Bill C‑269 adds a new section (127.431) to the Income Tax Act that grants taxable Canadian corporations a non‑refundable tax credit equal to 30% of the capital cost of qualifying heat recovery equipment acquired after December 31, 2025. The credit applies only where the equipment is used all or substantially all to recover heat from industrial processes and to convert that heat to generate energy; equipment whose primary function is energy generation is excluded.
The bill requires a prescribed form filed by the normal return due date and includes adjustments for government and non‑government assistance, rules for partnerships, limits for limited partners based on at‑risk amounts, and a five‑year recapture if equipment is repurposed, exported or disposed of.
The measure is narrowly targeted at industrial heat recovery and is layered into existing investment tax credit architecture (CCUS, clean technology, clean hydrogen, clean electricity credits). That layering, together with the assistance adjustments, partnership allocation rules and the recapture regime, creates immediate tax‑planning and compliance priorities for corporations, partnerships, equipment vendors and tax practitioners working with capital projects in heavy industry.
At a Glance
What It Does
Creates a new non‑refundable heat recovery tax credit equal to 30% of the capital cost of qualifying heat recovery equipment acquired after 2025, subject to filing a prescribed form and several adjustments. The capital cost rule strips certain capital cost reductions and requires downward adjustments for non‑government assistance; a five‑year recapture applies if the equipment is converted, exported or disposed of.
Who It Affects
Directly affects taxable Canadian corporations investing in industrial heat‑to‑energy systems, partnerships that hold such equipment, and limited partners whose credit allocations are constrained by at‑risk rules. It also matters to equipment manufacturers, project financiers and tax advisers involved in capital budgeting and transaction structuring.
Why It Matters
The credit targets a specific decarbonization technology rather than broad clean energy investments, so it will influence where companies allocate capital. Its interaction with existing ITCs and the partnership/allocation mechanics could change partnership design, tax‑ownership models and due diligence on government or private assistance received.
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What This Bill Actually Does
C‑269 inserts a discrete heat recovery tax credit into the Income Tax Act and builds a framework to integrate that credit into the existing ITC ecosystem. The statute defines qualifying heat recovery equipment as machinery acquired after December 31, 2025, used in Canada, and used all or substantially all to capture industrial process heat and convert it to energy; it excludes equipment whose primary role is energy generation.
The credit is non‑refundable and reduces tax otherwise payable, so corporations without current tax payable cannot immediately monetize it as cash.
Capital cost for the credit is subject to two key adjustments. First, the bill says the capital cost must be determined without reference to certain subsections (13(7.1) and 13(7.4)) that can otherwise double‑count or diminish capital cost calculations.
Second, capital cost must be reduced by any non‑government assistance actually received before or in the acquisition year, as well as by amounts the taxpayer is reasonably expected to receive in that year. If a previously expected non‑government assistance amount is repaid or ceases to be expected, the taxpayer must add that amount back to capital cost in the later year.Partnerships play a significant role: a partnership can be treated as if it were a taxable corporation for computing the credit, and then allocate that credit to members at fiscal year‑end.
The bill prevents members from allocating credits in amounts that are unreasonable relative to capital investment or services, and caps allocations to limited partners at their at‑risk amount. It also deems assistance received by a partner to belong to the partnership for credit computation and treats tiered partnership membership as flow‑through for allocation purposes.To prevent quick flips and ensure the credit supports durable industrial investment, the bill contains a five‑year recapture provision: if qualifying equipment is converted to a non‑heat‑recovery use, exported or disposed of within five calendar years, the previously claimed credit amount must be re‑added to tax payable.
The credit is also excluded where the equipment or an interest in it is part of a tax shelter under section 143.2. The measure applies to 2025 and subsequent taxation years, so projects with procurement or financing timelines around that date need to map eligibility and compliance.
The Five Things You Need to Know
The bill creates a 30% non‑refundable tax credit for qualifying heat recovery equipment acquired after December 31, 2025; the equipment must remain in the corporation’s control (not exported, sold or leased) through the taxation year to claim the credit.
Capital cost for the credit is calculated without reference to subsections 13(7.1) and 13(7.4) and must be reduced by any non‑government assistance received or reasonably expected in the acquisition year; repaid or no‑longer‑expected assistance is added back when that occurs.
Partnerships can compute a heat recovery credit at the fiscal‑period level and allocate it to members; the bill deems unreasonable allocations to be adjusted and caps limited partners’ allocations at their at‑risk amount.
If qualifying equipment is converted to another use, exported or disposed of within the five preceding calendar years after a credit claim, the entire amount of the claimed credit is added back to tax payable (recapture).
The credit cannot be claimed where the equipment or relevant interest is a tax shelter under s.143.2, and claiming requires filing a prescribed form by the corporation’s normal tax filing due date.
Section-by-Section Breakdown
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Definitions for the heat recovery credit
This subsection sets the key terms: at‑risk amount borrows the existing definition, non‑government assistance follows subsection 127(9), and qualifying heat recovery equipment is defined narrowly — acquired after Dec. 31, 2025, intended for exclusive use in Canada, used all or substantially all to recover industrial process heat and convert it to energy, and not previously used in Canada. The narrowness of these definitions will control eligibility at audit and define the universe of claimable assets.
