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. In the hypothetical scenario presented, where expenditures were incurred in (i) the taxation year before the related Class 57 equipment was acquired, (ii) the taxation year the Class 57 equipment was acquired and (iii) the taxation year after the related Class 57 equipment was acquired, does the deeming rule in paragraph 127.44(9)(e) apply to the expenditure incurred in the taxation year after the Class 57 equipment was acquired? 2. If the answer to question 1 is "yes", does this rule deem the expenditures incurred in the two previous taxation years to have been incurred in the latest of the three years?
Position: 1. Yes; paragraph 127.44(9)(e) applies to expenditures incurred in taxation years before and after the related Class 57 equipment is acquired. 2. No; the application of 127.44(9)(e) to the expenditure incurred in the taxation year after the related Class 57 equipment is acquired does not change the timing of the related expenditures incurred in the previous years.
Reasons: The conclusions are based on a textual, contextual and purposive analysis of the CCUS legislation in section 127.44.
XXXXXXXXXX 2025-106851
N. Verlinden
K. Wharram
July 21, 2025
Dear XXXXXXXXXX,
Re: CCUS Investment Tax Credit – Definition of “qualified CCUS expenditure” and the deemed timing provision in paragraph 127.44(9)(e)
I am writing in response to your email inquiry sent to Kim Wharram of the Income Tax Rulings Directorate on October 4, 2024. We apologize for the delay.
In your email you presented us with two hypothetical fact scenarios and a list of questions relating to the timing of various qualified CCUS expenditures. (footnote 1) This letter responds to the second hypothetical fact scenario and two questions relating to paragraph 127.44(9)(e) of Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”). A separate letter with file reference number 2024-103976 will be sent to you in response to the other hypothetical fact scenario and the related questions.
Unless otherwise stated, all references to a statute are to the relevant provision of the Act or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended (the “Regulations”).
Hypothetical fact scenario
- Bco is a taxable Canadian corporation, as defined in subsection 89(1).
- Bco has a calendar taxation year, as defined in subsection 249(1).
- Bco will undertake a project to construct, own and operate carbon capture facilities in Canada, that will meet the definition of a CCUS project in subsection 127.44(1).
- In 2025, Bco will receive an initial project evaluation from Natural Resources Canada (“NRCan”) and Bco’s project will be a qualified CCUS project, as that term is defined in subsection 127.44(1).
- In 2026, Bco will incur $1,000,000 of detailed engineering costs for its qualified CCUS project relating to equipment described in Class 57 of Schedule II of the Regulations (“Class 57 Equipment”).
- In 2027, Bco will acquire the Class 57 Equipment and will pay the vendor the invoice price of $10,000,000.
- In 2028, Bco will install the Class 57 Equipment in the course of constructing its carbon capture facilities. Bco will incur and pay $5,000,000 of installation costs in 2028 related to the installation of the Class 57 Equipment.
- In addition, we assume that the Class 57 Equipment will be verified by NRCan as being property described in paragraph (a) of Class 57 or in any of paragraphs (d) to (g) of Class 57 in relation to equipment described in paragraph (a) of Class 57.
Questions
1. In the hypothetical scenario, Bco will incur $5,000,000 of installation costs in 2028 related to the acquisition of the Class 57 Equipment, which will be acquired in 2027. Will the deeming rule in paragraph 127.44(9)(e) apply to the $5,000,000 of installation costs?
2. If the answer to question 1 is “yes”, will Bco’s previously incurred expenditures (e.g., the detailed engineering costs of $1,000,000 and the acquisition cost of the Class 57 Equipment of $10,000,000) be deemed to have been incurred by Bco in 2028?
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act 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.
Response
General information- summary of the relevant legislation
The purpose of section 127.44 and Part XII.7 is to encourage the investment of capital in the development and operation of carbon capture, transportation, utilization and storage capacity in Canada. (footnote 2)
The main benefit provision (herein referred to as the “CCUS tax credit”) is in subsection 127.44(2) and the relevant portion of that provision (for purposes of this letter) is:
Where a qualifying taxpayer files a prescribed form containing prescribed information on or before its filing-due date for a taxation year, the taxpayer is deemed to have paid on its balance-due day for the year an amount on account of its tax payable under this Part for the year equal to the total of
(a) the amount, if any, by which the taxpayer's cumulative CCUS development tax credit for the year exceeds its cumulative CCUS development tax credit for the immediately preceding taxation year, and […]
Subsection 127.44(4) provides the meaning of cumulative CCUS development tax credit. The relevant portion of that provision (for purposes of this letter) is:
For the purposes of this Act, a taxpayer's cumulative CCUS development tax credit for a taxation year is the total of all amounts, each of which is, in respect of an expenditure incurred for a qualified CCUS project of the taxpayer before the first day of commercial operations of the CCUS project
(a) a qualified CCUS expenditure incurred in the year or a previous taxation year by the taxpayer multiplied by the applicable specified percentage; or […]
When computing a taxpayer’s CCUS tax credit for a taxation year, you must determine the taxpayer’s qualified CCUS expenditures for the year, taking into account the special adjustments and other deeming rules located throughout section 127.44, notably those in subsection 127.44(9). The relevant deeming rule for purposes of this question is paragraph 127.44(9)(e), which states:
For the purposes of section 127.44 and Part XII.7, […]
(e) if an expenditure of a taxpayer would be a qualified CCUS expenditure, except that the expenditure is incurred in a different taxation year from the year in which the related property is acquired, the expenditure is deemed to be incurred, and the property is deemed to be acquired, in the later of the two years;
Furthermore, unlike the other clean economy investment tax credits (footnote 3) , there is no requirement that the property acquired must be available for use before the CCUS tax credit can be claimed.
