On August 4, 2023, the Division of Finance launched a collection of draft legislative proposals (August 4 Proposals) on quite a lot of beforehand introduced tax measures. The August 4 Proposals may be discovered right here and the associated explanatory notes may be discovered right here.

The August 4 Proposals embody revised draft laws in respect of the Carbon Seize, Utilization and Storage Funding Tax Credit score (CCUS Tax Credit score), draft laws in respect of the Clear Expertise Funding Tax Credit score (CTI Tax Credit score) and draft laws specifying the labour necessities (Labour Necessities) that have to be glad to maximise these tax credit in addition to the proposed Clear Hydrogen Tax Credit score and Clear Electrical energy Tax Credit score. The Clear Hydrogen Tax Credit score and the Clear Electrical energy Tax Credit score have been introduced in Finances 2023 however the August 4 Proposals don’t embody draft laws in respect of those credit.

This text evaluations the Labour Necessities. We are going to launch evaluations of the affect of the August 4 Proposals on the CCUS Tax Credit score and on the CTI Tax Credit score.

All statutory references are to the Revenue Tax Act (Canada) (Tax Act) as amended by the August 4 Proposals.

Highlights

Briefly, to ensure that a taxpayer to say the utmost out there CCUS Tax Credit score (the precise price is determined by the kind of certified CCUS expenditure and whether or not carbon is captured from the ambient air) or CTI Tax Credit score (30%), the taxpayer should elect to fulfill the Labour Necessities. If the taxpayer doesn’t elect to fulfill the Labour Necessities, the relevant share of the related credit score is diminished by 10%. The Labour Necessities have two prongs: a prevailing wage requirement and an apprenticeship requirement. If the taxpayer elects to fulfill the Labour Necessities however fails to take action, absent the Minister figuring out that the taxpayer knowingly or in circumstances amounting to gross negligence failed to fulfill the necessities, the credit score isn’t diminished however the taxpayer will likely be liable to sure extra taxes and penalties which can be mitigated in sure circumstances by taking corrective measures.

Incentive claimants, specified property, lined employees, designated work websites and set up taxation 12 months

The Labour Necessities typically apply in respect of every “lined employee” at a “designated work website” of an “incentive claimant”.

The August 4 Proposals present that “incentive claimant means an individual, or a partnership at the least one member of which, plans to say or has claimed a specified tax credit score for a taxation 12 months.” “Specified tax credit score” is at present outlined because the CCUS Tax Credit score or CTI Tax Credit score however presumably will likely be expanded to incorporate the Clear Hydrogen Funding Tax Credit score and Clear Electrical energy Funding Tax Credit score in the end.

The Labour Necessities seem to not deal with partnerships in a constant method. The definition of “incentive claimant” offers that, within the case of a partnership the place a accomplice plans to say or has claimed a specified tax credit score for a taxation 12 months, the partnership is the inducement claimant. This is sensible for the reason that related venture will likely be carried out by the partnership and its actions will set up whether or not the prevailing wage requirement and apprenticeship requirement are glad. Nonetheless, different provisions ponder that the inducement claimant “claims” a specified tax credit score and within the case of a partnership, it’s the companions, not the partnership, that declare the credit score.

A “specified property” is a property, all or a portion of the price of which qualifies for a specified tax credit score.

A “designated work website” in a taxation 12 months of an incentive claimant is a piece website the place specified property of the inducement is situated in the course of the incentive claimant’s taxation 12 months. It particularly consists of the positioning of an incentive claimant’s “CCUS venture” (as outlined in subsection 127.44(1)).

A “lined employee” is a person who:

• is engaged within the preparation or set up of specified property at a delegated work website as an worker of an incentive claimant or of one other particular person or partnership engaged within the preparation or set up of the desired property (e.g., a contractor); and
• is engaged in primarily handbook or bodily work or duties in respect of the designated work website.

A employee who’s an administrative, clerical, or govt worker, or who’s a enterprise customer to Canada as described in part 187 of the Immigration and Refugee Safety Laws, is particularly excluded from being a lined employee.

An “set up taxation 12 months” in respect of a specified tax credit score is a taxation 12 months throughout which preparation or set up of specified property happens. Notice that in a multi-year venture, prices could also be incurred in a taxation 12 months however the related property is probably not thought of to be acquired till a subsequent taxation 12 months when it turns into out there to be used. The taxation years earlier than that during which the property is out there to be used would even be “set up taxation years”. Conversely, within the case of a CCUS venture, the explanatory notes observe that the CCUS Tax Credit score could also be claimed in a taxation 12 months earlier than the labour is carried out.

Election

If an incentive claimant doesn’t elect to fulfill the Labour Necessities, the relevant share of the related credit score is diminished by 10%. The election is to be made in prescribed type and method.

Prevailing wage requirement

Every lined employee at a delegated work website of an incentive claimant for an set up taxation 12 months have to be compensated for his or her work within the preparation or set up of specified property below the phrases of an “eligible collective settlement” or, if there is no such thing as a eligible collective settlement, in an quantity that’s at the least equal in worth to the wages and advantages specified within the eligible collective settlement that almost all carefully aligns with the lined employee’s expertise stage, duties and placement, calculated on a per-hour or comparable foundation. If the related eligible collective settlement expires, the related wages and advantages stipulated below the settlement are to be listed for inflation.

