Principal Issues: Can carbon be stored in an underground mineral formation?
Position: Yes.
Reasons: Accepted industry meaning of the term “geological formation” and legislative purpose.
XXXXXXXXXX 2024-103806 Boriana Christov
October 31, 2024
Re.: Meaning of the term “geological formation”
This letter is in response to your email of September 26, 2024 in which you asked us to clarify the term “geological formation” as it is used in the definition of “dedicated geological storage” in paragraph 127.44(1) of the Income Tax Act (footnote 1) (the “Act”). Your specific question is whether captured carbon can be stored in an underground mineral formation that is not a geological reservoir.
OUR COMMENTS
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Unless otherwise stated, all legislative references herein relate to the provisions of the Act.
Background
Certain expenses incurred in the context of a carbon capture, utilization and storage (“CCUS”) project may qualify for a refundable tax credit (“CCUS-ITC”). A CCUS-ITC is available for a CCUS project when 10% or more of the captured carbon is used for an “eligible use” as defined in paragraph 127.44(1):
eligible use means
(a) the storage of captured carbon in dedicated geological storage; or
(b) the use of captured carbon in producing concrete in Canada or the United States using a qualified concrete storage process.
Your question concerns the meaning of the term “dedicated geological storage” in paragraph (a) and, more specifically, you are asking us whether this term refers only to an underground reservoir. For example, you are asking whether carbon storage in an underground serpentinite deposit could potentially qualify as “dedicated geological storage”, given that all other requirements are met.
Dedicated geological storage
The term “dedicated geological storage” is defined in paragraph 127.44(1) of the Act as follows:
dedicated geological storage means a geological formation that is
(a) located in a designated jurisdiction;
(b) capable of permanently storing captured carbon;
(c) authorized and regulated for the storage of captured carbon under the laws of the designated jurisdiction; and
(d) a formation in which no captured carbon is used for enhanced oil recovery.
The key question is whether CO2 stored in a mineral formation that is not a reservoir will be considered as stored in a “geological formation”. It should be noted that the definition of “dedicated geological storage” does not refer to an underground reservoir.
Geological formation
The term “geological formation” is not defined in the Act. The North American Commission on Stratigraphic Nomenclature explains the concept of “geological formation” as follows:
Article 24. − Formation. The formation is the fundamental unit in lithostratigraphic classification. A formation is a body of rock identified by lithic characteristics and stratigraphic position; it is prevailingly but not necessarily tabular and is mappable at the Earth’s surface or traceable in the subsurface.
Based on the above and our consultations with Natural Resources Canada, we are of the view that a “geological formation” will be an identifiable rock body with stable lithic characteristics that distinguish it from adjacent rock bodies and that occupies a particular position in the rock layers (the stratigraphic column). A formation may be mapped on the Earth’s surface or traceable underground. In general terms, a formation can be distinguished on the basis of the identification of a rock unit that has specific internal characteristics that make it different from neighbouring units.
CONCLUSION
For the purposes of the definition of “dedicated geological storage” in subsection 127.44(1), we are of the view that a geological formation is not limited to underground reservoirs but could instead include rock bodies with the characteristics described above.
We hope that you find our comments of assistance.
Best regards,
Kimberley Wharram
Manager
Resource Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 R.S.C. 1985, c. 1 (5th Supp.).