular project or with reference to measurements of captured carbon from locations downstream of Aco’s particular project.

Our Comments

Subsection 211.92(1) of the Act sets out the definition of “actual eligible use percentage” as follows:

actual eligible use percentage, in respect of a CCUS project, for a period means the amount, expressed as a percentage, determined by the formula

A ÷ B

where

A is the quantity of captured carbon that the CCUS project supported for storage or use in eligible use during the period, and

B is the total quantity of captured carbon that the CCUS project supported for storage or use in both eligible use and ineligible use during the period.

The definition does not expressly provide how the amount of captured carbon should be measured. Rather, it simply provides that it is the quantity of captured carbon that the CCUS project supported for storage or use in eligible and ineligible uses.

We therefore undertook a textual, contextual and purposive analysis of this definition in order to address the question that was raised. Based on that analysis, it is our view that it is the end use of captured carbon that should be used in quantifying the amount of captured carbon in both eligible and ineligible use for the purposes of the definition of “actual eligible use percentage”.

As a result, in the situation described, Aco would be required to use measurements of the end use of its captured carbon, which occur at measurement points outside of its particular project boundaries. However, as the unanticipated fugitive emissions occur within Bco’s pipeline transportation network, Aco may be able to avail itself of the relief provided in subsections 211.92(6) and (7) of the Act. This is because such emissions would likely be due to extraordinary circumstances outside of the control of Aco. Whether such relief is available to a taxpayer in any particular situation is a question of fact that would need to be determined on a case-by-case basis considering all the particular facts and circumstances.

We trust that these comments will be of assistance.

Yours truly,

Kimberley Wharram
Section Manager
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 R.S.C., 1985, c. 1 (5th Supp.), as amended (the “Act”).