Innovative Financing: Accelerating Canada’s Clean Technology Tax Credit Transformation

Our ambitious foray into clean technology and its pursuit of net-zero targets have taken center stage, echoing through Canadian government and corporate corridors alike. In a defining move, the Canadian government, in March 2023, unveiled a suite of investment tax credits (ITCs) aimed at accelerating the nation’s decarbonization drive, with the goal of achieving a net-zero emissions status by 2050.

Budgets & Boons

With the 2023 Federal Budget, eligible Canadian clean technology projects are set to receive a 30 percent refundable tax credit, a financial boon that stands poised to reshape the landscape of sustainable innovation. This credit can be leveraged by taxable entities for investments in a gamut of clean technologies and materials. The ITC covers a wide range of zero-emission technologies. While legislative details are still being fine-tuned, all investments in eligible technologies, initiated from the Budget’s proclamation on March 28, 2023, stand eligible for the ITC. The credit, however, is slated for a gradual phasing-out process, with rates reducing to 15 percent in 2034 and eventually tapering off to zero.

The Clean Technology Tax Credit holds tremendous promise, transforming up to now cost-prohibitive sustainable projects into financially viable ventures, and paving the way for clean tech projects to become cash-flow positive right from their inception. In essence, the financial outlay for these projects becomes offset by the expected energy savings or revenue generated.

For these ventures to succeed, creative financing proves crucial. It demands financial institutions that have a deep understanding of the industry’s nuances, capable of crafting flexible structures that minimize finance payments and maximize the potential for projects to become cash-flow positive.

US and Canada

Interestingly, Canada’s ITC framework bears a striking similarity to its American counterpart, which gives a sense of comfort to would-be American lenders that are already acquainted with the structure and intricacies of the system. The biggest difference is that in Canada, the ITC is refundable, meaning recipients receive the full amount regardless of how much income tax they pay. This allows more recipients to take advantage of the credit and also removes many administrative and operational hurdles for the lender. An example is the need to find a third-party tax equity partner that has a big enough tax liability to leverage the ITC. 

One example of how lenders can use structure to align with current demand is to structure a lump-sum payment, equal to the ITC in year one. Timing would depend on when the ITC is expected to be received, with the borrower using their ITC to make the lump-sum payment. Credit can get more comfortable with a rapid reduction in overall exposure, and the lump-sum payment will reduce all other payments, allowing the project a better chance of being cash-flow positive. 

For many smaller clean tech projects, if a customer has borderline credit quality, or more importantly, if the finance amount is right up against their exposure limits, that rapid reduction in exposure can often be a make-or-break change in terms of credit approval. 

Tempered Enthusiasm

Yet, in the excitement that surrounds environmental, social, and governance (ESG) goals, these projects and investments need to make sense financially – for all stakeholders. While some lenders are enthusiastically expanding their cleantech lending portfolio to bolster their ESG credentials, others have reservations as they consider the underlying asset collateral to be weak, (i.e., on solar projects where the resale value of the panels is not strong). These lenders often still view renewable energy and clean technology as an emerging industry in Canada and are approaching this economic upswing with caution. 

It’s imperative that the finance industry embrace the clean energy economic boom, utilize flexible structuring to incorporate the ITC’s and align their lending products to allow more projects to move forward. Canada needs companies to embrace the Clean Technology Tax Credit, but to do this, we need lending partners that can be resourceful, flexible, and move quickly to meet this marketplace need to bring these projects to fruition.  

About the Author

Grant MacFarlane is Regional Vice President at First Financial Canadian Leasing, a JA Mitsui Leasing, Ltd. company that is very active in lending and structured finance for the renewable energy sector. 

Here’s how your organization can be apart of the innovation that is occurring in the Canadian equipment finance sector:

CLA Equipment Finance Roundtable

REGISTER HERE, OCTOBER 12th at Cassels in downtown Toronto (4:00 PM – 6:30 PM)

What does next-gen Equipment Finance look like in Canada? The Equipment Finance Roundtable will represent key stakeholders across the ecosystem including captives, banks, non-banks and solution providers. Together we will work to advance innovation and thought-leadership. The roundtable will work closely with other CLA roundtables where we find common goals. (One area of immediate relevance is the Sustainable Finance Roundtable)

The group will be facilitated by the Canadian Lenders Association and focus on concrete business outputs including:

• Innovative technology and business solutioning to advance digital efficiencies.

And in partnership with the Sustainable Finance Roundtable:

• Emissions measurement framework for scope 1, 2, and 3 reporting using accurate, verifiable data (non-proxy)
• Ways to incentivize low-emissions purchase decisioning through green loans

2023 Lenders Summit

The need for next-gen solutions in the equipment finance sector has brought about a multitude of opportunities for lenders to service clients in new and seamless ways. Engaging with the organizations leading and innovating within the sector and beyond makes the upcoming 2023 Lenders Summit a must attend event. Taking place on November 1st at the MaRS Discovery District in downtown Toronto, the focus of the event will be on networking, partnerships, and driving innovation in the lending sector. 

From Banks and Credit Unions to best-of-breed vendors from the fintech ecosystem, the 2023 Lenders Summit is the hub for networking and business partnerships across all consumer and commercial sectors. Main themes include fraud technology, Identity Verification (IDV), financial data solutioning and supporting new-to-Canada and new-to-Credit.

Sponsorship: A variety of sponsorship opportunities that will help position your organization as an industry leader are still available! Contact dean@canadianlenders.org for further information. View the Sponsorship Deck here.