Clean Economy Tax Credits: Labour Requirements, As Updated By Bill C-59 - Employee Rights/ Labour Relations

On November 30, 2023, Bill C-59 received first reading in the House of Commons and the Department of Finance released accompanying Explanatory Notes. Bill C-59 can be found here and the related Explanatory Notes can be found here.

Among other tax measures, Bill C-59 will enact the Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS ITC), the Clean Technology Investment Tax Credit (CT ITC) and the labour requirements (Labour Requirements) that must be satisfied to maximize these tax credits as well as the proposed Investment Tax Credit for Clean Hydrogen (CH ITC) and Clean Electricity Investment Tax Credit (CE ITC).

The CH ITC and Clean Technology Manufacturing Investment Tax Credit (CTM ITC) were announced in Budget 2023 and draft legislation to implement these credits was released on December 20, 2023 (December 20 Proposals) which can be found here. The CE ITC was also announced in Budget 2023 but no draft legislation relating to this credit has been released.

This article reviews the Labour Requirements. Our review of the CCUS ITC can be found here and our review of the CT ITC can be found here. We will prepare a review of the CH ITC and CTM ITC.

All statutory references are to the Income Tax Act (Canada) (Tax Act) as amended by Bill C-59 and the December 20 Proposals.

Highlights

In brief, in order for a taxpayer to claim the maximum available CCUS ITC (the specific rate depends on the type of qualified CCUS expenditure and whether carbon is captured from the ambient air), CT ITC (30%), or CH ITC (the specific rate depends on the carbon intensity of hydrogen to be produced by the particular project), the taxpayer must elect to satisfy the Labour Requirements. If the taxpayer does not elect to satisfy the Labour Requirements, the applicable percentage of the relevant credit is reduced by 10%. The Labour Requirements have two prongs: a prevailing wage requirement and an apprenticeship requirement. If the taxpayer elects to satisfy the Labour Requirements but fails to do so, absent the Minister determining that the taxpayer knowingly or in circumstances amounting to gross negligence failed to meet those requirements, the credit is not reduced; instead, the taxpayer will generally be liable for certain additional taxes and penalties which may be mitigated in certain circumstances by taking corrective measures.

Scope of Application

The Labour Requirements generally apply in respect of each "covered worker" at a "designated work site" of an "incentive claimant".

Bill C-59 provides that "incentive claimant" means a person that, or a partnership at least one member of which, plans to claim or has claimed a specified tax credit for a taxation year. A "specified tax credit" is currently defined as the CT ITC and CCUS ITC but this definition will be expanded by the December 20 Proposals to include the CH ITC and CM Tax Credit and, presumably, will be expanded to include the CE ITC in due course.

It appears that the Labour Requirements do not treat partnerships in a consistent manner. The definition of "incentive claimant" provides that, in the case of a partnership where a partner plans to claim or has claimed a specified tax credit for a taxation year, the partnership is the incentive claimant. This makes sense since the relevant project will be carried out by the partnership and its activities will establish whether the prevailing wage requirement and apprenticeship requirement are satisfied. However, other provisions contemplate that the incentive claimant "claims" a specified tax credit and in the case of a partnership, it is the partners, not the partnership, that claim the credit.

A "specified property" is a property, all or a portion of the cost of which qualifies for a specified tax credit.

A "designated work site" in a taxation year of an incentive claimant is a work site where specified property of the incentive claimant is located during the incentive claimant's taxation year. It specifically includes the site of an incentive claimant's "CCUS project" (as defined in subsection 127.44(1)) or "clean hydrogen project" (as defined in subsection 127.48(1)).

A "covered worker" is an individual who:

is engaged in the preparation or installation of specified property at a designated work site as an employee of an incentive claimant or of another person or partnership engaged in the preparation or installation of the specified property (e.g., a contractor or subcontractor); and
is engaged in primarily manual or physical work or duties in respect of the designated work site.

A worker who is an administrative, clerical, or executive employee, or who is a business visitor to Canada as described in section 187 of the Immigration and Refugee Protection Regulations, is specifically excluded from being a covered worker.

An "installation taxation year" in respect of a specified tax credit is a taxation year during which preparation or installation of specified property occurs. Note that in a multi-year project, costs may be incurred in a taxation year but the relevant property may not be considered to be acquired until a subsequent taxation year when it becomes available for use. The taxation years before that in which the property becomes available for use would also be "installation taxation years". Conversely, in the case of a CCUS project, the Explanatory Notes observe that the CCUS ITC may be claimed in a taxation year before the labour is performed.

Election

Incentive claimants must file an election in the prescribed form and manner to satisfy the Labour Requirements; if an incentive claimant fails to do so, the applicable percentage of the relevant credit is reduced by 10%. The prescribed form and manner in which the election must be made has not yet been announced.

