CCUS Tax Credit Extended to EOR: 2026 Rates & Rules

This article is for informational purposes only and does not constitute tax or financial advice. Consult a qualified accounting professional before making any tax or financial decisions.

— Quick Answer

For the past four years, Ottawa told carbon capture project sponsors a hard “no” when they asked whether enhanced oil recovery could qualify for the federal CCUS tax credit. On April 28, 2026, that answer changed.

The Spring Economic Update 2026 proposes to extend the Carbon Capture, Utilization and Storage Investment Tax Credit — known as the CCUS ITC — to projects that store captured CO₂ through enhanced oil recovery, or EOR. The change delivers on a commitment the federal government made to Alberta in a memorandum of understanding signed November 27, 2025, and reverses an explicit EOR exclusion from the 2025 federal budget.

If you advise clients in the energy sector, hold investments in Western Canadian producers, or are simply trying to keep track of Canada’s expanding stack of clean economy tax credits, this guide explains what the rules say, who can claim, and what the half-rate structure means for project economics.

— Quick Start: Pick Your Path

This article touches several audiences. Use the path below that matches your situation, then read the linked sections in depth.

• →You operate a CCUS project in Alberta, British Columbia, or Saskatchewan. Read every section — the proposed EOR rules may change your project tax position for expenditures from April 28, 2026 onward.
• →You are an investor or shareholder in a Western Canadian energy producer. Focus on “What Changed” and “Standard vs EOR Rates” to understand how the credit affects after-tax project returns.
• →You advise an incorporated client with energy-sector exposure or manage a holding company structure. Pay close attention to “Step-by-Step” and “Common Mistakes” so you can spot issues in tax planning conversations.
• →You run a business outside the energy sector and are tracking Canada clean economy tax credit landscape. The “How the CCUS ITC Works” and “FAQ” sections provide context without overwhelming detail.

— How the CCUS Investment Tax Credit Works

The Carbon Capture, Utilization and Storage Investment Tax Credit is a refundable federal tax credit for businesses that build out carbon capture infrastructure in Canada. “Refundable” means the credit pays out in cash if it exceeds the corporation tax owing — unlike a non-refundable credit, which only reduces tax payable.

The credit is governed by section 127.44 of the Income Tax Act and applies to eligible capital expenditures incurred from January 1, 2022 to December 31, 2040. Before the Spring 2026 Update, only two uses of captured CO₂ qualified: dedicated geological storage in a designated jurisdiction, or storage in concrete.

Three equipment categories carry different rates. Direct air capture equipment receives 60%, other capture equipment 50%, and transportation, storage, and use equipment 37.5%. These standard rates apply to expenditures through the end of 2035, then halve for the remaining years through 2040.

Two structural rules matter for everyone considering a claim. First, only a taxable Canadian corporation can claim the credit — sole proprietors and partnerships do not qualify directly. Second, prevailing-wage and apprenticeship labour requirements must be met to receive the maximum rate; falling short reduces the rate by 10 percentage points.

For broader context on the federal clean economy stack, see our overview of Canada clean economy tax credits.

— What Changed in the Spring 2026 Economic Update

The Spring Economic Update 2026, tabled April 28, 2026, proposes to add enhanced oil recovery as an eligible use of captured CO₂ under the CCUS ITC. The rule would take effect for expenditures incurred from April 28, 2026 — but the underlying legislative amendments have not yet received Royal Assent as of mid-2026.

The change formalizes a commitment Ottawa made to Alberta in the memorandum of understanding signed November 27, 2025. It also reverses an explicit position from the Federal Budget 2025, which had stated that EOR would not be eligible for the credit.

Two practical points matter for readers tracking this carefully. First, the federal government has confirmed the effective date as April 28, 2026 — so once enacted, the rules apply retroactively to expenditures from that date forward. Second, the legislative amendments to section 127.44 are still pending, meaning final claim mechanics may shift slightly before they reach the Income Tax Act.

The update goes slightly further than EOR alone. The Spring Update also proposes to recognize EOR as a form of CO₂ storage for the Clean Hydrogen Investment Tax Credit and the Clean Electricity Investment Tax Credit, which interact with CCUS for combined projects. The shift brings Canada closer to the United States, where 45Q credits already apply to EOR.

