The Clean Technology Manufacturing Investment Credit: Details matter

Budget 2023 states that the Clean Technology Manufacturing Investment Tax Credit (CTM-ITC) aims to support Canadian companies engaged in manufacturing and processing clean technologies, as well as in the extraction, processing and recycling of critical minerals. The objective of this Budget measure is to create well-paying jobs for the middle class, enhance the global competitiveness of Canadian businesses, and fortify supply chains for Canada and its international partners.

The central aim of the CTM-ITC is to facilitate the acceleration of Canadian critical mineral production, processing and recycling, thereby enhancing the overall availability of critical minerals essential for the low-carbon economy and to reduce reliance on less friendly suppliers of these materials. This priority has become even more pronounced in the context of the United States’ (U.S.) Inflation Reduction Act (IRA), which offers substantial incentives to promote domestic activity. The attractiveness of these incentives may redirect mining investments and capital towards the U.S., underscoring the urgency for Canada to enhance its competitiveness through targeted measures such as the CTM-ITC. In November 2023, the Bank of America estimated that the IRA has already spurred $132 billion of investment across more than 270 new clean energy projects.

In the past 25 years, there have been marked declines in Canadian mineral reserves and production in all major base metals except gold. In 2021, Canada produced an estimated 133,581 tonnes of nickel in concentrate – this represents a 16% decrease in nickel mine production from 158,138 tonnes in 2020. Additionally, refined copper production declined by 43% between 2005 and 2018, the most recent year available. This happened as global copper production increased 73% since 2000. Furthermore, raw production has not fared much better, having fallen by 8% since 2019.  Consequently, Canada no longer ranks among the top 10 producers of copper.
Needless to say, Canada is not a top destination for mining or processing investments.

Additionally, over the last 12 years, at least four smelters have permanently closed or suspended operations (Kidd Creek, Thompson, two Flin Flon Smelters, Brunswick), resulting in significant production capacity losses and reductions in the mining industry’s workforce. Given global supply chain disruptions, investment in upstream supply chains means the creation of economic activity within the midstream and is essential to enable Canada to be competitive in downstream production (i.e., EV production). The question is not whether minerals and metals are necessary to achieve climate goals, but rather how much Canada can be the supplier the world requires.

Given the transformative potential of the CTM-ITC, it is critical that the design of the tax credit, including eligible expenses and criteria, is crafted to enhance the implementation and effectiveness of this measure. Well-designed measures could positively impact investment decisions, while badly designed ones would have little effect on the decision-making process. This will be instrumental in bolstering our existing smelting capacity, advancing critical minerals production, reversing the trend of declining production of base metals, reinforcing Canada’s position in the global market, and ensuring a sustainable supply chain for key industries and for Canada’s allies. It will also be key to incentivizing investments in critical mineral recycling, which will allow Canada to keep existing critical minerals within its ecosystem and address what is currently a significant gap in Canada and Western North America.

MAC recommends the following considerations on the CTM-ITC draft legislation:

1. Eligible Expenses
2. Metals Requirement: The Case for Copper

Eligible expenses

The proposed CTM-ITC has greater value for greenfield sites where a substantial amount of new equipment will be purchased. However, these mines have considerably longer lead times, including for regulatory approvals and massive non-equipment related construction costs. To enhance production from existing operations, facilitate the extension of the life of existing mines, and support the construction of new brownfield mines, expanding eligible expenses to include mine development-related expenditures beyond equipment could significantly influence multi-billion-dollar projects towards a positive investment decision. This is crucial for a company competing for investment dollars across a spectrum of projects globally. Broadening eligible expenses to encompass mine development-related expenditures will play a pivotal role not just in attracting investments but also in accelerating critical mineral production needed to meet global economic demands and technological advancements.

The same applies to critical mineral recycling projects. Capital expenditures to construct new recycling facilities can be prohibitively high, and since the market for critical mineral recycling – specifically electric vehicle batteries that contain three priority critical minerals (lithium, cobalt and nickel) – will not be mature in the near- to medium-term, there are significant risks for companies to invest in recycling projects without the right incentives, especially if other less risky projects could use that capital. Eligible machinery and equipment should include, but not be limited to, feed material receipt and storage, product drying and storage, and general infrastructure like pumps, tanks and filtration units.

The Government of Canada has successfully expanded the critical mineral exploration sector by implementing the Critical Minerals Exploration Tax Credit (CMETC), fostering increased grassroots exploration specifically for certain critical minerals in Canada.

Similarly, the downstream portion of the value chain has experienced significant strategic government investment in OEMs – battery manufacturers and automotive plants. However, without an increase in critical mineral production within Canada, these plants will need to import their critical minerals feed from other potentially higher risk mining jurisdictions, often lacking the high levels of sustainability performance found in Canada. This not only poses challenges for resource security, but Canada also risks missing out on the economic growth and job creation opportunities that increased domestic production would otherwise provide.

To achieve the goal of accelerating critical minerals production within shorter timelines, the Government of Canada, through the CTM-ITC, must ensure that mine expansions and satellite mines can effectively leverage this incentive. While assisting existing operations with the purchase of new machinery and equipment alone will not significantly increase their production of critical minerals, the inclusion of mine development costs, such as shafts (sinking), ventilation, and underground vertical and lateral development, and infrastructure, will make a marked difference in their final investment decisions to move forward with a project. The expansion of allowable expenses we are seeking includes all physical assets directly associated with the production from the project (this isn’t funding administrative or overhead costs). In fact, the investment in this infrastructure is more labor-intensive and, therefore, is a significant flow to more Canadian and local content.