Prevailing Wage Requirement

Each covered worker at a designated work site of an incentive claimant for an installation taxation year must be compensated for their work in the preparation or installation of specified property under the terms of an "eligible collective agreement" or, if there is no eligible collective agreement, in an amount that is at least equal in value to the regular wages (without taking into account overtime) and benefits specified in that eligible collective agreement which most closely aligns with the covered worker's experience level, tasks and location, calculated on a per-hour or similar basis. If the relevant eligible collective agreement expires, the relevant wages and benefits stipulated under the agreement are to be indexed for inflation. Alternatively, if "prescribed circumstances" exist, the requirements to satisfy the prevailing wage requirements are the "prescribed conditions" for such prescribed circumstances. The Income Tax Regulations (Regulations) do not currently set out any "prescribed circumstances" or "prescribed conditions" for the purposes of the Labour Requirements.

"Eligible collective agreement" means, in Québec, a collective agreement negotiated in accordance with provincial law or a "prescribed agreement". In any other case, it means either (i) the most recent multi-employer collective bargaining agreement that has been negotiated with a trade union that is an affiliate of Canada's Building Trades Unions for a given trade in a region or province; (ii) a project labour agreement established with a trade union in accordance with applicable provincial law that covers the work associated with the investments eligible for specified tax credits and that provides for wages and benefits for covered workers in a given trade that are at least equal to the regular wages (i.e. excluding overtime) and benefits provided under a multi-employer collective agreement as described above; or (iii) a "prescribed agreement". We note that there do not appear to be any Regulations setting out any "prescribed agreements" at this time.

The incentive claimant must attest in prescribed form and manner for each installation taxation year that it compensated its own employees who are covered workers in accordance with the prevailing wage requirement described above, and took reasonable steps to ensure that any covered workers employed by another person or partnership at its designated work site were also compensated in accordance with such prevailing wage requirement. The prescribed form and manner of such attestation has not yet been announced.

An incentive claimant must communicate, in a poster or notice readily visible to and accessible by covered workers at the designated work site, or by electronic means, that the work site is subject to the prevailing wage requirements in relation to covered workers. The communication must include a plain language explanation of the consequences for workers and information about how to report failures to pay prevailing wages to the Minister.

Apprenticeship Requirement

The "standard" requirement is that the incentive claimant must make reasonable efforts to ensure that apprentices registered in a "Red Seal trade" work at least 10% of the total hours that are worked during each installation year by Red Seal workers at the incentive claimant's designated work site on the preparation or installation of specified property. In provinces that do not use the Red Seal trade program, the same requirements apply with respect to the equivalent provincially registered trade.

If the number of apprentices employed at a designated work site is restricted or a maximum ratio of apprentices to journeypersons is specified by an applicable collective agreement or by an applicable law which prevents the standard requirement from being met, the incentive claimant must make reasonable efforts to ensure that the highest possible percentage of the total labour hours performed during the installation year by Red Seal workers on the preparation or installation of specified property are performed by apprentices registered in a Red Seal trade within such restrictions or limitations (Step Down Apprentice Requirement).

The incentive claimant must attest in prescribed form and manner for each installation year that it has met the applicable apprenticeship requirements. The prescribed form and manner of such attestation has not yet been announced.

While the Labour Requirements do not specify what constitutes "reasonable efforts" to satisfy the apprenticeship requirement, Bill C-59 provides for a deeming rule pursuant to which an incentive claimant will be deemed to have made sufficient efforts to comply with the requirements set out above if, at least every four months, the claimant:

posts a bona fide job advertisement seeking sufficient apprentices to perform the required hours that:
- includes a commitment to facilitate participation by apprentices in a Red Seal apprentice program;
- includes a statement that the job opportunity is open to both existing employees and new hires; and,
- is open and readily accessible on the Government of Canada Job Bank website and at least two other websites, either on a continuous basis throughout the year or for at least 30 consecutive days from the time of posting.
communicates with a trade union and at least one secondary school or post-secondary educational institution to facilitate hiring for the positions about which it advertises; and
receives written confirmation from the relevant trade union that it has provided as many apprentices as reasonably possible for work at the designated work site during the installation year, unless the trade union fails to respond to such a request within five days.

In order for the deeming rule to apply, the incentive claimant must duly review and consider all applications received in response to its advertisements for apprenticeship opportunities and must take reasonable steps to review other applications. The incentive claimant must also attest in prescribed form and manner that it has complied with the requirements for the deeming rule to apply. The prescribed form and manner of such attestation has not yet been announced.

