Explanatory Notes to Legislative Proposals Relating to the Income Tax Act

Preface

These explanatory notes describe proposed amendments to the Income Tax Act and the Income Tax Regulations. These explanatory notes describe these proposed amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable Dominic LeBlanc, P.C., K.C., M.P.
Minister of Finance and Intergovernmental Affairs

Amendments to the Income Tax Act (the "Act" or "ITA") and the Income Tax Regulations (the "Regulations" or "ITR")

Electric Vehicle Supply Chain Investment Tax Credit

Clause 1

Investment tax credit

Income Tax Act (ITA)
12(1)(t)

The amount deducted from tax in respect of an investment tax credit may reduce the tax basis of a related expenditure — that is, the undepreciated capital cost of depreciable property, the adjusted cost base of certain interests in a partnership or a trust, the amount of deductible scientific research expenditures, or the amount of Canadian exploration expenses. To the extent that such reductions in tax basis do not take place, paragraph 12(1)(t) requires the amount of any credit claimed to be included in the taxpayer's income.

Paragraph 12(1)(t) is amended to reflect the introduction of the electric vehicle (EV) supply chain investment tax credit by adding a reference to new section 127.492 under which the new investment tax credit is provided.

This amendment applies on and after January 1, 2024.

Clause 2

Deemed capital cost of certain property

ITA
13(7.1)

Section 13 provides a number of special rules related to the treatment of depreciable property. Generally, these rules apply for the purposes of sections 13 and 20 and the capital cost allowance (CCA) regulations.

Subsection 13(7.1) provides for reductions in the capital cost of a depreciable property equal to the amounts of deducted investment tax credits and certain other assistance from government in respect of the property, but does not apply to amounts described in paragraph 13(7.1)(a), (b) or (b.1).

Subsection (7.1) is amended by adding a reference to new section 127.492 in the preamble and in paragraph (e). These amendments are consequential to the introduction of the new EV supply chain investment tax credit under section 127.492.

These amendments apply on and after January 1, 2024.

Definitions

ITA
13(21)

"undepreciated capital cost"

Element I of the definition "undepreciated capital cost" (UCC) reduces the UCC of the depreciable property of a class by the amount of any investment tax credit claimed in respect of a property which was in the class in the year where that tax credit was claimed subsequent to the disposition of the property. Because an investment tax credit claim reduces the balance of the class and may cause it to become negative, thereby giving rise to an income inclusion for a year which, in turn, may affect the amount of the investment tax credit which can be claimed, this calculation can become circular where the credit reduces UCC in the same year as that in which the tax credit is claimed. Accordingly, a reduction of the UCC of the class is required only for taxation years following the year in which a related investment tax credit is claimed.

Element I of the definition is amended by adding a reference to new subsection 127.492(6), consequential to the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Loss restriction event

ITA
13(24)(a)

Subsection 13(24) is a special rule that applies where a corporation or partnership of which a corporation is a majority interest partner has acquired a depreciable property within the 12-month period ending immediately before a change of control of the corporation and the property was not used, or acquired for use, in a business carried on before that period. Under this rule, the capital cost of property acquired in the 12-month period is not included in computing undepreciated capital cost until after the change of control. Also, for the purposes of the investment tax credit and refundable investment tax credit rules in sections 127, 127.1, 127.44, 127.45, 127.48,127.49 and 127.491, the property will be considered not to have been acquired until after the change of control.

Where the property was disposed of and not reacquired before the change of control, the property is treated for capital cost allowance purposes as having been acquired immediately before the disposition. The purpose of this special rule is to prevent the transfer of depreciable property in contemplation of a change of control in order to reduce taxable income where the person acquiring control would not themselves be in a position to use the capital cost allowance or investment tax credit on the property.

Paragraph 13(24)(a) is amended to add a reference to new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 3

ITA
18.2(1)

"adjusted taxable income"

A taxpayer's adjusted taxable income is a measure of its earnings before interest, taxes, depreciation and amortization and is determined based on tax, rather than accounting, concepts. It is relevant to the excessive interest and financing expense limitation rules.