As a global comparison, other countries have recognized that their support needs to be broad enough to help mining companies offset their capital costs. For instance, Japan’s Ministry of Economy, Trade, and Industry will subsidize up to half the cost of mine development and smelting projects of important minerals invested in by Japanese companies. Lithium, manganese, nickel, cobalt, graphite, and rare earths are the main targets for support. A stipulation will also require a certain amount of the output to be supplied to Japan. In the event of a supply crunch, participating companies will be called on to make every effort to provide the full amount. Currently dependent on countries such as China for many important minerals, Japan aims to diversify its supply network.

It should be emphasized that the CTM-ITC is not a general subsidy to companies; it is related to direct spending by the company on physical assets. For a mining operation to claim the refund, they must invest the appropriate capital in their operations to increase critical mineral production. If a mining operation decides not to invest in their project or expand current operations due to insufficient eligibility for the CTM-ITC, it represents foregone government revenue in the future. Spending nothing on projects and expansion yields no government returns.

Furthermore, these expenditures are not covered by any Government of Canada targeted funding program (e.g., Critical Minerals Infrastructure Fund, Strategic Innovation Fund) or strategic funding (e.g., Canada Infrastructure Bank, Canada Growth Fund). Therefore, if the CTM-ITC is not designed in a competitive manner to attract capital, there will be no incremental mineral production or additional investment.

The Government of Canada may consider establishing a requirement for mining companies leveraging the tax credit to demonstrate an increase in their production and recycling of critical minerals when compared with what it would have been without investments. This would serve as a robust signal, both to Canadians and the global community, that the CTM-ITC’s development and implementation are effectively achieving their intended goal of fostering increased Canadian critical mineral production and recycling.

Recommended approach

MAC recommends including the following additional expenditures, in addition to those already included in the draft legislation for the CTM-ITC:

• Eligible expenses should encompass all mine development-related expenditures, not limited to machinery and equipment.
• Eligible expenses should include all costs associated with installing and commissioning the new machinery and equipment.
• To acknowledge all the cost of property related to a new mine, CTM property should be extended to include all property included in subparagraphs (g), (l), (k), (m) and (t) of Class 10 as described in Schedule II of the Income Tax Regulations acquired for the purpose of gaining or producing income from a mine that includes primarily qualifying mineral activity.

Metals requirement: The case for copper

As one of the six priority critical minerals, copper is crucial for the energy transition as a key component in renewable energy technologies, electric vehicles, and efficient power grids. Its high conductivity and durability play a pivotal role in enhancing the efficiency and reliability of clean energy systems, making copper indispensable for advancing the goals of a sustainable energy future.

However, due to Canada’s geological formations, valuable metals such as copper, zinc, lead, molybdenum, gold, and silver often occur in the same deposit. Emphasizing the prevalence of polymetallic ore bodies is essential, as these complex deposits not only present economic opportunities but also play a crucial role in supporting the clean energy transition.

The CTM-ITC’s purpose is to spur as much copper production as possible, given copper’s significance in renewable technologies, electric vehicles, and power grids, ensuring environmental sustainability. However, a threshold of ‘all or substantially all’ percent would effectively fail to incentivize any new copper production. As the table in Annex A illustrates, only one project would be eligible if the CTM-ITC threshold were to be set at 90% of value of production.

While other polymetallic deposits such as nickel/cobalt in the Sudbury basin may meet such a high threshold, copper does not. Hence, it is crucial to establish an eligibility threshold that also enables copper projects to move forward. While the concentration of gold in a copper deposit may offer some benefits to a copper mining project, it should not be considered as favorable as a pure gold mine. Having gold as a credit in a copper project is not akin to opening a gold mine; it is still considered a copper project, especially when copper represents the majority of the metal value in a respective deposit. Additionally, in British Colombia and the Yukon, copper and gold are commonly found together in porphyry deposits and sometimes with molybdenum, another critical mineral used in steel production but not one of the six priority minerals.

In determining an appropriate threshold, it would be prudent to align with other critical minerals tax incentives/policies and the Income Tax Act. Specifically, the CMETC requires the signed certificate of a qualified professional engineer or professional geoscientist to attest that the mineral deposit(s) being explored will contain primarily (i.e., more than 50%) critical minerals.

In the case of the CMETC, critical minerals are not defined as the six priority critical minerals but 15: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metal, and uranium.

Recommended approach

• MAC recommends that the Government of Canada, in the spirit of policy and taxation coherence across critical minerals tax programming, remain aligned. From exploration tax policy to mine development tax policy and critical mineral recycling tax policy, there should not be a different approach and unfair treatment of projects throughout the critical mineral value chain.
• MAC recommends that the Department of Finance and the Canada Revenue Agency collaborate with subject-matter experts, such as mine engineers and geoscientists at Natural Resources Canada, to address the practical application of the eligibility threshold when multiple minerals are being produced.
• The CTM-ITC should take the same approach in eligibility requirements, as is stated in the Canada Revenue Agency’s form for the CMETC Certificate of Qualified Professional Engineer or Professional Geoscientist, and consideration should be given to expanding the eligible priority critical minerals to include the CMETC’s list of 15, as outlined below.
  • Provide a brief explanation of why it is expected that the mineral deposit(s) being explored will contain primarily (i.e., more than 50%) critical minerals.
  • Critical minerals include: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metal and uranium.

Ongoing consultation and collaboration with the mining industry are pivotal in refining the design and execution of the CTM-ITC. This collaborative dialogue strengthens alignment with Canada’s Critical Minerals Strategy and enhances our nation’s capacity to remain globally competitive in clean technology and critical mineral supply chains.