The Explanatory Notes provide that this deeming rule is illustrative of one means of satisfying the "reasonable efforts" tests in the apprenticeship requirements. Variations of these steps may constitute (but not be deemed to be) reasonable efforts depending on the facts and circumstances.

The apprenticeship requirement raises a number of issues:

While the incentive claimant is required to use "reasonable efforts" to ensure that the applicable hours are worked by apprentices, the rules provide for an addition to tax (described below) if in fact the actual number of hours performed is less than the minimum.
The apprenticeship requirement applies to hours worked on the preparation or installation of specified property. Hours worked by Red Seal trades in performing other tasks at a work site are not taken into account in either the numerator or denominator of the applicable fraction. That would seem to require an incentive claimant to establish a system that will distinguish between hours worked by Red Seal trades on the preparation or installation of specified property and those worked on other tasks, as well as tracking hours worked by Red Seal apprentices on the preparation or installation of specified property, which could be burdensome in practice.

Consequences of Failing to Meet the Labour Requirements

An incentive claimant who elects to satisfy the Labour Requirements but fails to do so may be subject to certain penalties and additions to tax payable under Part I of the Act.

If the apprenticeship requirement is not satisfied, an amount will be added to the incentive claimant's Part I tax payable for the installation taxation year equal to $50 multiplied by the shortfall between the number of hours that should have been worked by apprentices registered in a Red Seal trade in the installation taxation year at the designated work site and the number of hours actually worked by such workers. For these purposes, the number of hours actually worked includes any hours of labour in respect of which the incentive claimant (i) made reasonable efforts to ensure that apprentices registered in a Red Seal trade worked at least 10% of the total hours worked by Red Seal workers during the installation taxation year, or (ii) where the Step Down Apprentice Requirement applies, made reasonable efforts to ensure that Red Seal trade apprentices worked the highest allowable percentage of the total hours worked by Red Seal workers during the installation taxation year.

If the prevailing wage requirement it not satisfied in respect of a covered worker, $20 is added to the tax payable under Part I of the Tax Act by the incentive claimant for each day that such worker was not paid the prevailing wage in an installation taxation year in respect of that specified tax credit. This additional tax is computed on a worker-by-worker basis. Note that "covered workers" are not limited to employees of the incentive claimant but also include employees of contractors and subcontractors. For covered workers who are not employed by the incentive claimant, this additional tax should only apply where the incentive claimant has failed to take reasonable steps to ensure that those other covered workers are paid the prevailing wage.

Where the Minister notifies an incentive claimant that they have not met the prevailing wage requirements for a designated work site for a taxation year, the incentive claimant may, within one year of receipt of the notification (or such longer period as the Minister may permit), pay each covered worker that received less than the prevailing wage a "top-up" payment equal to the amount of the shortfall plus interest calculated at the prescribed rate applicable to taxes to be paid to the Minister. A top-up payment is included in the recipient's income as salary and wages for the year of receipt, and is deductible by the payor in the year it was paid. Such amounts are expenditures that can qualify for any specified tax credit. If the required top-up payment is not made, the incentive claimant is liable to pay a penalty equal to 120% of the top-up amount. Again, note that covered workers are not limited to employees of incentive claimants, but also those of contractors and subcontractors.

If the Minister determines that an incentive claimant knowingly or in circumstances amounting to gross negligence failed to meet the Labour Requirements, the above consequences for failing to meet the Labour Requirements do not apply. Instead:

the incentive claimant will only be entitled to the specified tax credit net of the 10% rate reduction; and
the incentive claimant will be liable to a penalty equal to 50% of the amount by which the amount of the credit claimed at the regular rate exceeds the amount that would have been claimed under the reduced rate.

If any of the taxes or penalties imposed for failing to satisfy the prevailing wage or apprenticeship requirements apply to a claimant that is a partnership, including where incentive the claimant knowingly or in circumstances amounting to gross negligence failed to meet the Labour Requirements:

any member of the partnership can elect to pay the relevant tax or penalty on the partnership's behalf;
if no such election is made, each partner must pay the amount of penalty or tax that can reasonably be considered to be their share thereof; and
each member will be jointly and severally liable for any portion of the amount of penalty or tax that is not paid in accordance with the foregoing requirements.

It can be expected that contracts between incentive claimants and contractors will require that the contractor ensure that each of its employees (and any employees of their subcontractors) performing services relating to the preparation or installation of specified property is paid the prevailing wage and must indemnify the incentive claimant for any failure to do so. Analogous contractual requirements will need to be considered to ensure that apprenticeship requirements are met.

Exceptions

The Labour Requirements do not apply to a specified tax credit relating to the acquisition of zero-emission vehicles or the acquisition and installation of low-carbon heat equipment.

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