Paragraph (l) of Variable B includes in adjusted taxable income an amount deducted under subsection 127(5) or (6), 127.44(3), 127.45(6), 127.48(3), 127.49(6) and 127.491(11) that was not included in income under paragraph 12(1)(t) and was not included in calculating adjusted taxable income for a preceding year, to the extent that the amount is included in an amount determined under paragraph 13(7.1)(e), subparagraphs 53(2)(c)(vi) to (c)(vi.5) or (h)(ii), or for I in the definition "undepreciated capital cost" in subsection 13(21).

Paragraph (l) of Variable B is amended to add a reference to subsection 127.492(6), consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 4

Certain investment tax credits

ITA
87(2)(qq.1)

Paragraph 87(2)(qq.1) treats the corporation formed on an amalgamation as the same corporation as, and a continuation of, each of its predecessors, for the purposes of computing the corporation's clean economy investment tax credits.

This paragraph is amended to provide the same treatment for the purposes of new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 5

Winding-up

ITA
88(1)(e.31)

Subsection 88(1)(e.31) allows the flow-through of investment tax credits for the purposes of sections 127.44, 127.45, 127.48, 127.49 and 127.491 and Part XII.7 to a parent corporation on a wind-up of the subsidiary. A parent corporation could be subject to recapture or recovery of these investment tax credits.

Paragraph 88(1)(e.31) is amended to add a reference to new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Winding-up of Canadian corporation

ITA
88(2)(c)

Subsection 88(2) applies to a winding-up of a Canadian corporation to which subsection 88(1) does not apply.

Paragraph 88(2)(c) provides that paragraph 12(1)(t), which generally requires investment tax credits claimed in a preceding taxation year to be included in computing a taxpayer's income to the extent that they have not been applied to reduce certain related expenditures or amounts, may also apply in respect of investment tax credits claimed by the corporation in the year in which all or substantially all of its property is distributed on a winding-up.

Paragraph 88(2)(c) is amended to reflect the introduction of the new EV supply chain investment tax credit by adding a reference to new subsection 127.492(6).

This amendment applies on and after January 1, 2024.

Clause 6

Government assistance

ITA
127(9)

The definition "government assistance " in subsection 127(9) is relevant for various provisions that require an investment tax credit to be calculated by reference to the cost of property or the amount of an expenditure made net of any grant, inducement or other assistance received in respect of the cost of the property or the expenditure . In particular, the definition may be relevant for the purposes of the clean economy investment tax credits in sections 127.45 , 127.48 , 127.49 and 127.491.

The definition is amended to exclude the EV supply chain investment tax credit in new section 127.492. This amendment is intended to ensure that this new tax credit, the investment tax credits under section 127 (such as the Atlantic investment tax credit ) and the clean economy investment tax credit sare not reduced by tax credits received under section 127.492.

This amendment applies on and after January 1, 2024.

Clause 7

Deemed deduction

ITA
127.44(3)

Subsection 127.44(3) ensures that any amount determined under subsection 127.44(2) is also deemed to have been deducted from the taxpayer's tax otherwise payable under Part I for the purposes of section 127.44  and various rules. It causes these rules to operate in the same manner whether the CCUS tax credit is received as a refund or is actually deducted against tax otherwise payable.

Subsection 127.44(3) is amended to add a reference to new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Special rules — adjustments

ITA
127.44(9)(b)(ii)(C)

Paragraph 127.44(9)(b) causes certain amounts to be excluded from a taxpayer's qualified CCUS expenditures. This includes, for instance, an expenditure to acquire property for which an investment tax credit is claimed under section 127 or under a clean economy provision. Paragraph (b) is amended consequential on the introduction of section 127.492 to exclude an expenditure to acquire property for which an EV supply chain investment tax credit is claimed.

This amendment applies on and after January 1, 2024.

Clause 8

Deemed deduction

ITA
127.45(6)

Subsection 127.45(6) ensures that any amount determined under subsection 127.45(2) is also deemed to have been deducted from the taxpayer's tax otherwise payable under Part I for the purposes of section 127.45 and various rules. It causes these rules to operate in the same manner whether the clean technology investment tax credit is received as a refund or is actually deducted against tax otherwise payable.

