Ottawa is preparing for Canada's next generation of major projects, including in relation to energy and various types of related infrastructure. The federal government has moved quickly to overhaul the legal framework for these projects through the Building Canada Act, a key component to Bill C-5, which received Royal Assent on June 26, 2025. This legislation allows the federal government to designate certain developments as “national interest projects” enabling them to bypass conventional regulatory processes and significantly reduce approval timelines.
Bill C-5, however, has sparked concerns among Indigenous nations and commentators – both for the lack of consultation in its development and passage, and for the risk that it could undermine and erode Indigenous rights.
For project proponents and investors, speed is only part of the equation. Long-term success will depend on meaningful consultation and participation by Indigenous rights-holders, and on how effectively projects are structured, particularly in light of Canada's increasingly complex legal and tax environment. It is critical that Indigenous engagement and structuring are done right from the outset to attract capital, manage risk, and ensure project viability.
Indigenous Equity Participation – Structuring Considerations
There is no single model for structuring Indigenous equity participation in major projects. The choice of structure will depend on several critical factors, including, the desired level of management control, financing, and fundamental tax considerations, such as income tax and federal tax allocations and reliance on available tax credits. Each project will have its own requirements which must be carefully assessed to determine the most appropriate structure.
Limited Partnerships
Limited partnerships have long been, and largely continue to be, the prevalent structure for major projects involving First Nations co-ownership.
Generally, a partnership itself does not pay income tax. Instead, each partner is responsible for filing their own income tax return and reporting their share of the partnership's net income or loss. First Nations partners, constituted as bands under the Indian Act and deemed public bodies performing governmental functions in Canada, can be exempt from Canadian income tax. Limited partnerships also provide limited liability protection to each limited partner, meaning they are only liable for the amount they invest in or loan to the partnership. Consequently, from both tax and liability perspectives, the results for First Nations partners in a limited partnership can be highly advantageous.
However, when First Nations and taxable corporations are partners in the same project, it could lead to incremental structuring complexity. Absent careful consideration, construction costs and early losses incurred by a limited partnership may require proportionate allocation, leading to material losses being allocated to tax exempt entities (e.g., a First Nations partner). What will be a reasonable allocation of income and losses will depend on the facts and circumstances of each individual project.
Access to the new tax credits (discussed below) may also be limited.
Non-Resident Investors or Tax Exempt Taxpayers
It is not uncommon for major projects in the energy sector to be subject to M&A and financing transactions as new investors could seek to join and existing investors may wish to exit.
From a tax perspective, the timing for the integration or departure of non-resident or tax exempt investors could lead to adverse tax implications. Early integration of tax exempt or Canadian companies may be required.
Project Financing
Financing is a crucial consideration for any major project involving Indigenous equity participation.
Access to affordable capital is a key gating item for many Indigenous nations contemplating equity ownership. Some Indigenous nations may be able to independently fund (in whole or in part) their initial equity contribution through a combination of its own or government sources. However, if an Indigenous nation does not have its own equity to invest, it will need to finance the investment. The structure must be flexible, affordable and predictable enough to address the timing and constraints of such Indigenous financing requirements.
Additionally, financing at the wrong level could cause issues with the Excessive Interest and Financing Expenses Limitation (“EIFEL”) tax rules and other tax rules such as the at-risk limitations.
The New Energy Credits
The Federal government introduced a number of new tax credits targeting projects promoting cleaner sources of electricity, such as solar or wind, and the development and construction of geothermal, nuclear, and/or hydroelectric projects. A number of these credits have built-in limitations for limited partners. When considering these new credits (the “Clean Tech Tax Credits”) as a source of financing, one will need to consider a number of significant concerns:
- The Clean Tech Tax Credits cannot be claimed by limited partners if there is an at-risk limitation (lack of equity contributions) or if the tax shelter rules apply;
- The assets must be available for use and complex requirements must be met. The Clean Tech Tax Credits could be required to be repaid in certain instances;
- The rates at which the Clean Tech Tax Credits are available may vary significantly depending on the nature of the projects and in certain circumstances, more than one credit or different credits could apply to different taxpayers;
- Certain of the Clean Tech Tax Credits are reduced by 10% if labor requirements are not met;
- Partners in a partnership are subject to reasonable allocation rules;
- Only certain tax exempt entities can benefit from the new clean electricity credit and only if they claim it using certain tax exempt corporations and not the other Clean Tech Tax Credits (as opposed to what could otherwise be a preference to a limited partnership structure);
- The Clean Tech Tax Credits seem to benefit a corporate JV model; however, this may lead to losses being trapped until the corporation earns sufficient income;
- Recapture rules may prevent the transfer of properties to entities other than taxable Canadian corporations for 10 years; and
- Anti-leasing rules are also built into the Clean Tech Tax Credits.
Contractual Joint Ventures
Unincorporated joint venture agreements are not recognized from a tax perspective. Each party to the agreement is viewed as a taxpayer carrying on their share of the project directly. Although very flexible, they may present significant issues from a tax perspective. For example, arrival and departure of new parties could cause inadvertent tax for the parties involved.
Corporations
Corporations may not always be the best option. For example, if a project requires significant upfront costs, it may be very difficult to consolidate such costs with other revenues, causing long delays before using the benefit of the tax attributes generated.
Additional Factors to Consider
In determining the overall structure of the equity arrangement, the following commercial considerations (not exhaustive) can also significantly impact the structure:
- Which project assets will Indigenous nations have the opportunity to acquire an ownership interest in?
- Will Indigenous nations be allocated a specific equity interest, or will Indigenous nations have the option to subscribe for an equal interest?
- Will Indigenous nations have the option to increase their interest (purchasing from the majority owner or other Indigenous nations)?
- Which decisions will require majority, super-majority or unanimity?
- Will Indigenous investors be permitted to collectively “pool” (i.e. collectively combine) their interests to meet the required thresholds for governance rights on material matters (including appointment of directors/officers or voting rights)?
- Will the agreed structure require regulatory approval?
- Who will be funding the project at what stage?
- Will the financing be in the form of debt or equity?
- What loan guarantee programs may be available and what securities will be granted?
- Are the parties intending their investment to be short-term or long-term?
- Are certain investors subject to lock-up periods or restrictions as to whom they can sell their participation to?
From a tax perspective, it is critical to consider the following:
- When the project is anticipated to be available for use (from a tax perspective);
- The capacity to enter the structure on a tax rollover basis or using a holding structure;
- The possibility to add or exit partners without material tax consequences;
- The option to finance the project without interest limitations (considering paragraph 20(1)(c) of the Income Tax Act, EIFEL and thin cap rules);
- The capacity to allocate income and losses in a reasonable way;
- For limited partnerships, the capacity to monitor the at-risk issues and negative adjusted cost base;
- Monitoring of indirect taxes effectively; and
- Monitoring the tax shelter, deemed limited partnership and mandatory disclosure rules and the general anti-avoidance rule.
Conclusion
As various parties consider the construction of infrastructure and energy projects, one should carefully model the potential consequences of several structures, with consideration of their pros and cons, from a legal and tax perspective. There will be no one-size-fits-all structure, and each project will need to be organized considering its specific facts and circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
