Penalty for Non-Compliance Could Be 50% of the ITC
Author: Rachelle Lynne-Davies, P.Eng.
The third in a series of ITC blogs from Compass Energy Consulting
- Making Sense of the Federal ITC Legislation
- Making Sense of the Federal ITC Labour Requirements
- Penalty for Non-Compliance Could Be 50% of the ITC — This Blog
Where the incentive claimant claims the regular tax credit rate of 30%, but it is determined that the labour requirements are not met, there are financial penalties incurred by the incentive claimant which will be added to the tax payable for the installation taxation year. It is important to note that the financial penalties are significantly different whether or not gross negligence is determined to have caused the non-compliance.
Assuming gross negligence was not a factor, non-compliance with the prevailing wage requirement results in a financial penalty equivalent to $20 for each day in the installation tax year that a covered worker was not paid the prevailing wage.
EXAMPLE
Let’s assume it was determined that the incentive claimant that claimed the regular tax credit rate for the installation tax year did not pay 75 covered workers the correct prevailing wage for their labour hours on-site for a period of 6 months from Jan 1 , 2024 to June 30, 2024.
The financial penalty equivalent to $20 x 126 working days x 75 covered workers = CAD $189,000 would be added as tax payable for the installation tax year. It is important to note that the incentive claimant’s eligibility for the regular tax credit rate of 30% is not affected by this marginal non-compliance.
Again assuming gross negligence was not a factor, non-compliance with the apprenticeship requirement results in a financial penalty for the claim year equal to the following: $50 x (A – B), where A is the total number of hours of labour required to be performed by apprentices registered in a Red Seal trade for the installation tax year, and B is the total number of actual hours performed by apprentices.
EXAMPLE
Let’s assume it was determined that the incentive claimant that claimed the regular tax credit rate for the installation tax year did not meet the 10% apprenticeship requirement. The target apprenticeship percentage was 10,000 hours but only 9,455 hours were performed. For clarity, there were no applicable laws or clauses of an eligible collective agreement that prevented the incentive claimant from meeting the 10% apprenticeship requirement.
The financial penalty equivalent to $50 x (10,000 – 9,455) = CAD $27,250 would be added as tax payable for the installation tax year. Again, it is important to note that the incentive claimant’s eligibility for the regular tax credit rate of 30% is not affected by this marginal non-compliance.
If it is determined by the Minister that the non-compliance was known or the result of gross negligence, the financial penalties are more severe. The incentive claimant will not be eligible for the regular tax credit rate and will only be entitled to not more than the reduced tax credit rate of 20%. Additionally, the incentive claimant is liable to a penalty for the claim year equal to the following: 50% x (A – B), where A is the amount of tax credit claimed at the regular tax credit rate, and B is the amount of tax credit that the incentive claimant would be entitled to claim at the reduced tax credit rate. This penalty amounts to 5% of the total tax credit amount expected through the Clean Tech ITC at the regular tax credit rate. Together, the financial penalties sum to 50% of the original expected refundable tax credit.
EXAMPLE
For a 100MW wind farm located in Saskatchewan, which has eligible capital costs of CAD $200 million, the expected Clean Tech ITC at the regular tax credit rate is expected to be CAD $60 million.
Assuming the regular tax credit rate was claimed, but the Minister determined that non-compliance was the result of gross negligence, the taxpayer would only be eligible for the reduced tax credit rate, a reduction of $20 million and an additional financial penalty of $10 million for gross negligence could be applied. This is a total financial penalty of $30 million, or 50% of the original expected ITC.
Financial penalties for non-compliance should be avoided altogether. A structured compliance plan will set a strong foundation to ensure you are able to realize the full value of the ITC without risk of claw backs due to non-compliance.
The Need for Compliance Management Support
It would be detrimental to project stakeholders to incur additional financial penalties for non-compliance whether it is gross negligence or an honest mistake. Mismanagement of the compliance activities to meet the labour requirements is an avoidable error.
The labour and apprenticeship requirements give rise to the need for compliance planning, monitoring, and data management of evidence.
Why Compass Energy Consulting?
Founded in 2011, Compass has been providing regulatory and compliance support to the renewable energy marketplace throughout Canada and the Northeastern U.S. for over a decade. Compass’ founders helped to design some of the largest Domestic Content compliance obligations for renewable energy procurements, like those found in Ontario’s Feed-in Tariff program, and our team of consultants help developers participate and win in some of the largest procurements, like NYSERDA’s Tier 1 REC RFP.
Compass is uniquely positioned to provide a turn-key compliance, monitoring, and audit service due to our experience providing these types of services to over 200 MW of projects under Ontario’s Feed-in Tariff 1 and 2 Domestic Content compliance regime. Our compliance assessments were provided for project owners but importantly were relied upon by project lenders to ensure projects satisfied this critical and binary contractual obligation.
Compass Energy Consulting is your insurance policy for your ITC. Feel free to reach out to me at rachelle@compassenergyconsulting.ca to discuss further.
Check Out Our Other Blogs in the ITC Series
- Making Sense of the Federal ITC Legislation
- Making Sense of the Federal ITC Labour Requirements
- Penalty for Non-Compliance Could Be 50% of the ITC — This Blog