Fear mounts over Japanese EV makers as Canada tightens tax incentives

Prime Minister Justin Trudeau is offering more tax breaks to automotive firms to put their electric vehicle factories in Canada, as companies including Honda and Toyota consider lucrative new investments.

Canada’s federal budget, released on Tuesday, unveiled a new 10 per cent tax credit on the capital cost of buildings used for EV manufacturing — but only if companies make a significant bet on locating other portions of their supply chains within Canada.

That tax credit, projected to cost C$1 billion by 2035, can be stacked on top of a 30 per cent tax credit for the equipment costs of EV manufacturers, a measure announced last year.

The budget document said the tax credit is meant to encourage companies to “choose Canada for more than one stage in the manufacturing process," which would create more jobs and “help cement Canada’s position as a leader in this sector."

The new tax incentive underscores a shift in the government strategy as it tries to keep pace with the US as a destination for manufacturers. Last year, Volkswagen, Stellantis and Northvolt all received massive production-subsidy packages in exchange for building their battery assembly plants in Canada.

But when it comes to Honda, which is considering a multibillion dollar EV project, the government is not offering another production subsidy deal, according to people familiar with matter. Instead, the government is hoping that the tax credits will be enough to land the investment.

Finance Minister Chrystia Freeland’s budget also introduces other programs meant to boost investment in energy and natural resources projects.

One is a C$5 billion program for Indigenous loan guarantees, which will see the federal government use its AAA credit rating to help Indigenous groups get better terms when borrowing money to buy stakes in projects.

Oil and gas assets are eligible — a significant move, as some Indigenous leaders and industry groups were worried that fossil fuel investments would be excluded.

The government is also aiming to speed up the permitting of natural resource projects, particularly those in the critical minerals sector. “It shouldn’t take over a decade to open a new mine and secure our critical minerals supply chains," the document says.

But there are still few details on how it will proceed. The budget promises an action plan to be released later this spring. It intends to set a target of five years or less to complete the assessment and permitting for “federally designated" projects, and a target of two years or less for simpler or less controversial projects that aren’t subject to a federal impact assessment.