Canada Expands CCUS Investment Tax Credit to Include Enhanced Oil Recovery

On April 28, 2026, the federal government released the Spring Economic Update, which proposes to formally expand the Carbon Capture, Utilization and Storage Investment Tax Credit (the CCUS ITC) to include enhanced oil recovery (EOR) as an eligible use of captured carbon dioxide (CO2). The expansion of the CCUS ITC delivers on a commitment first made in the Canada-Alberta Memorandum of Understanding signed on November 27, 2025 (the MOU), which committed the federal government to extend federal investment tax credits to encourage large-scale CCUS investments, including EOR. More information on the MOU can be found in our previous Insight: Canada and Alberta sign landmark agreement to advance energy, emissions reduction and Indigenous participation.

Background

The CCUS ITC is a refundable tax credit for eligible capital expenditures incurred in connection with qualified CCUS projects from January 1, 2022, to December 31, 2040. Prior to the Spring Economic Update, EOR was expressly designated as an “ineligible use” under the applicable legislation.

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The 2025 federal budget committed to not making EOR eligible for the CCUS ITC. However, shortly after that budget passed the House of Commons, the federal government reversed course in the MOU.

EOR Credit Rates

The effective CCUS ITC rates for EOR are set at one half of the standard rates, with the rationale that EOR projects generate additional revenue through incremental oil production. To implement this, half of the CO2 intended for storage through EOR is considered an eligible use in determining the credit amount.

The following sets out the effective CCUS ITC EOR credit rates for eligible expenditures incurred from April 28, 2026, to the end of 2035, alongside the standard CCUS ITC rates for dedicated geological storage:

• Capture equipment – direct air capture:

  • Standard rate: 60%
    
  • Effective EOR rate: 30%

• Capture equipment – all other:

  • Standard rate: 50%
    
  • Effective EOR rate: 25%

• Transportation, storage and use equipment:

  • Standard rate: 37.5%
    
  • Effective EOR rate: 18.75%
    

From 2036 to the end of 2040, all of these CCUS ITC rates are halved again.

Key Conditions

The Spring Economic Update imposes the following key conditions on the availability of the CCUS ITC for EOR projects:

• Jurisdictional designation – EOR will be an eligible use only in jurisdictions with sufficient regulations to ensure CO2 is permanently stored. Alberta, British Columbia and Saskatchewan are identified as provinces expected to meet this threshold. Ultimately, Environment and Climate Change Canada will formally designate eligible jurisdictions.

• Permanent storage requirement – EOR operations must be designated to permanently store a minimum of 95% of the CO2 intended for EOR storage. If CO2 released during operations exceeds the 5% allowance, a project will be subject to a recovery tax.

• Eligible equipment – Equipment for injection and storage of CO2 through EOR is eligible, unless all (or substantially all) of its use is to produce oil. Natural Resources Canada is expected to publish updated technical guidance on equipment eligibility.

• Mixed-use projects – Projects involving both dedicated geological storage and EOR will receive the credit on a weighted-average basis, full-rate for CO2 directed to geological storage and half-rate for CO2 directed to EOR, based on the project’s most recent project plan.

Competitive Implications

Mark Scholz, President of the Canadian Association of Energy Contractors, described the MOU, which discusses the inclusion of EOR in carbon capture credits, as a “game-changer” that would put Canada in a much better competitive position.

The move also brings Canada closer to alignment with the U.S., where the One Big Beautiful Bill Act (signed into law in mid-2025) increased the value of Section 45Q tax credits for EOR projects to create credit parity between CCUS-only and combined EOR/CCUS projects.

Industry Support: PTRC

The Petroleum Technology Centre (PTRC) has publicly expressed its support of the Government of Canada’s decision to allow EOR for CO2 within the scope of the CCUS ITC. PTRC is a Saskatchewan based not-for-profit corporation and world leader in CO2-EOR research. PTRC managed the Weyburn-Midale CO2-EOR program between 2000 and 2015, which is widely regarded as one of the most important projects in the world related to the storage and utilization of CO2 in a depleted oil reservoir. PTRC continues to expand its expertise through its management of the Aquistore deep saline CO2 storage project and its leadership in developing ISO international standards for CCUS.

What Comes Next

Canadian draft legislation has not yet been released in relation to the CCUS ITC for EOR. Businesses considering CCUS projects involving EOR should monitor the following developments:

1. Draft legislation implementing the expanded CCUS ITC
   
2. Updated technical guidance from Natural Resources Canada on equipment eligibility
   
3. Jurisdictional designations from Environment and Climate Change Canada
   
4. Provincial incentives, including Alberta’s Carbon Capture Incentive Program and Saskatchewan’s existing EOR incentive programs
   
5. CRA advance income tax rulings, which the Spring Economic Update has committed to prioritizing for clean economy investment tax credits
   

MLT Aikins LLP’s leading Energy and Taxation teams have extensive experience with all legal aspects of CCUS projects, including regulatory, procurement and contracting issues. We can assist your organization in navigating the expanded CCUS ITC framework and position projects to take advantage of both federal and provincial incentive programs.