Canada has expanded its carbon capture incentive framework to include projects that use captured carbon dioxide for enhanced oil recovery (EOR), marking a change in how the federal tax credit applies to oil-linked storage.
The change, effective 28 April 2026 under the Spring Economic Update, delivers on a prior agreement between the federal government and Alberta and broadens eligibility under the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS ITC).
EOR brought into the credit system at lower rates
The CCUS ITC remains structured around capital spending on carbon capture, transport and storage equipment, with differentiated rates depending on the type of technology used. Under the existing framework, eligible projects receive:
- 60% for direct air capture equipment
- 50% for other capture equipment
- 37.5% for transport, storage and use equipment
These rates apply to spending through 2035, after which they are reduced by half for 2036 to 2040.
For the first time, carbon capture projects using enhanced oil recovery are now included, but at half the standard rates:
- 30% for direct air capture equipment
- 25% for other capture equipment
- 18.75% for transport, storage and use equipment
These rates also apply to spending through 2035, after which they are reduced by half for 2036 to 2040.
Stricter conditions on eligibility
Eligibility for enhanced oil recovery projects is subject to tighter conditions than other carbon storage pathways.
Capture and transport equipment, along with injection infrastructure, can qualify, but only where they are not primarily used for oil production. Projects must also demonstrate that carbon dioxide is permanently stored underground.
If emissions released during operations exceed 5% of captured volumes, the excess becomes ineligible for the credit. The framework also allows for a recovery of tax credits if actual carbon storage falls below projected levels.
Integration into other federal climate credits
The update also links enhanced oil recovery to other federal clean energy incentives.
Carbon dioxide stored through these projects will be recognised under the Clean Hydrogen Investment Tax Credit for emissions intensity calculations. It will also be treated as valid storage under the Clean Electricity Investment Tax Credit for qualifying natural gas systems, provided safeguards are met.
LNG incentives added alongside carbon capture changes
Alongside the carbon capture updates, the government introduced accelerated capital cost allowances for low-carbon LNG facilities.
To qualify, LNG plants must meet an emissions intensity threshold of 0.20 tCO2e/tLNG (tonnes of carbon dioxide equivalent per tonne of LNG produced annually). Eligible equipment can receive a 50% depreciation rate, while buildings qualify for 10%, subject to federal certification.
The measure applies to assets acquired from 4 November 2025 through the end of 2034 and is intended to encourage the development of lower-emission LNG within Canada’s broader industrial transition strategy.