31 October 2024 External T.I. 2024-1038062E5 - CCUS ITC - Dedicated Geological Storage

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: Can carbon be stored in an underground mineral formation?

Position: Yes.

Reasons: Accepted industry meaning of the term "geological formation" and legislative purpose.

XXXXXXXXXX									2024-103806
										Boriana Christov

October 31, 2024

Re.: Meaning of Geological Formation

We were asked to clarify the meaning of the term “dedicated geological storage” which is defined in subsection 127.44(1) of the Income Tax Act (footnote 1) (the “Act”). The issue is whether captured carbon could be stored in an underground mineral formation which is not a geological reservoir.

I. 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.

Unless otherwise stated, all references to a statute are to the relevant provision of the Act.

A. Background

Certain expenses incurred in the context of carbon capture, utilization and storage (“CCUS”) may qualify for an investment tax credit (the “CCUS-ITC”). However, the CCUS-ITC is available for CCUS projects only if 10% or more of the captured CO2 is used in an “eligible use,” which is defined in subsection 127.44(1) as follows:

“eligible use” means

(a) the storage of captured carbon in dedicated geological storage; or

(b) the use of captured carbon in producing concrete in Canada or the United States using a qualified concrete storage process.

Your question relates to the meaning of “dedicated geological storage” in paragraph (a) and more specifically, whether this term includes only an underground reservoir. For example, you have asked whether the storage of CO2 in an underground serpentinite deposit could potentially qualify as “dedicated geological storage,” provided that all other conditions have been otherwise met.

B. Dedicated Geological Storage

“Dedicated geological storage” is defined in subsection 127.44(1):

“dedicated geological storage” means a geological formation that is

(a) located in a designated jurisdiction;

(b) capable of permanently storing captured carbon;

(c) authorized and regulated for the storage of captured carbon under the laws of the designated jurisdiction; and

(d) a formation in which no captured carbon is used for enhanced oil recovery. (stockage géologique dédié)

The key issue is whether CO2 that is stored in a mineral formation that is not a reservoir will be considered to be stored in a “geological formation.” Notably, the definition of “dedicated geological storage” does not include any reference to an underground reservoir.

C. Geological Formation

The term “geological formation” is not defined in the Act. The North American Commission on Stratigraphic Nomenclature provides the following information about the concept of a geological formation:

Article 24. Formation. The formation is the fundamental unit in lithostratigraphic classification. A formation is a body of rock identified by lithic characteristics and stratigraphic position; it is prevailingly but not necessarily tabular and is mappable at the Earth’s surface or traceable in the subsurface.

Based on the foregoing and on our consultations with Natural Resources Canada, in our view a geological formation would be a body of rock (lithology) having a consistent set of physical characteristics that distinguishes it from adjacent bodies of rock, and which occupies a particular position in the layers of rock (the stratigraphic column). A formation is mappable at the Earth’s surface or traceable in the subsurface. In broad terms, a formation can be distinguished based on the identification of a rock unit that internally shows specific features that make it different from surrounding units.

II. CONCLUSION

For purposes of the definition of “dedicated geological storage” in subsection 127.44(1) a geological formation is not limited to underground reservoirs but instead could include any body of rock having the characteristics described above.

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