Section 127.48

Whether a project, which used the chlor-alkali process or the chlorate process to produce inter alia hydrogen, constituted a qualified clean hydrogen project depended on whether, in accordance with the “eligible pathway” definition, such processes produced hydrogen from “electrolysis of water.”

CRA indicated that the term "electrolysis of water" was a technical term defined on the Natural Resources Canada website as “a process that splits water (H₂O) into hydrogen and oxygen using an electric current” and that this process does not produce any other products.

In contrast, the chlor-alkali process involved the electrolysis of sodium chloride solution to produce sodium hydroxide, along with chlorine and hydrogen. Similarly, the chlorate process involved the electrolysis of a sodium chloride solution to produce chlorate compounds and hydrogen. In both cases, the hydrogen was considered a byproduct, representing 1% by mass of the products in the case of the chlor-alkali process and 5% by mass in the case of the chlorate process.

Accordingly, CRA concluded that neither process constituted the electrolysis of water.

The concept of an “operating year” is defined to “disregard … any period during which the project is not operating”, so that, for example, if it did not operate for one month, the operating year might be 13 months.

CRA was referred to the following scenarios:

• The carbon capture and storage plant is shut down, but the hydrogen continues to be produced.
• The supply of the eligible renewable hydrocarbon is disrupted, but the hydrogen continues to be produced using a different eligible hydrocarbon.
• Dedicated wind turbines are down, but the hydrogen continues to be produced by using electricity from the electrical utility grid.

CRA concluded:

[T]he meaning of “not operating” in this context refers to those periods during which hydrogen is not produced in any amount.

Consequently, each of the periods described in the scenarios above would not be considered a period during which the project is not operating. In other words, since hydrogen continues to be produced by the project in each of the outlined scenarios, the project is considered to be operating. Accordingly, for the purposes of determining the cumulative 365-day period set out in the definition of “operating year”, such periods would not be disregarded.

Regarding whether a project which produced hydrogen that was used to make another fuel could still qualify for the Clean Hydrogen Investment Tax Credit (“CH ITC”), CRA stated:

In order to produce clean hydrogen a taxpayer must, among other things, (i) use one of the specifically defined eligible pathways, and (ii) ensure the carbon intensity of the hydrogen so produced is less than four. 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 confirming that a “clean hydrogen project” cannot qualify as a “qualified clean hydrogen project” where it is expected to be operational for less than 20 years, CRA stated:

Section 2.2.5.1 of the Guidance Document [referenced in s. 127.48(6)(i) – to be renumbered (n)] requires the use of cumulative data that represents the first 20 years of operation of the clean hydrogen project in determining expected carbon intensity. Therefore, a clean hydrogen project must be expected to operate for at least 20 years in order for the calculation of the expected carbon intensity of the project to be computed in accordance with the Guidance Document, as required by paragraph 127.48(6)(i).

In doubting that a pilot and demonstration project would be eligible for the Clean Hydrogen Investment Tax Credit, CRA noted, in particular, that s. 127.48(6)(i) required satisfactory modelling of carbon intensity over the first 20 years of projected operation of the project.