Subsection 127.45(6) is amended to add a reference to new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 9

Definitions

ITA
127.47(1)

The "clean economy tax credit" definition in subsection 127.47(1) serves to consolidate the clean economy tax credits. In addition to its application to the partnership provisions in 127.47, this definition is also relevant for rules relating to the determination of capital cost of investment tax credits (for example, subparagraph 127.45(5)(a)(ii) provides that a clean technology investment tax credit cannot be claimed in respect of an amount if another clean economy tax credit is deducted on the same amount). Subsection 241(3.41) also provides authority to the Minister of National Revenue and the Minister of Finance to publish certain taxpayer information that reasonably relates to the claimants or recipients of a "clean economy tax credit".

The definition "clean economy tax credit" is amended to add a reference to the "EV supply chain investment tax credit" (EVSC-ITC), as defined in new subsection 127.492(1). Although the EVSC-ITC is not available to partners in respect of expenditures of their partnership, this amendment ensures that the other provisions of the Act that incorporate the definition "clean economy tax credit" apply in respect of the EVSC-ITC.

This amendment applies on and after January 1, 2024.

Clause 10

Deemed deduction

ITA
127.48(3)

Subsection 127.48(3) ensures that any amount determined under subsection 127.48(2) is also deemed to have been deducted from the taxpayer's tax otherwise payable under Part I for the purposes of section 127.48 and various rules. It causes these rules to operate in the same manner whether the clean hydrogen tax credit is received as a refund or is actually deducted against tax otherwise payable.

Subsection 127.48(3) is amended to add a reference to new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 11

Deemed deduction

ITA
127.49(6)

Subsection 127.49(6) ensures that any amount determined under subsection 127.49(2) is also deemed to have been deducted from the taxpayer's tax otherwise payable under Part I. This deeming rule applies for the purpose of various provisions of the Act. It causes these rules to operate in the same manner whether the clean technology manufacturing investment tax credit is received as a refund or is actually deducted against tax otherwise payable.

Subsection 127.49(6) is amended to add a reference to new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 12

Deemed deduction

ITA
127.491(11)

Proposed subsection 127.491(11) ensures that any amount determined under subsection 127.491(2) is also deemed to have been deducted from the taxpayer's tax otherwise payable under Part I. This deeming rule applies for the purpose of various provisions of the Act. It causes these rules to operate in the same manner whether the proposed clean electricity investment tax credit is received as a refund or is actually deducted against tax otherwise payable.

Proposed subsection 127.491(11) is amended to add a reference to new section 127.492, consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after April 16, 2024.

Clause 13

EV supply chain investment tax credit (EVSC-ITC)

In general terms, section 127.492 provides a fully refundable investment tax credit to qualifying taxpayers for the cost of buildings and other structures (EV building property) used all or substantially all to house qualifying property that is used in electric vehicle (EV) assembly or EV battery production, or in the production of cathode active materials (CAM) to be used in such batteries.

Section 127.492 is effective as of January 1, 2024, in respect of property that is acquired and becomes available for use on or after January 1, 2024. For more detail regarding how the effective date applies in relation to acquisitions of property, see the commentary on the definition "specified percentage" in subsection 127.492(1) and on subsection 127.492(4).

Definitions

ITA
127.492(1)

Subsection 127.492(1) provides various definitions relevant for the purpose of the EV supply chain investment tax credit (EVSC-ITC).

"CAM production"

"CAM production" means the production of cathode active materials to be used as inputs to the manufacturing of battery cells used in the powertrain of electric vehicles, other than production that is a "qualifying mineral activity" as defined in subsection 127.49(1). The definition is relevant to the definition "EV building property" (regarding which type of property qualifies for the EVSC-ITC), and to the definition "qualifying taxpayer" (regarding which taxpayers are eligible to claim the EVSC-ITC).

"electric vehicle"

"Electric vehicle" means a "motor vehicle" (as defined in subsection 248(1)) that is either fully electric or a plug-in hybrid vehicle having a battery with capacity of at least 7 kilowatt-hours. The definition is relevant to the definitions "CAM production", "EV assembly" and "EV battery production".

"EV assembly"

"EV assembly" means the final assembly of electric vehicles. The definition is relevant to the definition "EV building property" (regarding which type of property qualifies for the EVSC-ITC) and to the definition "qualifying taxpayer" (regarding which taxpayers are eligible to claim the EVSC-ITC).

