Regulations Amending the Income Tax Regulations (Battery Assembly and Manufacturing Production Support): SOR/2024-9

Canada Gazette, Part II, Volume 158, Number 4

Registration
SOR/2024-9 February 2, 2024

INCOME TAX ACT

P.C. 2024-77 February 2, 2024

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending the Income Tax Regulations (Battery Assembly and Manufacturing Production Support) under section 221footnote a of the Income Tax Act footnote b.

Regulations Amending the Income Tax Regulations (Battery Assembly and Manufacturing Production Support)

Amendment

1 Section 7300 of the Income Tax Regulations footnote 1 is amended by striking out “or” at the end of paragraph (c.1), by adding “or” at the end of paragraph (d) and by adding the following after paragraph (d):

Coming into Force

2 These Regulations come into force on the day on which they are published in the Canada Gazette, Part II.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The amounts payable as production-based support for electric vehicle (EV) batteries under the special contribution agreements, entered into by the Government of Canada and NextStar Energy Inc. (NextStar) and 1000511515 Ontario Inc. (PowerCo), respectively, before December 31, 2023 (the Contributions) would, in the absence of a regulatory amendment, be subject to income tax under the Income Tax Act (the Act). The Government of Canada is contractually obligated to provide support on a tax-neutral basis, which can be effected either by (a) grossing up the Contributions to cover the tax liability, or (b) exempting the Contributions from income tax by including them as prescribed amounts in section 7300 of the Income Tax Regulations (the Regulations).

Background

The U.S. Inflation Reduction Act (IRA) — specifically the Advanced Manufacturing Production Credit (AMPC) — is having a transformational impact on the global race to attract battery manufacturing capacity. To consider large battery manufacturing projects in Canada, companies are now demanding equivalent government support to what they could receive in the United States, including the requirement that government support be provided on a tax-neutral basis.

The Government of Canada entered into special contribution agreements with NextStar (July 2023) and PowerCo (May 2023), according to which the Government of Canada has agreed to provide support, in the form of production-based payments, for battery manufacturing and assembly (in relation to EV batteries) undertaken in Ontario. The Government also negotiated a cost-sharing agreement with the province of Ontario in respect of the PowerCo and NextStar agreements.

In the course of the negotiations of the special contribution agreements, it was determined that the Contributions received by NextStar and PowerCo would be taxable as government assistance. However, the parties agreed that the Contributions would be made on a tax-neutral basis, requiring the Government of Canada to either (a) gross up the Contributions to cover the tax liability or (b) exempt the Contributions from tax by including them in the Regulations as prescribed amounts.

Objective

To ensure that the Contributions are exempt from tax under the Act and avoid the cost associated with negotiating the gross-up.

Description

The Regulations Amending the Income Tax Regulations (Battery Assembly and Manufacturing Production Support) add to the list of prescribed amounts in the Regulations an amount paid as production-based support for EV batteries under the special contribution agreements, entered into by the Government of Canada before December 31, 2023. This will exempt the Contributions from tax under the Act.

Regulatory development

Consultation

The effect of the regulatory amendment was discussed with the impacted stakeholders during the negotiation of the special contribution agreements. There are no other stakeholders to consult.

Modern treaty obligations and Indigenous engagement and consultation

The regulatory amendments are not expected to impact potential or established Indigenous or treaty rights, which are recognized and affirmed in section 35 of the Constitution Act, 1982.

While there are no known modern treaty implications, the agreements each provide that the payment of the contribution is conditional upon His Majesty satisfying any obligation that it may have to consult with or accommodate any Indigenous groups which may be affected by their terms.

Instrument choice

In order to operationalize the terms of the agreements that the Contributions be made on a tax-neutral basis, it is necessary to either (a) gross up the Contributions to cover the tax liability or (b) include the Contributions as prescribed amounts in section 7300 of the Regulations for the purpose of paragraph 12(1)(x) of the Act.

The regulatory amendment was chosen as it is the more cost-effective option.

Regulatory analysis

Benefits and costs

The regulatory amendment exempts the Contributions from income tax. The cost of foregone federal tax revenue associated with the regulatory amendment is estimated to be about $2.1 billion over ten years, starting in 2024–2025, which is the estimated amount of federal corporate income tax otherwise payable by the recipients on the aggregate Contributions.

The Government of Canada is contractually obligated to provide funding under the special contribution agreements on a tax-neutral basis. Therefore, in the absence of the regulatory amendment, the Government would have been required to gross up the Contributions to offset the federal and provincial income tax payable by the recipients.

The cost of grossing up the Contributions would be at least as high as the cost of exempting them from taxation through the regulatory change. Proceeding with the regulatory amendment also eliminates the requirement to determine the amount of the gross-up in each year production support is paid.

Small business lens

The entities impacted by the amendment are not small businesses; therefore, the small business lens does not apply.

One-for-one rule

The one-for-one rule does not apply, as there is no incremental change in the administrative burden on businesses and no regulatory titles are repealed or introduced. This is because the recipients of the Contributions are already required to determine their income for accounting and tax purposes and report their taxable income on a tax return each year. The regulatory change only impacts the amount reported, not the effort required to report. As such, there is no impact on this existing administrative burden.

Regulatory cooperation and alignment

The regulatory amendment does not require or envision regulatory cooperation and alignment. However, the need for the change is in response to the U.S. IRA, specifically the AMPC, which is having a transformational impact on the global race to attract battery manufacturing capacity.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

No gender-based analysis plus (GBA+) impacts have been identified in association with these amendments.

Implementation, compliance and enforcement, and service standards

The Act provides the necessary compliance mechanisms for enforcement of the Regulations. These mechanisms allow the Minister of National Revenue and the Canada Revenue Agency to assess and reassess tax payable, conduct audits and seize relevant records and documents.

The exemption under Regulations Amending the Income Tax Regulations (Battery Assembly and Manufacturing Production Support) comes into force upon publishing in the Canada Gazette. The exemption will apply to all Contributions paid under the special contribution agreements. Payments under the special contribution agreements could begin as early as 2024.

Contact

Katharine Skulski
Tax Legislation Division
Department of Finance
James Michael Flaherty Building
90 Elgin Street
Ottawa, Ontario
K1A 0G5
Telephone: 613‑299‑9608