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      June-July 2009
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A few green measures

By Julie Larocque + Brigitte Alepin
Illustration: Ryan Snook

Growing numbers of SMEs would like to follow the green path, and a tax stimulus could help them make such a transition

President Barack Obama would like to see ecological virtue ethics adopted worldwide. Just look at the leaf-bearing emblem that will be displayed on projects funded by the US$787-billion stimulus package. One glance is all it takes to comprehend the new US government’s commitment to the environment.

Despite the economic and financial crisis, the US focus on ecological virtue is spreading across the border to Ottawa. The Canadian government needs to think outside the box to convince businesses to become genuine green giants. Possible options include green taxation, an ingenious economic instrument that links ecological virtue to economic decision-making processes. The Organization for Economic Co-operation and Development has been promoting green taxation since the dawn of the ecological age. Several countries have already introduced it, and others, including Germany, Denmark and the UK, have launched green taxation reform.

Even though ecological taxation is in its infancy in Canada, it has nevertheless managed to carve out a small place for itself in the taxation regimes. A number of tax measures encourage environmentally friendly consumption and investment, while others, like ecotaxes, are punitive and based on the polluter-payer principle.

A growing number of Canadian SMEs would like to go green, and a tax stimulus could help them make the transition. Businesses can benefit from advantageous measures when they decide to follow the green path.

The Canadian green taxation guide compiles the main environmental taxation measures applicable at the federal level. It is intended as a valuable tool to help users quickly identify the relief measures available to firms and their clients.

A Canadian green taxation guide

I – Investment incentives
Class 43/ Manufacturing and processing equipment
Subject to the half-year rule (which generally allows half the capital cost allowance [CCA] writeoff otherwise available in the year the asset is first available for use by the taxpayer, and will apply to the properties that are subject to this measure) an enterprise that acquires equipment to process natural gas or for facilities to produce alternative fuel for vehicles is normally eligible for a 30% CCA deduction, on a declining balance basis. This rate is temporarily increased to 50% on a straight-line basis for equipment purchased on or after March 19, 2007, and before 2012. (The 2009 budget proposes that, in lieu of the accelerated CCA on a declining basis for eligible assets acquired in 2010 and 2011, the 50% straight-line accelerated CCA treatment will apply.)

However, Class 43 derives from the general taxation regime, which is not primarily intended to save the planet. Accordingly, some “dirty assets” may be included under Class 43.

Class 43.1 and 43.2/ Renewable power generating equipment
Some advantageous CCA rates are available to enterprises that acquire certain types of energy-saving property and equipment for renewable energy solutions. The purpose of these measures is to encourage enterprises that generate and sell electricity or that use energy in other industrial sectors to make more efficient use of fossil fuels and increase their use of alternative renewable energy. Geothermal pumps used for nonindustrial processes or for greenhouses, and heating and hot-water production in industrial, commercial and income-producing residential buildings are included in these classes.

Class 43.2 is a temporary measure. Introduced in 2005, this class applies to energy systems acquired before 2020. It offers an even more advantageous accelerated CCA than the Class 43.1 rate, i.e. 50% instead of 30%. The eligibility criteria for both classes are generally the same. However, assets that qualify as Class 43.2 property must meet a higher efficiency standard.

CCA for carbon capture and storage
The 2009 federal budget notes the government will consult with stakeholders to identify specific assets used in carbon capture and storage with a view to providing accelerated CCA.

Class 24 and 27/Water and air pollution control equipment
Since 1999, acquisitions of assets used to preserve water and air no longer qualify for the favourable tax treatment offered by classes 24 and 27. The maximum CCA that could normally be claimed for the taxation year in which the eligible capital property was acquired totalled 25% of the original cost. The rest of the deduction was claimed in the two years following, i.e. 50% in year two and 25% in year three.

Research and development
R&D tax relief can encourage enterprises to invest in energy efficiency and renewable resources. An investment tax credit is computed based on eligible expenditures. The general rate is 20%, although it may be as high as 35% for Canadian-controlled private corporations. Similar rules also exist in various provincial legislation.

In the 2009 budget, the R&D expenditure limit of $3 million, giving entitlement to enhanced tax credits (35%), is gradually reduced when the taxable income for the previous year exceeds $500,000, and will be fully eliminated when the income exceeds $800,000. This change will apply where the previous taxation year ends after 2008.

