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: Whether the eligible proportion of the capital cost of dual-use equipment for the purpose of calculating the CCUS investment tax credit of a taxpayer (Taxpayer A), as determined by subparagraph (b)(i) of variable A of the definition of "qualified carbon capture expenditure" in subsection 127.44(1) of the Act, should be determined by reference to energy sold to another taxpayer (Taxpayer B) for use in Taxpayer B's qualified CCUS project where the energy is delivered over an electrical utility grid.
Position: Question of fact.
Reasons: Textual, contextual, and purposive analysis of the relevant provisions. There is no restriction on counting energy delivered through an electrical utility grid in determining "the amount of energy expected to be produced for use in a qualified CCUS project" under the definition of qualified carbon capture expenditure. However, the energy must be sold by the taxpayer to the owner of the other qualified CCUS project (e.g., through a direct sales agreement) and such energy must be necessary for the operation of the other project. Energy that is provided to an electrical utility grid that may, incidentally, be used by another qualified CCUS project should not be counted.
XXXXXXXXXX Michael Sims
2025-105522
June 5, 2025
Dear XXXXXXXXXX:
Re: Technical interpretation concerning “over the wires” sale of electricity
This is in reply to your letter of February 27, 2025, wherein you requested our views on whether electricity sold “over the wires” to a taxpayer should be included in determining the factor calculated under subparagraph (b)(i) of variable A of the definition of “qualified carbon capture expenditure” in subsection 127.44(1) of the Act for the purpose of the carbon capture, utilization, and storage (“CCUS”) investment tax credit (“ITC”).
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.
Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c. 945, as amended (the “Regulations”).
Overview
The hypothetical scenario and assumptions set out below formed the basis of our analysis for the purposes of this technical interpretation.
1) Taxpayer A is a “taxable Canadian corporation”, as defined in subsection 89(1) of the Act.
2) Taxpayer A will construct a XXXXXXXXXX power plant built with integrated carbon capture equipment in Alberta and is subject to the regulatory regime in Alberta (footnote 1) (“CCUS Project A”).
3) The carbon capture unit and related equipment of CCUS Project A will constitute Class 57 property of Schedule II of the Regulations. The power generation property of CCUS Project A (the “Power Generation Equipment”) will be considered “dual-use equipment”, as defined in subsection 127.44(1) of the Act.
4) The Power Generation Equipment will generate approximately XXXXXXXXXX MW of electricity (determined without regard to energy produced and consumed by the equipment in the process of producing the energy), of which approximately XXXXXXXXXX MW (or approximately 87%) will be utilized to power the carbon capture equipment of CCUS Project A.
5) CCUS Project A will constitute a “qualified CCUS project”, as defined in subsection 127.44(1) of the Act, upon the approval of the project plan and issuance of the initial project evaluation from Natural Resources Canada (“NRCan”).
6) The Power Generation Equipment will be connected to the Alberta interconnected energy system (the “Grid”) and deliver the estimated XXXXXXXXXX MW of surplus electricity into the Grid at a metered interconnection point an estimated XXXXXXXXXX hours per year (the “Surplus Electricity”).
7) Taxpayer B is a “taxable Canadian corporation”, as defined in subsection 89(1) of the Act.
8) Taxpayer B will operate a CCUS project in Alberta (“CCUS Project B”) which will constitute a qualified CCUS project upon the approval of the project plan and issuance of the initial project evaluation from NRCan.
9) CCUS Project B will receive electricity from the Grid at a metered interconnection point and will have power requirements in excess of the amount of Surplus Electricity generated by the Power Generation Equipment.
10) Taxpayer A and Taxpayer B will enter into a power supply agreement that will be effected as a direct sales agreement under the EUA setting out the terms of the purchase and sale of the Surplus Electricity between the participants.
11) The term of the power supply agreement is expected to be not less than the “total CCUS project review period”, as defined in subsection 127.44(1) of the Act, of CCUS Project A. During the term of the power supply agreement, each of Taxpayer A and Taxpayer B will provide to the other all relevant metering data in respect of the Surplus Electricity.
12) The purchase and sale of the Surplus Electricity between Taxpayer A and Taxpayer B under the power supply agreement will be conducted through a dual-metering arrangement whereby Taxpayer A will deliver electricity to the Grid at a metered interconnection point and Taxpayer B will receive electricity from the Grid at a metered interconnection point.
13) During the term of the agreement, 100% of the Surplus Electricity generated by the Power Generation Equipment will be purchased by Taxpayer B for use in CCUS Project B. Taxpayer B will use the Surplus Electricity it receives only in respect of CCUS Project B.
14) Taxpayer A and Taxpayer B will acknowledge that, under the regulatory regime in Alberta, Taxpayer B may not receive the actual electricity generated from the Power Generation Equipment of CCUS Project A but will instead receive electricity from the Grid in accordance with the rules set out by the regulatory regime.
15) Taxpayer A will collect any applicable goods and services taxes payable in respect of the supply of Surplus Electricity to Taxpayer B under the power supply agreement.
Issue
Whether the eligible proportion of the capital cost of the Power Generation Equipment for the purpose of calculating the CCUS ITC of Taxpayer A in respect of CCUS Project A, as determined by subparagraph (b)(i) of variable A of the definition of “qualified carbon capture expenditure” in subsection 127.44(1) of the Act, should be determined by reference to the Surplus Electricity sold to Taxpayer B for use in CCUS Project B where it is delivered over the Grid to CCUS Project B.
Our Comments
Subparagraph (b)(i) of variable A of the definition of “qualified carbon capture expenditure” in subsection 127.44(1) of the Act reads as follows:
qualified carbon capture expenditure of a taxpayer for a taxation year means an amount that is the portion of an expenditure incurred by the taxpayer to acquire a property in the year, in respect of a qualified CCUS project of the taxpayer, determined by the formula
A × (B + C + D + E) × F
where
A is, in respect of property acquired by the taxpayer in the year (other than property situated outside of Canada),
[…]
(b) the proportion of the capital cost of dual-use equipment that,
(i) if the equipment is described in subparagraph (a)(i) of the definition dual-use equipment in this subsection, or is acquired in relation to such equipment, the amount of energy expected to be produced for use in a qualified CCUS project over the project’s total CCUS project review period is of the total amount of energy expected to be produced by the equipment in that period (determined without regard to energy produced and consumed by the equipment in the process of producing energy), based on the project’s most recent project plan,
The provision does not indicate whether energy sold to a third-party may be counted in determining “the amount of energy expected to be produced for use in a qualified CCUS project” if it is transmitted to the third-party’s project by way of an electrical utility grid.
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 there is no restriction on counting energy delivered through an electrical utility grid in determining “the amount of energy expected to be produced for use in a qualified CCUS project”. However, the energy must be sold by the taxpayer to the owner of the other qualified CCUS project (e.g., through a direct sales agreement) and such energy must be necessary for the operation of the other project. Energy that is provided to an electrical utility grid that may, incidentally, be used by another qualified CCUS project should not be counted.
Whether energy that is produced by a particular property that is dual-use equipment is produced for use in (i.e., necessary for) another qualified CCUS project is a question of fact that can only be determined on a case-by-case basis after considering all of the particular facts and circumstances.
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
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 Electric Utilities Act (Alberta), S.A. 2003, c. E-5.1 (the “EUA”)
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