Response to Question 1
Yes, the deeming rule in paragraph 127.44(9)(e) will apply to the $5,000,000 of installation costs incurred by BCo in 2028.
The Explanatory Notes to paragraph 127.44(9)(e) read as follows:
New paragraph 127.44(9)(e) is a special rule to deal with circumstances where an expenditure is incurred in relation to a property before the property is acquired. This could happen, for example, if there is a delay in delivery of purchased property. If these two events happen in different taxation years, paragraph 127.44(9)(e) deems both the incurring of the expenditure and the acquisition of the property to happen in the later of the two taxation years.
The Explanatory Notes indicate that paragraph 127.44(9)(e) was clearly intended to apply where expenditures are incurred in a taxation year that is before the property is acquired. They do not expressly address a situation, such as the one raised by Question 1, where the expenditure is incurred after the taxation year in which the property is acquired.
Nevertheless, the words of paragraph 127.44(9)(e) refer to an expenditure that is incurred in a different taxation year from the year in which the related property is acquired. “Different” could mean a taxation year before or after the property is acquired. Moreover, the application of the deeming rule in paragraph 127.44(9)(e) to an expenditure that is incurred in a taxation year after the property is acquired is necessary in order to allow the definition of qualified carbon capture expenditure in subsection 127.44(1) to apply to that expenditure because such definition requires that the property be acquired and the expenditure be incurred in the same taxation year.
In particular, Element A of the definition of qualified carbon capture expenditure requires that the expenditure incurred be in respect of property acquired by the taxpayer in “the year”. In the absence of the application of the deeming rule in paragraph 127.44(9)(e), there would be no property acquired in 2028 because the property was actually acquired in 2027. However, applying the deeming rule in paragraph 127.44(9)(e) results in the related property being deemed to have been acquired in 2028, which allows the definition of qualified carbon capture expenditure to apply to the taxpayer for 2028 as follows:
qualified carbon capture expenditure of a taxpayer [here, Bco] for a taxation year [2028] means an amount that is the portion of an expenditure incurred by the taxpayer to acquire a property in the year [deemed to be 2028 by virtue of paragraph 127.44(9)(e)], in respect of a qualified CCUS project of the taxpayer, determined by the formula
A x (B + C + D + E) x F
Where
A is, in respect of property acquired by the taxpayer in the year [deemed to be 2028 by virtue of paragraph 127.44(9)(e)] (other than property situated outside of Canada),
(a) the capital cost of property described in (and, in the case of property acquired before the first day of commercial operations of the project, verified by the Minister of Natural Resources as being property described in)
(i) paragraph (a) of Class 57 in Schedule II to the Income Tax Regulations, or
(ii) any of paragraphs (d) to (g) of Class 57 in Schedule II to the Income Tax Regulations in relation to equipment described in paragraph (a) of that Class, or […]
As a result, the $5,000,000 of installation costs incurred by the taxpayer in 2028 would be qualified carbon capture expenditures of the taxpayer for 2028.
Response to Question 2
In our view, the application of the deeming rule in paragraph 127.44(9)(e) in respect of the $5,000,000 of installation costs incurred in 2028 would not result in the expenditures incurred by the taxpayer in earlier taxation years (e.g., the detailed engineering costs of $1,000,000 incurred in 2026 and the acquisition cost of the Class 57 Equipment of $10,000,000 incurred in 2027) to instead be incurred in 2028. In our view, the deeming rule in paragraph 127.44(9)(e) should be applied in respect of each particular expenditure, such that its application to the installation costs incurred in 2028 would not impact its application to expenditures incurred in other taxation years.
For example, when applying paragraph 127.44(9)(e) to the $1,000,000 of detailed engineering costs incurred by the taxpayer in 2026, those expenditures will be deemed to be incurred in the later of the year in which they were incurred (2026) and the year in which the property to which they relate was acquired (2027). As a result, those expenditures would be deemed to be incurred in 2027. The fact that paragraph 127.44(9)(e) might apply again in respect of expenditures incurred in a different taxation year (such as the installation costs that are incurred in 2028), would not affect this conclusion.
We trust that these comments will be of assistance.
Yours truly,
Kimberley Wharram
Manager, Resources Section
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 This term is defined in subsection 127.44(1) of the Act.
2 Subsection 127.44(15).
3 Clean Technology Investment Tax Credit (see subsection 127.45(4); Clean Hydrogen Investment Tax Credit (see subsection 127.48(5)); Clean Manufacturing Investment Tax Credit (see subsection 127.49(4)).
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