"EV battery production"

"EV battery production" means the manufacturing of battery cells, or battery modules, to be used in the powertrains of electric vehicles. The definition is relevant to the definition "EV building property" (regarding which type of property qualifies for the EVSC-ITC), and to the definition "qualifying taxpayer" (regarding which taxpayers are eligible to claim the EVSC-ITC).

"EV building property"

In general, an "EV building property" is a building or structure of a taxpayer included in paragraph (q) of Class 1 in Schedule II to the Income Tax Regulations that is used, or to be used, all or substantially all to house "CTM property" (as defined by subsection 127.49(1)) of any person that is used in EV assembly, EV battery production or CAM production. The building or structure must be situated in Canada and intended for use exclusively in Canada. It must also not have been used, or acquired for use or lease, for any other purpose whatever before it was acquired by the taxpayer. (For this purpose, the rule in paragraph 127.492(4)(b) – which may deem an acquisition not to have occurred until the time that the taxpayer becomes a "qualifying taxpayer" – does not apply.)

"EV supply chain investment tax credit"

"EV supply chain investment tax credit" of a qualifying taxpayer for a taxation year means the total of all amounts, each of which is the specified percentage of the capital cost to the taxpayer of EV building property acquired by the taxpayer in the year.

See the commentary on the definitions "EV building property" and "specified percentage" for more information.

"government assistance"

"Government assistance" has the same meaning as in subsection 127(9). That definition in subsection 127(9) is amended to exclude the EVSC-ITC – see explanatory notes on the amendment to that definition.

The capital cost of property that is eligible for the EVSC-ITC is reduced by the amount of any government assistance or non-government assistance pursuant to paragraph 127.492(5)(c). Those amounts could become eligible for the EVSC-ITC if they are subsequently repaid, pursuant to subsection 127.492(7). For more information, see the commentary on those provisions.

"qualifying group"

A "qualifying group" is a related group of corporations. A "related group", as defined in subsection 251(4), means a group of persons, each member of which is related to each other member of the group. The definition "qualifying group" is relevant to the definition "qualifying taxpayer".

"qualifying investment"

In general, a "qualifying investment" is a minimum aggregate investment of $100 million by a taxpayer in one or more pieces of CTM property, the acquisition of which entitled the taxpayer to a CTM investment tax credit under section 127.49. To be included in this aggregation, the CTM investment tax credit in respect of the property may not have arisen due to the application of subsection 127.49(8) (from a property acquired by a partnership in which the taxpayer was a member) and may not have been subject to recapture under subsection 127.49(12). The minimum $100 million investment is to be determined at any relevant time – see commentary for subsection 127.491(10) regarding the potential recapture of the EVSC-ITC. The definition "qualifying investment" is relevant to the definition "qualifying taxpayer".

"qualifying minority interest"

A "qualifying minority interest" means ownership of both (a) at least 10% of the issued share capital of a corporation (having full voting rights under all circumstances), and (b) shares of the capital stock of the corporation having a fair market value of at least 10% of the fair market value of all of the issued shares of the capital stock of the corporation.

The definition "qualifying minority interest" is relevant to the definition "qualifying taxpayer".

"qualifying taxpayer"

A qualifying taxpayer that acquires EV building property may be eligible to claim an EVSC-ITC.

In general, a "qualifying taxpayer" is a taxable Canadian corporation that, at the relevant time, meets the requirements in any of paragraphs (a) to (e) of the definition.

A taxable Canadian corporation that holds a qualifying investment for use in each of the three specific manufacturing segments in the EV supply chain (being EV assembly, EV battery production and CAM production) is a qualifying taxpayer (paragraph (a) of the definition).

Alternatively, the corporation may be a member of "qualifying group" of corporations, one or more members of which holds such qualifying investments (paragraph (b) of the definition). In the case of a qualifying group, the minimum amount of a qualifying investment may not be shared across members of the group; instead, each qualifying investment must be held by a particular member of the group. In this case, a taxable Canadian corporation that is a member of the group, but that does not itself hold a qualifying investment, may still be eligible to claim an EVSC-ITC in respect of its EV building property.