It is important to understand that while these measures could be beneficial to the environment, the opposite could also be true. R&D incentives are available to enter-prises that harm the environment or that adopt behaviours that run counter to current environmental values.

EcoENERGY for Biofuels Initiative
This initiative provides operating incentives for producers of renewable alternatives to gasoline and diesel. The purpose of the program is to encourage investment in production facilities by partially offsetting the risks related to the supply of raw materials and fluctuations in fuel prices.
This initiative was implemented following the repeal of excise tax exemptions for renewable fuels. The program will invest up to $1.5 billion over nine years and is effective from April 1, 2008, to March 31, 2017.

Canadian renewable and conservation expense
With the objective of promoting the development and conservation of various sources of renewable energy, under the Income Tax Act, enterprises can create a notional expense account or a Canadian renewable and conservation expense. The account includes expenses for engineering, design, site preparation, feasibility studies, contract negotiations and regulatory approvals. The expenses can be deducted in the year in which they are incurred or in a subsequent year. Subject to a number of conditions, the expenses can even be transferred to an investor who acquires flow-through shares.

II – Consumer Incentives
Public transit
In order to reduce car pollution, the Income Tax Act offers a tax break to users of public transportation. The incentive is in the form of a nonrefundable credit for the cost of a monthly (or longer duration) pass for daily travel on buses, streetcars, subways, commuter trains and ferries.

EcoAUTO Rebate Program
The EcoAUTO Rebate Program encourages Canadians to purchase fuel-efficient vehicles by offering rebates of $1,000 to $2,000 to individuals who buy or sign a long-term lease (12 months or more) for a fuel-efficient vehicle. The buyer must fill in a form and forward it to Transport Canada. Applications are assessed in the order in which they are received.

This year’s models (2009) are no longer eligible under this program. The rebate applies only to 2006, 2007 and 2008 model vehicles purchased or leased (12 months or more) between March 20, 2007, and December 31, 2008. Note there are no tax consequences if the vehicle is not used for the purpose of earning income.

III – Ecotaxes
Ecotaxes are tax-based economic instruments the government can use to protect the environment. They allow for higher prices on certain products for which more environmentally friendly substitutes are available. These taxes are intended to encourage consumers to choose recyclable, reusable and less polluting products. Canadian legislation provides for very few ecotaxes.

Environmental levies (excise tax on fuel-inefficient vehicles)
Manufacturers and importers of vehicles purchased after March 19, 2007, with a fuel consumption rating of 13 litres or more per 100 kilometres are required to collect excise taxes of between $1,000 and $4,000, depending on the fuel consumption. The vehicles must be new and designed primarily for use as passenger vehicles (including station wagons, vans and sport utility vehicles). No levy is required for pickup trucks and certain types of special vehicles.

IV – Other green tax measures
Ecological Gifts Program
Taxpayers who donate private land or a partial interest in land with ecological value to an organization responsible for protecting, in perpetuity, the biodiversity and natural state of the gifted property can claim a tax credit or a deduction. If the donor is an individual, the total value of the ecogift is used to calculate a nonrefundable tax credit (15% on the first $200 and 29% on the balance). Corporate donors can deduct the full value of the gift from their taxable income.

The Income Tax Act sets no limit for the eligible amount of an ecogift. The tax credit or donation is granted in the year in which the donation is made and any unused portion may be carried forward for the five subsequent taxation years. Unlike the donors of other types of gifts, donors of ecogifts are not subject to tax on their capital gains.

Environmental trusts
Beneficiaries of a trust that accumulates funds for the purpose of funding the reclamation of a site used for the operation of a mine, the extraction of clay, peat, sand, shale or aggregates or the deposit of waste, can deduct their contributions to the trust during the year. However, beneficiaries are required to pay income tax on amounts they receive from the trust, but can receive a refundable tax credit equal to the amount of income tax payable by the trust. At the federal level, the trust is required to pay income tax under Part XII.4 Income Tax Act. The implications at the provincial level should be reviewed since certain specific rules may apply depending on the province of residence.

In its most recent budget, the federal government also announced a series of tax measures to address environmental issues, including the following:

It remains to be seen whether the government authorities, either federal or provincial, will make better use of taxation measures to protect the environment.

Julie Larocque, LLB, M. Fisc., is a tax specialist with AGORA Services de fiscalité Inc. 

Brigitte Alepin, M.Fisc., MPA, CA, is president of AGORA. She is Technical editor for Taxation — small business