Credit mechanics and claiming conditions
Establishes the core entitlement: a taxable Canadian corporation may deduct from tax otherwise payable an amount equal to 30% of the capital cost of qualifying equipment if a prescribed form with required information is filed on or before the return due date and the equipment hasn’t been exported, sold or leased before year‑end. The non‑refundable design means corporations with little or no tax payable will not receive a refundable cheque; the timing of the prescribed filing and year‑end possession are practical gating items for claimants.
Capital cost adjustments for assistance
Directs that capital cost for the credit be computed without reference to subsections 13(7.1) and (7.4) and be reduced by non‑government assistance actually received or reasonably expected in the acquisition year. This forces taxpayers and auditors to track promised private grants or vendor discounts as immediate capital cost reducers and creates valuation questions where expected assistance is conditional or contingent.
Partnership computation, allocation and limits
Provides a partnership regime: a partnership’s fiscal‑period credit is allocated to members as their share of the amount reasonably attributed to them; unreasonable allocation agreements are disregarded and replaced with a reasonable amount. Limited partners are capped by their at‑risk amount. The section deems assistance received by partners to be assistance to the partnership for credit computation and treats tiered partnership membership as direct membership for allocation purposes — mechanics that will affect deal terms, carried interests and sponsor structures.
Recapture, anti‑shelter rule and application year
Contains the five‑year recapture rule: if equipment claimed in any of the five preceding calendar years is converted, exported or disposed of, the earlier claimed credit is added back to tax payable. Subsection (12) excludes claims tied to tax shelters under s.143.2. The bill explicitly applies to 2025 and subsequent taxation years, making projects with 2025 procurement dates immediately relevant for eligibility and planning.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Energy‑intensive industrial corporations (e.g., pulp & paper, cement, steel): receive a capital subsidy that lowers after‑tax cost of installing heat recovery systems and improves project economics for onsite heat‑to‑energy projects.
- Taxable Canadian corporations that own and operate qualifying equipment: can directly reduce tax payable by 30% of capital cost when they have tax capacity, accelerating payback on decarbonization investments.
- Equipment manufacturers and suppliers of heat recovery and heat‑to‑power systems: likely see increased demand as buyers chase credit eligibility and favourable after‑tax returns.
- Partnership operating sponsors (general partners or active owners): can centralize the credit at the partnership level and allocate it in ways that enhance sponsor returns, subject to the reasonableness and at‑risk limits.
Who Bears the Cost
- The federal fiscal position: the credit represents foregone tax revenue concentrated on industrial capital projects; the scope of uptake will determine actual budgetary cost.
- Taxpayers and sponsors: administrative and compliance costs rise because they must track non‑government assistance, forecast expected assistance, file prescribed forms and maintain documentation for potential recapture within five years.
- Limited partners and small passive investors: face allocation caps tied to at‑risk amounts and may be unable to monetize credits they expected, affecting financing structures reliant on tax attributes.
- Canada Revenue Agency (CRA) and tax authorities: increased audit and interpretive workload over ‘‘all or substantially all,’’ valuation of expected assistance, partnership allocation disputes and recapture timing.
Key Issues
The Core Tension
The central dilemma is promoting rapid private investment in industrial heat recovery while preventing tax‑base erosion and abuse: generous, targeted credits accelerate decarbonization but invite complex layering with other credits, partnership allocations and assistance, forcing the law to choose between simplicity (broad, refundable supports) and anti‑abuse precision (detailed rules, adjustments and recapture) — each option helps one policy goal while complicating the other.
The bill tightly targets industrial heat recovery but leaves several implementation challenges unresolved. The phrase ‘‘all or substantially all’’ is standard statutory phrasing but invites fact‑intensive interpretation: is 80% use sufficient, or is the threshold effectively higher?
That determination matters for equipment that performs heat recovery alongside other functions (e.g., pre‑heating or combined heat and power adjuncts). Similarly, excluding equipment whose primary function is energy generation raises edge cases for cogeneration and ORC (organic Rankine cycle) units where heat recovery and energy production are intertwined.
The capital cost adjustment for ‘‘reasonably expected’’ non‑government assistance creates timing and valuation pressure. Claimants must forecast private grants, vendor discounts or contingent payments at acquisition year‑end; disputes with CRA over what is ‘‘reasonable’’ will likely become common.
Partnership allocation rules and the reasonableness backstop introduce negotiations over allocation methodology and documentation; sponsors will want clear safe harbours for allocating credits to equity vs. operating partners, but the statute provides none.
Finally, the five‑year recapture gives the government a blunt tool to prevent short‑term flips but also injects resale and secondary‑market risk. Buyers of used heat‑recovery systems or investors in modular heat equipment will need contractual protections and careful tax‑due diligence to avoid inheriting recapture exposure.
The non‑refundable nature of the credit means firms with low current taxable income cannot convert the credit into immediate cash support, which reduces attractiveness for some capital‑constrained firms.
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