In addition, if a corporation or qualifying group holds qualifying investments in only two of the segments, the corporation may still be a qualifying taxpayer if it or a member of the group holds a qualifying minority interest in an unrelated taxable Canadian corporation that holds a qualifying investment for use in the third and remaining segment (paragraphs (c) and (d) of the definition). In such a case, the unrelated corporation will itself also qualify as a qualifying taxpayer (paragraph (e) of the definition).

A corporation that has claimed an EVSC-ITC and has subsequently ceased to be a qualifying taxpayer may be subject to recapture of the tax credit under subsections 127.492(10) and (11). For more information, refer to the commentary on those subsections.

For more information on an "EV building property", a "qualifying group", a "qualifying investment", a "qualifying minority interest", "EV assembly", "EV battery production" or "CAM production", refer to the commentary on those definitions.

"specified percentage"

The definition "specified percentage" sets out the rates for determining the amount of the EVSC-ITC.

Under paragraph (a), the rate is nil for property that is acquired before January 1, 2024. For this paragraph, the date of acquisition is not affected by subsection 127.492(4).

Under paragraph (b), the rate is 10% for property acquired after 2023 and before 2033, while the rate is 5% for property acquired in 2033 or 2034.

For property acquired after 2034, the rate is nil.

EV supply chain investment tax credit

ITA
127.492(2)

Subsection 127.492(2) deems the amount of the EVSC-ITC to have been paid on account of tax payable by a qualifying taxpayer for a taxation year, where the taxpayer has filed with its return of income for the year a prescribed form containing prescribed information. The deemed payment will effectively reduce the taxpayer's tax payable for the year, if any, and result in a refund to the extent the EVSC-ITC exceeds its tax payable for the year.

Time limit for application

ITA
127.492(3)

Subsection 127.492(3) places a time limit on filing the form necessary to be eligible for the EVSC-ITC.

The prescribed form claiming this tax credit must be filed on or before the day that is one year after the qualifying taxpayer's filing-due date for the year. A consequential change to subsection 220(2.2) removes the Minister's discretion to waive this requirement.

If the form is filed after the taxpayer's filing-due date but within the one-year period, the deemed payment under subsection (2) is deemed not to arise under that subsection until the prescribed form and information have been filed with the Minister.

Time of acquisition

ITA
127.492(4)

For the purpose of the EVSC-ITC, subsection 127.492(4) deems an EV building property of a taxpayer not to have been acquired until the later of the time at which it has become available for use and the time at which the taxpayer becomes a qualifying taxpayer.

Accordingly, the EVSC-ITC cannot be claimed before the year in which the property becomes available for use, even if expenditures to acquire the property are incurred in an earlier year. Further, a property acquired in a taxation year prior to that in which the taxpayer became a qualifying taxpayer may still qualify for the EVSC-ITC, but not until that later time. This could also impact the specified percentage applicable during the phase-out period – see the commentary on the definitions "qualifying taxpayer" and "specified percentage" in subsection 127.492(1) for more information.

Special rules — adjustments

ITA
127.492(5)

Subsection 127.492(5) sets out various rules to determine the capital cost of EV building property to a qualifying taxpayer for the purpose of section 127.492. By excluding amounts from the capital cost of property in the context of the EVSC-ITC, these rules may operate to deny support under this tax credit to the extent described.

Under paragraph (a), the EVSC-ITC is not available for any amount for which any person has deducted an EVSC-ITC or any other "clean economy tax credit" (as defined in subsection 127.47(1)), or for an amount in respect of any part of the capital cost a property in respect of which a "CCUS tax credit" (as defined in subsection 127.44(1)) or a "clean hydrogen tax credit" (as defined in subsection 127.48(1)) was deducted by any person in respect of that property.

In addition, amounts added to the cost of property by virtue of section 21 do not form part of the capital cost of an EV building property for the purposes of the EVSC-ITC.

Under paragraph (b), the cost of a qualifying taxpayer's EV building property is determined without reference to subsections 13(7.1) and (7.4). Among other things, this allows EVSC-ITC to be disregarded in determining the cost of EV building property for these purposes.

