This article provides an overview of the Canadian federal income tax considerations relevant to Canadian renewable and conservation expenses (CRCE). These provisions were originally introduced in the March 1996 Federal Budget as a new category of deductible expenses under Schedule II to the Income Tax Regulations. They have been updated several times in recent years, including in the February 2018 Federal Budget.
CRCE was invoked to place the "renewable energy sector" on an equal footing and a level playing field with the non-renewable resource sector namely, the oil, gas and mining sectors, by treating CRCE as a deductible pool of expense with tax treatment similar to that of Canadian exploration expense ("CEE") under Section 66 of the Income Tax Act (Canada) (the "Act"). As the upfront soft costs incurred in developing and exploring for oil and gas and minerals can be very expensive, the Act contains provisions that in many cases permit immediate deductions for such expenditures called CEE. Similar issues exist for developers/operators of environmentally friendly or otherwise known as "green" or renewable or next generation energy generation projects (such as wind, solar, run-of-river, high efficiency, cogeneration systems, environmentally friendly biofuels from landfill gas, wood waste or manures, etc.).
Before the creation of CRCE, development expenses could have been characterized as eligible capital expenditures or added to the cost of the equipment or property. In either case, there was a significant disincentive to undertaking speculative work in the "green" energy or "renewable energy sector". Now certain renewable energy-related development work, subject to certain specific exceptions as described in the regulations to the Act, is included in the definition of CRCE and is fully deductible when incurred and can be carried forward indefinitely.
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