Extending Canada’s Accelerated Capital Cost Allowance Classes: In Time and Scope

Canadian electric utility companies are faced today with a double-edged financial sword. They must invest to meet the increased need for clean electricity that is required for Canada to reach its climate goals. They must also ensure the safe, secure, and reliable delivery of electricity, even as the escalating effects of climate change present new challenges to the grid. Canadians expect their electricity to be increasingly clean, while maintaining current levels of affordability and reliability.

Canada already has one of the cleanest electricity grids in the world. More than 80% of our power is non-emitting and the electricity sector has already reduced greenhouse gas emissions by almost half since 2005. But very soon, we are going to need much more power. To meet our emissions-reduction targets, Canada’s clean energy production will need to double or triple to support the electrification of sectors like transportation and industrial processes.

If you’re thinking “wow, it must cost a lot of money to decarbonize, expand, and reinforce all at the same time”, well you’re right. The Conference Board of Canada has pegged the needed investment at $1.7 trillion over the next few decades. Here’s one small and practical way that the federal government can help investor-owned electricity companies as they bring us closer to our climate goals: tax depreciation.

Tax depreciation is a mechanism for writing off some amount of an asset’s cost over its useful life against the profits generated by the asset owner. Depreciation is thus a useful mechanism to encourage investments for specific types of assets since increasing depreciation rates reduces taxable income which, in turn, saves money. Accelerated depreciation allows a company to greatly reduce its taxable income in current years, further incentivizing the purchase of new assets.

In Canada, depreciable property is split into multiple classes with differing rates of depreciation, called Capital Cost Allowance (CCA) classes. CCA classes 43.1 and 43.2 are accelerated and have high depreciation rates. Some properties are even eligible for an enhanced first-year allowance providing a 100% deduction. These classes were introduced to encourage businesses to invest in clean energy generation and energy conservation equipment. They further incentivize such investments by allowing the asset owner to issue flow through shares, which work by allowing a business with more tax deductions than revenue to ‘flow’ unused tax deductions on to shareholders. In this way, investors can support clean energy and reduce their own tax burdens: a win-win.

Incentivizing businesses to invest in clean energy technology is a clear and practical way to help us achieve our climate goals. ACCA classes 43.1 and 43.2 are doing this, but are limited in two critical ways: Firstly, in the too narrow scope of eligible properties, and secondly in duration, as 43.2 is set to expire in 2024. Below I argue for specific expansions of these classes in both duration and scope.

Time: ACCA class 43.2 should be extended to include properties acquired before 2031

In 1994, shortly following Canada’s ratification of the UN Framework Convention on Climate Change at the Rio Earth Summit, the accelerated CCA class 43.1 was introduced. This class provides an accelerated depreciation rate of 30% for certain properties to encourage businesses to invest in clean energy generation and energy conservation equipment. In 2005, Canada committed to reducing GHG emissions as part of the Kyoto Protocol. The same year, the federal government introduced CCA class 43.2. The new class further incentivises clean energy investment with a depreciation rate of 50% for properties eligible for class 43.1 that are acquired before 2025.

In December 2020, the federal government made a new climate commitment: achieving net zero greenhouse gas emissions by 2050, with a 30% reduction in emissions from 2005 levels by 2030 as an interim target.

To meet these escalating goals, Canada’s electric utilities are expected to invest heavily in clean energy generation to meet the load demands of the necessary increases in electrification. These investments can be encouraged and supported by the federal government by following the pattern above and extending the favourable depreciation rate of ACCA Class 43.2 to apply to properties acquired before 2031, or further.

Scope: ACCA classes 43.1 and 43.2 should be extended to include Smart Grid Technology

Classes 43.1 and 43.2 include property that will help to decarbonize, decentralize, and diversify (3Ds) electricity production in Canada. Technologies in these categories help to make our energy cleaner, as well as more reliable in the face of increasingly common extreme events. Specified eligible properties include geothermal energy equipment, electric vehicle charging equipment, electrical energy storage equipment, solar generation equipment, heat recovery equipment, and many more technologies for clean generation and energy conservation. The only problem is that smart grid technology, which is essential to the 3Ds of clean electricity modernization, are not currently eligible for these classes.

Smart grid technology includes smart meters, power quality filters, grid communication devices, grid scale batteries or other energy storage, and behind the meter devices such as hot water tank controls. This equipment contributes to a reduction in greenhouse gas emissions through efficient energy management at all levels, from generation to household use. It is the key to a more diversified energy supply as grid automation and extension enables the integration of variable renewable generation and energy storage. Investments in the technology that maximizes grid integration, efficiency, and flexibility is essential for clean electricity modernization.

The modernization of our power system is necessary to support the increased grid capacity required for the electrification of heavily polluting sectors. Our electric utilities and others should be further encouraged and incentivized to invest in smart grid technology by making it eligible for favourable rates of depreciation.

References

A Timeline of Canadian Climate Change Commitments. (2021). Retrieved from https://www.oag-bvg.gc.ca/internet/English/sds_fs_e_41101.html

2019. Wadhera, J. Ayoub, M. Roy, “Smart Grid in Canada 2018”, 2019-066 RP-FIN DER-SGNETS, Natural Resources Canada, April 2019.