Under paragraph (c), the capital cost of EV building property is reduced by amounts relating to "government assistance" and "non-government assistance" (as those terms are defined in subsection 127(9)) that can reasonably be considered to be in respect of the property. Subparagraph (c)(i) reduces the capital cost of EV building property by assistance received in or before the taxation year in which the property was acquired. Subparagraph (c)(ii) reduces the capital cost of EV building property in circumstances where an amount has not yet been received during the year, but the taxpayer is nevertheless entitled to receive the amount in the year, or can be reasonably be expected to receive the amount in the year or a subsequent year, and that amount would be government assistance or non-government assistance to the taxpayer if it were received by the taxpayer. Amounts that are repaid (or that, having reduced the capital cost of property under paragraph 127.492(5)(c), are no longer expected to be received) may be eligible for the EVSC-ITC under subsection 127.492(7).

Under paragraph (d), adjustments in subsections 127(11.6) to 127(11.8) may apply to the cost of property transferred between non-arm's length parties for the purposes of the EVSC-ITC. Those rules are imported for the purpose of the EVSC-ITC, subject to certain necessary adjustments.

Deemed deduction

ITA
127.492(6)

Subsection 127.492(6) ensures that any amount determined under subsection 127.492(2) is also deemed to have been deducted from the taxpayer's tax otherwise payable under Part I. This deeming rule applies for the purpose of various provisions of the Act. It causes these rules to operate in the same manner whether the EVSC-ITC is received as a refund or is actually deducted against tax otherwise payable.

Repayment of assistance

ITA
127.492(7)

The capital cost of EV building property may be reduced under paragraph 127.492(5)(c) by the amount of "government assistance" and "non-government assistance" that is received, is receivable or is reasonably expected to be received, in respect of the property. If such assistance is subsequently repaid or can no longer reasonably be expected to be received in a later year, those amounts may once again be eligible for the EVSC-ITC because of subsection 127.492(7) in that year. A property must be acquired in the year to obtain an investment tax credit under section 127.492 (see the definition "EV supply chain investment tax credit" in subsection 127.492(1)). Accordingly, a separate property is deemed to have been acquired to enable the investment tax credit to be claimed in respect of the later year provided that a recapture event described in paragraph 127.492(10)(c) has not occurred in respect of the property on which an assistance amount has been repaid.

Unpaid amounts

ITA
127.492(8)

Subsection 127.492(8) ensures that if any part of the capital cost of a particular EV building property is unpaid on the day that is 180 days after the end of the taxation year of a taxpayer in which the property was acquired, that amount shall be excluded from the capital cost of the property for the purpose of section 127.492. Instead, once the amount is paid, it is added to the capital cost of a separate EV building property that is deemed to be acquired at that time, provided that a recapture event described in paragraph 127.492(10)(c) has not occurred in respect of the property.

Tax shelter investment

ITA
127.492(9)

Subsection 127.492(9) provides that the EVSC-ITC is unavailable if an EV building property (or an interest in a person or partnership with a direct or indirect interest in such property) is a tax shelter investment under section 143.2. This approach is consistent with that taken for the other clean economy investment tax credits.

Recapture — conditions for application

ITA
127.492(10)

Subsection 127.492(10) sets out the conditions for the application of subsection 127.492(11), which may add an amount to a taxpayer's Part I tax payable for a taxation year. Where these conditions are met, the effect is to recapture all or part of an EVSC-ITC of a taxpayer.

The first condition, in paragraph (a), is that the taxpayer acquired an EV building property in the taxation year or any of the preceding 10 calendar years. Subsection 127.492(4) may have the effect of extending the date of acquisition for these purposes.

The second condition, in paragraph (b), is that the taxpayer became entitled to an EVSC-ITC in respect of all or a portion of the capital cost of the EV building property referred to in paragraph (a).

Finally, the requirements of paragraph (c) will be met if the property in question:

• is no longer used all or substantially all to house CTM property (as defined in subsection 127.49(1)) that is used in EV assembly, EV battery production or CAM production;
• is no longer situated in Canada and intended for use exclusively in Canada; or
• has been disposed of.

Alternatively, paragraph (c) will also apply in the event that an EVSC-ITC claimant ceases to meet the requirements of the definition "qualifying taxpayer" in subsection 127.492(1). This could occur, for example, if a corporation divests itself of the qualifying investment that it held in an earlier taxation year when an EVSC-ITC was claimed.

The conditions in paragraph (c) will not be met if they previously applied in respect of the same property.