— Standard CCUS Rates vs EOR Rates: Side-by-Side

EOR rates under the proposed CCUS ITC extension are exactly half the rates that apply to dedicated geological storage or concrete storage. The rationale is straightforward: EOR projects generate incremental oil revenue, so Ottawa argues the federal subsidy can be lower while still attracting investment.

The half-rate structure applies uniformly across all three equipment categories. A second halving applies for expenditures from 2036 to end of 2040: EOR rates fall to 15%, 12.5%, and 9.375%. Project sponsors typically need to weigh expenditure timing carefully to capture the higher pre-2036 rates.

A pro-ration rule applies when the same equipment is used for both dedicated storage and EOR. In that case, half of the CO₂ intended for EOR storage counts toward the project eligible-use threshold.

— Step-by-Step: How to Claim the CCUS ITC for an EOR Project

Claiming the CCUS ITC for an EOR project means confirming jurisdiction, identifying equipment categories, applying the half-rate, pro-rating dual-use equipment, meeting labour requirements, filing with the corporate tax return, and tracking actual CO₂ delivery against projections.

The seven steps below assume the project is operated by a taxable Canadian corporation and that legislative amendments to section 127.44 have received Royal Assent.

1. 1
   Confirm the host jurisdictionThe host jurisdiction must have regulations ensuring at least 95% permanent CO₂ storage. Alberta, British Columbia, and Saskatchewan currently meet this test; other provinces do not.
2. 2
   Identify equipment categoriesDetermine which equipment category each expenditure falls under. Direct air capture, other capture, and transportation/storage/use each carry different rates.
3. 3
   Apply the EOR rateApply the EOR rate, which is half of the standard rate for the same equipment category. A 2026 expenditure on “other capture” equipment qualifies at 25%, not 50%.
4. 4
   Pro-rate dual-use equipmentWhen equipment is used for both standard storage and EOR, half of CO₂ intended for EOR counts toward the eligible-use calculation.
5. 5
   Meet labour requirementsConfirm that prevailing-wage and apprenticeship labour requirements are met for the project. Otherwise the rate drops by 10 percentage points across the project.
6. 6
   File on the T2 returnClaim the credit on the corporation T2 return using the relevant clean economy ITC schedule. Because the credit is refundable, any excess generally pays out in cash. Familiarity with corporate tax rates in Canada helps frame how the credit interacts with regular tax payable.
7. 7
   Document for the recovery mechanismMaintain documentation supporting projected CO₂ delivery. The recovery mechanism under Part XII.7 of the Income Tax Act applies if actual CO₂ sent to EOR falls short of projections.

— Common Mistakes to Avoid

Most CCUS ITC mistakes for EOR projects come from one of two sources: assuming the rules are already enacted, or treating the EOR regime as identical to standard CCUS. The six items below cover the issues most likely to surface in a tax planning conversation.

• →Assuming the EOR rules are already enacted. The Spring 2026 Update is a proposal; section 127.44 amendments remain pending as of mid-2026.
• →Confusing standard CCUS rates with the half EOR rates. EOR rates are exactly 50% of standard across all three equipment categories.
• →Overlooking the 95% permanence test. EOR projects outside Alberta, British Columbia, and Saskatchewan do not currently qualify.
• →Underestimating the recovery mechanism. Actual CO₂ sent to EOR must match projections, and shortfalls can trigger a clawback under Part XII.7.
• →Failing to pro-rate dual-use equipment. When equipment serves both standard storage and EOR, the eligible-use percentage must reflect actual usage.
• →Treating the CCUS ITC as interchangeable with the Clean Technology ITC, Clean Hydrogen ITC, Clean Electricity ITC, or SR&ED tax incentives. Each has distinct eligibility, rates, and filing mechanics.

— Frequently Asked Questions

This article is for informational purposes only and does not constitute tax or financial advice. Consult a qualified accounting professional before making any tax or financial decisions.

Sources & References

1. Department of Finance Canada. 2026 Spring Economic Update, April 28, 2026. canada.ca
2. Canada Revenue Agency. Carbon Capture, Utilization and Storage Investment Tax Credit. canada.ca CCUS ITC guidance
3. Natural Resources Canada. CCUS Investment Tax Credit — Technical Guidance. natural-resources.canada.ca
4. Government of Canada and Government of Alberta. Canada-Alberta Memorandum of Understanding on Energy, Emissions Reduction and Indigenous Participation, November 27, 2025.
5. Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)), section 127.44 and Part XII.7. laws-lois.justice.gc.ca