9 December 2025 External T.I. 2025-1073491E5 - CH ITC - Pilot projects and fuel production

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) Are pilot and demonstration projects eligible for the CH ITC? (2) Would hydrogen produced to make another fuel still be covered by the CH ITC?

Position: (1) Question of fact. Pilot or demonstration projects are not expressly precluded from qualifying, but are unlikely to meet all the requirements. (2) Question of fact. There is no inherent restriction on the downstream use of the hydrogen.

Reasons: (1) There is no inherent restriction within the CH ITC regime that would preclude a pilot or demonstration project from qualifying. However, the conditions set out in the definitions of "clean hydrogen project" and "qualified clean hydrogen project" would need to be met. It seems unlikely that a pilot or demonstration project could qualify given the requirement, for example, that expected carbon intensity is calculated using cumulative data representing the first 20 years of operations. (2) There are specifically defined eligible pathways from which hydrogen can be produced and the carbon intensity of the hydrogen so produced must fall within certain limits. There is no inherent restriction on what happens with the hydrogen after production. However, the other eligibility conditions must be met.

XXXXXXXXXX								2025-107349
									Michael Sims

December 9, 2025

Dear XXXXXXXXXX:

Re: Questions concerning eligibility for the clean hydrogen investment tax credit

This is in reply to your email of July 22, 2025, wherein you enquired about eligibility for the Clean Hydrogen (“CH”) investment tax credit (“ITC”) for pilot or demonstration projects. You also enquired about eligibility where the hydrogen produced by the project is used to make another fuel. We apologize for our delay in responding.

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.

Issues

1) Are pilot and demonstration projects eligible for the CH ITC?

2) Would hydrogen produced to make another fuel still be covered by the CH ITC?

Our Comments

Issue 1

Costs relating to a particular project will not be eligible for the CH ITC unless the project is a “clean hydrogen project” that is a “qualified clean hydrogen project”, in each case as defined in subsection 127.48(1). There are a number of requirements that must be met in order for a project to be regarded as a “clean hydrogen project” and to qualify as a “qualified clean hydrogen project”. In light of these requirements, it seems unlikely that a pilot or demonstration project could qualify. For example, as provided in paragraph (b) of the definition “qualified clean hydrogen project” in subsection 127.48(1), it must be confirmed in writing by the Minister of Natural Resources (“NRCan”) that the expected carbon intensity contained in a taxpayer’s most recent clean hydrogen project plan (i) is determined in accordance with subsection 127.48(6), and (ii) can reasonably be expected to be achieved based on the project design.

In particular, paragraph 127.48(6)(i) of the Act provides that the Clean Hydrogen Investment Tax Credit – Carbon Intensity Modelling Guidance Document (footnote 2) published by the Government of Canada at the time of filing by the taxpayer of the most recent related clean hydrogen project plan applies conclusively with respect to the calculation of carbon intensity (except as otherwise provided in section 127.48). Section 2.2.5.1 of the guidance document requires the use of cumulative data that represents the first 20 years of operation of the clean hydrogen project in determining expected carbon intensity. This includes assumptions about the volume of production of hydrogen for each year of the first 20 years. If this condition cannot be met because the particular project is not expected to operate for at least 20 years, NRCan would not be able to confirm in writing that the expected carbon intensity is determined in accordance with subsection 127.48(6) of the Act.

Issue 2

Subsection 127.48(31) of the Act describes the intended purpose of the CH ITC, as follows:

127.48(31) The purpose of this section is to encourage the investment of capital in the production of clean hydrogen and clean ammonia in Canada.

In order to produce clean hydrogen a taxpayer must, among other things, (i) use one of the specifically defined eligible pathways, (footnote 3) and (ii) ensure the carbon intensity of the hydrogen so produced is less than four. (footnote 4) Eligible clean hydrogen property may still qualify for the CH ITC where clean hydrogen produced by the qualified clean hydrogen project is used downstream to produce another fuel. In other words, there is no inherent restriction on what can be done with the hydrogen after production. However, the other eligibility conditions must be met.

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

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”)

2. Available at: https://www.canada.ca/en/environment-climate-change/services/managing-pollution/fuel-life-cycle-assessment-model/clean-hydrogen-carbon-intensity-modelling-guidance.html

3. Refer to the definition of “eligible pathway” in subsection 127.48(1) of the Act.

4. Refer to the definition of “clean hydrogen” in subsection 127.48(1) of the Act.