In cases where the property has been disposed of without having previously been converted to an ineligible use or exported from Canada, recapture may be deferred in some cases by virtue of subsections 127.492(12) and (13).

Recapture of credit

ITA
127.492(11)

Where the conditions of subsection 127.492(10) are met, subsection 127.492(11) may add an amount to the taxpayer's Part I tax payable so as to recapture a portion of the EVSC-ITC associated with EV building property. The recapture is effectively calculated based on the proportion of the value of the property that has been used by the taxpayer prior to its conversion to an ineligible use, its export or its disposition, or prior to the taxpayer ceasing to be a qualifying taxpayer, as the case may be.

Where an EV building property is disposed of to a person or partnership that deals at arm's length with the taxpayer, the recaptured amount is, generally, the proportion of the original EVSC-ITC for that property that the proceeds of disposition is of the capital cost of the property.

For example, if an EV building property is sold to an arm's-length party for 80% of the original capital cost of the property to the taxpayer, 80% of the EVSC-ITC associated with that property will be recaptured.

In other cases (being a disposition to a non-arm's length party, a conversion to an ineligible use or export, or the taxpayer ceasing to be a qualifying taxpayer), the recaptured amount is, generally, the proportion of the original EVSC-ITC for that property that the fair market value of the property is of the capital cost of the property.

For example, if an EV building property is converted to an ineligible use at a time when its fair market value is 50% of its original capital cost, 50% of the EVSC-ITC associated with that property will be recaptured.

However, recapture will in no case exceed the taxpayer's EVSC-ITC associated with the particular property. Also, there is an exception to the recapture rules if the property is disposed of to certain related persons, in which case recapture may be deferred pursuant to subsections 127.492(12) and (13).

Certain related party transfers – recapture deferred

ITA
127.492(12) and (13)

Subsection 127.492(12) sets out conditions for the deferral of recapture of the EVSC-ITC under subsection 127.492(13).

Under subsection 127.492(12), recapture of the EVSC-ITC will be deferred where EV building property is disposed of by a qualifying taxpayer to a related taxable Canadian corporation in circumstances where the property would be EV building property to the purchaser (but for the requirement that the property not have been previously used, under paragraph (d) of the definition "EV building property"). This relieving provision is intended to facilitate bona fide transfers of EV building property within related groups. It is similar to subsection 127(33), which provides for deferral of the recapture of certain other investment tax credits where property is transferred to a non-arm's length party.

Subsection 127.492(13) provides for situations where recapture is triggered in the hands of the purchaser. It generally causes the purchaser to be treated as if it had claimed investment tax credits of the transferor in respect of the property, ensuring that the purchaser is subject to recapture if a recapture event occurs (e.g., a subsequent disposition of the property). To achieve this result, subsection 127.492(13) makes subsection 127(34) applicable, with such modifications as the circumstances require.  

Recapture event reporting requirement

ITA
127.492(14)

Where a recapture event described in subsection 127.492(11) or (13) occurs, or a deferral of recapture occurs because a qualifying taxpayer has transferred EV building property to a related taxpayer under subsection 127.492(12), the taxpayer is required to notify the Minister in prescribed form and manner on or before the taxpayer's filing-due date for that year. Consequential amendments to subsections 152(4) and (4.01) will extend the normal reassessment period in respect of EVSC-ITC assessments where the notification has not been filed in prescribed form and manner.

EV supply chain investment tax credit — purpose

ITA
127.492(15)

Subsection 127.492(15) is an interpretative provision that describes the intended purpose of the EVSC-ITC: to encourage major investments in Canada by integrated manufacturers in each of the three critical segments of the electric vehicle supply chain.

Clause 14

Assessment

ITA
152(1)(b)

Section 152 contains rules relating to assessments and reassessments of tax, interest and penalties payable by a taxpayer. Subsection 152(1) lists certain refunds and deemed payments on account of tax that are to be determined in the course of assessment of tax.

Paragraph 152(1)(b) is amended to add a reference to new subsection 127.492(2), consequential on the introduction of the new refundable EV supply chain investment tax credit under section 127.492. In general terms, subsection 127.492(2) deems an amount equal to the investment tax credit to have been paid on account of tax payable by a qualifying taxpayer.