“Eligible collective settlement” means, in Québec, a collective settlement negotiated in accordance with provincial regulation. In every other case, it means both (i) the latest multi-employer collective bargaining settlement that will fairly be thought of the business customary for a given commerce, in a area, province or territory between a bunch of employers and a commerce union, who’re accredited to discount collectively and to be sure by the identical settlement, or (ii) a venture labour settlement that covers the work related to the investments eligible for the desired tax credit score and that’s based mostly on such business customary, multi-employer collective bargaining agreements.

The motivation claimant should attest in prescribed type and method for every set up taxation 12 months that it compensated its personal staff who’re lined employees in accordance with the prevailing wage requirement described above, and took affordable steps to make sure that any lined employees employed by one other particular person or partnership at its designated work website have been additionally compensated in accordance with such prevailing wage requirement.

An incentive claimant should talk, in a poster or discover, readily seen to and accessible by lined employees on the designated work website, or by digital means, that the work website is topic to the prevailing wage necessities in relation to lined employees. The communication should embody a plain language rationalization of the implications for employees and details about the best way to report failures to pay prevailing wages to the Minister.

Apprenticeship requirement

The “customary” requirement is that the inducement claimant should make affordable efforts to make sure that apprentices registered in a “Pink Seal commerce” work at the least 10% of the entire hours which are labored throughout every set up 12 months by Pink Seal employees on the incentive claimant’s designated work website on the preparation or set up of specified property.

Nonetheless, if the variety of apprentices employed at a delegated work website is restricted or a most ratio of apprentices to journeypersons is specified by an relevant collective settlement or by relevant labour regulation which prevents the usual requirement from being met, the inducement claimant should make affordable efforts to make sure that the best potential share of the entire labour hours carried out in the course of the set up 12 months by Pink Seal employees on the preparation or set up of specified property is carried out by apprentices registered in a Pink Seal commerce inside such restrictions or limitations (Step Down Apprentice Requirement).

The motivation claimant should attest in prescribed type and method for every set up 12 months that it has met the relevant apprenticeship requirement.

The apprenticeship requirement raises various points:

• Whereas the inducement claimant is required to make use of “affordable efforts” to make sure that the relevant hours are labored by apprentices, the principles present for an addition to tax (described under) if actually the precise variety of hours carried out is lower than the minimal.
• The apprenticeship requirement applies to hours labored on the preparation or set up of specified property. Hours labored by Pink Seal trades in performing different duties at a piece website aren’t taken under consideration in both the numerator or denominator of the relevant fraction. That would appear to require that an incentive claimant set up a system that may distinguish between hours labored by Pink Seal trades on the preparation or set up of specified property and people labored on different duties in addition to monitoring hours of apprentices labored on the preparation or set up of specified property, which could possibly be burdensome in observe.

Penalties of failing to fulfill the labour necessities

If the Minister determines that an incentive claimant knowingly or in circumstances amounting to gross negligence failed to fulfill the Labour Necessities:

• The motivation claimant is simply entitled to the desired tax credit score web of the ten% price discount.
• The motivation claimant is liable to a penalty equal to 50% of the credit score claimed on the common price much less the credit score allowed after giving impact to the ten% price discount.

Absent such a dedication by the Minister, if an incentive claimant fails to fulfill the Labour Necessities in an set up 12 months, the desired tax credit score isn’t diminished however there are different monetary penalties:

• If lower than 10% of the entire hours which are labored throughout an set up taxation 12 months in respect of the desired tax credit score on the designated work website on the preparation or set up of specified property are labored by apprentices registered in a Pink Seal commerce, an quantity is added to the tax payable below Half I of the Tax Act by the inducement claimant. The quantity is $100 multiplied by the distinction between the variety of hours “required” to be labored in that set up 12 months on the designated work website by apprentices registered in a Pink Seal commerce much less the hours truly labored. The hours “required” to be labored could also be lower than 10% of the entire hours if the Step Down Apprentice Requirement applies.
• For every day {that a} explicit lined employee was not paid the prevailing wage in an set up taxation 12 months in respect of that specified tax credit score, $20 is added to the tax payable below Half I of the Tax Act by the inducement claimant. Notice that lined employees aren’t restricted to staff of the inducement claimant however embody staff of contractors.
• The motivation claimant could also be notified by the Minister that it didn’t meet the prevailing wage necessities for a delegated work website for a taxation 12 months. In such case, the inducement claimant could, inside one 12 months (or such longer interval because the Minister could allow), pay every lined employee that obtained lower than the prevailing wage a top-up cost equal to the shortfall plus curiosity on the prescribed price relevant to taxes to be paid to the Minister. A top-up cost is included within the recipient’s earnings when obtained and is deductible by the payor when made and isn’t an expenditure that qualifies for any specified tax credit score. If the required top-up cost isn’t made, the inducement claimant is liable to pay 120% of the top-up cost as a penalty. Once more, be aware that lined employees aren’t restricted to staff of the inducement claimant however embody staff of contractors.

Since a partnership isn’t a taxpayer for the needs of the Tax Act, it isn’t clear how the provisions including an quantity to tax payable by an incentive claimant the place it fails to fulfill the apprenticeship requirement, prevailing wage requirement or each are supposed to function.

It may be anticipated that contracts between incentive claimants and contractors would require that the contractor be sure that every of its staff performing companies regarding the preparation or set up of specified property is paid the prevailing wage and should indemnify the inducement claimant for any failure to take action. Analogous contractual necessities will have to be thought of to make sure that apprenticeship necessities are met.

Exceptions

The Labour Necessities don’t apply to a specified tax credit score regarding the acquisition of zero-emission automobiles or the acquisition and set up of low-carbon warmth gear.

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