28 October 2025 External T.I. 2025-1060891E5 - CCUS - Exploration wells and monitoring equipment

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: (1) Does “storage” in paragraph (c) of Class 57 include (i) exploration of the underlying geology to determine if storage is possible or (ii) monitoring activities taking place at the storage site during the storage phase in respect of the captured carbon? (2) Where a taxpayer drills an exploratory well, whether the well casing would qualify under Class 57(c) of the Regulations as being used solely for the storage of captured carbon in a geological formation if the well casing is completed to the same specifications required for an injection well and is used for both exploration of the underlying geology to determine if storage is possible and storage of captured carbon? (3) Where a taxpayer builds monitoring equipment into the well casing of a storage well such that the monitoring equipment becomes part of the well casing, whether the well casing would qualify under Class 57(c) of the Regulations as being used solely for the storage of captured carbon in a geological formation?

Position: (1) "Storage" does not include exploration of the underlying geology to determine if storage is possible. "Storage" may include monitoring activities provided they are necessary and integral to the storage. (2) No. Where the well casing is used for both exploring the underlying geology to determine storage adequacy and for injection of the captured carbon for storage it will not meet the requirement set out in Class 57(c). (3) Likely yes. If the monitoring equipment becomes a part of the well casing, the well casing may still qualify under Class 57(c) where the monitoring is necessary and integral to the storage or if it is otherwise required for the storage system safety and integrity.

Reasons: See below.

XXXXXXXXXX									2025-106089
										Michael Sims

October 28, 2025

Dear XXXXXXXXXX:

Re: CCUS – Exploration wells and monitoring equipment

This is in reply to your email of April 5, 2025, and our follow-up meeting of April 11, 2025, where we discussed questions concerning well casing qualifying under Class 57 of Schedule II of the Regulations (footnote 1), thereby allowing a taxpayer to claim capital cost allowance (“CCA”) on the property and, potentially, the cost of property being eligible for the carbon capture, utilization, and storage (“CCUS”) investment tax credit (“ITC”). We apologize for our delay in responding.

This technical interpretation provides general comments about the provisions of the Income Tax Act (footnote 2) 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.

Issues

Based on our discussions, the following issues arose in respect of your questions and are addressed in this technical interpretation:

1) Does “storage” in paragraph (c) of Class 57 include (i) exploration of the underlying geology to determine if storage is possible or (ii) monitoring activities taking place at the storage site during the storage phase in respect of the captured carbon?

2) Where a taxpayer drills an exploratory well, whether the well casing would qualify under Class 57(c) of the Regulations as being used solely for the storage of captured carbon in a geological formation if the well casing is completed to the same specifications required for an injection well and is used for both exploration of the underlying geology to determine if storage is possible and storage of captured carbon?

3) Where a taxpayer builds monitoring equipment into the well casing of a storage well such that the monitoring equipment becomes part of the well casing, whether the well casing would qualify under Class 57(c) of the Regulations as being used solely for the storage of captured carbon in a geological formation?

Our Comments

Very generally speaking, Class 57 of Schedule II of the Regulations includes property that is used to capture, transport or store carbon dioxide as part of a CCUS project. Whether the above described property is part of a CCUS project is a question of fact that can only be determined on a case-by-case basis. Moreover, where property is described in Class 57 it may be eligible for the CCUS ITC, provided the other conditions for ITC eligibility are met. Such conditions include that the CCUS project must be expected to support the capture of carbon dioxide in Canada for a period of, in general terms, at least twenty years. Whether such conditions for eligibility are met would require an examination of all the particular facts and circumstances.

The relevant portions of Class 57 are as follows:

Property that is part of a CCUS project of a taxpayer and that is

…

(c) equipment that is to be used solely for storage of captured carbon in a geological formation, including equipment used for the storage system safety and integrity, but not including equipment used for enhanced oil recovery;

…

(e) equipment used for system safety and integrity or as part of a control or monitoring system solely to support the equipment described in any of paragraphs (a) to (d);

The capital cost of a property described in paragraph (c) of Class 57, as well as property described in paragraph (e) of Class 57 in relation to equipment described in paragraph (c), may qualify for the CCUS ITC as a “qualified carbon storage expenditure” provided the other conditions for eligibility are met. Where such property is acquired before the first day of commercial operations of a CCUS project, it must be verified by the Minister of Natural Resources as being property described in the particular paragraph in order to be eligible for the CCUS ITC. It is also important to note that paragraph 127.44(9)(f) of the Act provides that, for the purposes of section 127.44 and Part XII.7 of the Act, the technical guide published by the Department of Natural Resources (footnote 3) applies conclusively with respect to engineering and scientific matters for the purposes of determining whether a property is described in Class 57 of the Regulations.

Issue 1

As set out above, paragraph (c) of Class 57 captures equipment that is to be used solely for the storage of captured carbon in a geological formation. Storage, which contemplates injection of the carbon dioxide, is separate and distinct from exploration for determining the adequacy of the geological formation for storage. As a result, “storage” in paragraph (c) of Class 57 would not include such exploration.

However, the monitoring of the captured carbon during the storage phase is a vital aspect of both the CCA and CCUS ITC regimes and appears necessary and integral to storage. Where such monitoring activities are necessary and integral to storage they could be considered to be part of “storage” for the purposes of paragraph (c) of Class 57.

Issue 2

Well casing of a well that is used for both exploration and storage would not qualify under Class 57(c), even if the well casing was completed to the specifications required for an injection well, because the well casing is not exclusively used for storage of captured carbon. As noted above in Issue 1, “storage” does not include the exploration of the underlying geology in this context.

Issue 3

As set out above, paragraph (e) of Class 57 would include stand-alone monitoring equipment that is used solely to support equipment that falls within paragraph (a) to (d) of Class 57. If monitoring equipment were not stand-alone but were instead incorporated into a well casing such that it became part of the well casing, the well casing could nevertheless fall within paragraph (c) of Class 57 if the monitoring activities are necessary and integral to storage or are otherwise required for the storage system safety and integrity.

We trust these comments will be of assistance.

Yours truly,

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

cc: XXXXXXXXXX

FOOTNOTES

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

1. Income Tax Regulations, C.R.C., c. 945, as amended (the “Regulations”)

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

3. Available at: https://natural-resources.canada.ca/sites/nrcan/files/pdf/CCUS-ITC%20Technical%20Guidance%20Document.pdf