This amendment applies on and after January 1, 2024.

Assessment and reassessment

ITA
152(4)(b.96)

Consequential to the introduction of the EV supply chain investment tax credit in section 127.492, new subsection 127.492(14) requires taxpayers to notify the Minister in prescribed form and manner when certain transactions or events described trigger the application of any of subsections 127.492(10) to (13). Notice must be filed by a taxpayer for a recapture event that occurred in the year, on or before the taxpayer's filing-due date for the year.

Subsection 152(4) is amended to add new paragraph (b.96), which allow the Minister to reassess a taxpayer outside the normal reassessment period when the taxpayer has failed to notify the Minister in prescribed form and manner of a transaction or event described in the subsections mentioned above.

When this new paragraph applies, the Minister may reassess the taxpayer within four years (in the case of a corporation other than a Canadian-controlled private corporation) or three years (in any other case) from the date the form is filed. The Minister's ability to reassess under this paragraph is limited to reassessments related to the application of the recapture rules of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Extended period of assessment

ITA
152(4.01)(b)

Subsection 152(4.01) limits the matters in respect of which the Minister can reassess when a reassessment to which paragraph 152(4)(a), (b), (b.1) or (b.5) to (c) applies is made beyond the normal reassessment period for a taxpayer in respect of a taxation year.

Consequential on the addition of paragraph 152(4)(b.96), subparagraph 152(4.01)(b)(xvi) is added with a reference to that paragraph. As such, a reassessment for a taxation year, made by the Minister after the normal reassessment period as a result of paragraph 152(4)(b.96), is limited to the recapture of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 15

Reduced instalments

ITA
157(3)(e)

Section 157 requires a corporation to pay instalments of its total tax payable under Parts I, I.3, VI, VI.1 and XIII.1 of the Act. Paragraph 157(3)(e) allows a corporation to reduce its monthly installments by certain refundable amounts under the Act.

Paragraph 157(3)(e) is amended to add a reference to new subsection 127.492(2), consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Amount of payment — three-month period

ITA
157(3.1)(c)

Subsection 157(1.1) allows small Canadian-controlled private corporations that meet certain conditions to pay their annual tax liability by quarterly instalments instead of monthly. Subsection 157(3.1) allows these corporations to reduce each quarterly instalment by 1/4 of the amount of certain tax refunds. Paragraphs 157(3.1)(b) and (c) list these tax refunds.

Paragraph 157(3.1)(c) is amended to add a reference to new subsection 127.492(2), consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 16

False statements or omissions

ITA
163(2)(d.1)

Subsection 163(2) imposes a penalty where a taxpayer knowingly, or in circumstances amounting to gross negligence, participates in or makes a false statement or omission for the purposes of the Act. Paragraph 163(2)(d.1) is amended to apply where false information is provided in respect of an amount claimed under new subsection 127.492(2) (the EV supply chain investment tax credit).

This amendment applies on and after January 1, 2024.

Clause 17

Exception

ITA
220(2.2)

Subsection 220(2.2) provides that the Minister's discretion to waive a requirement to file a prescribed form, receipt or other document, or to provide prescribed information, does not extend to such items filed on or after the day specified for the purposes of subsection 37(11), paragraph (m) of the definition "investment tax credit" in subsection 127(9), or subsection 127.44(17), 127.45(3), 127.48(4),127.49(3) or 127.491(7).

Subsection 220(2.2) is amended to extend the restriction on Ministerial discretion to waive filing requirements by adding a reference to new subsection 127.492(3), consequential on the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.

Clause 18

Where taxpayer information may be disclosed

ITA
241(4)(d)(vi.2)

Paragraph 241(4)(d) authorizes the communication of information obtained under the Act to specific persons for specific purposes.

Subparagraph 241(4)(d)(vi.2) permits the communication of taxpayer information to a person employed or engaged in the service of an office or agency of the Government of Canada (e.g., Canada Revenue Agency, Natural Resources Canada and Environment and Climate Change Canada) solely for the purpose of administering or enforcing the clean economy tax credits or the evaluation or formulation of related policies or guidelines.

This subparagraph is amended to add a reference to new section 127.492, consequential to the introduction of the EV supply chain investment tax credit.

This amendment applies on and after January 1, 2024.