Canada: Carbon Tax In Canada

Last Updated: December 2 2016
Article by Catarina Wong

Prime Minister Justin Trudeau took provinces by surprise on October 3, 2016 by announcing that they have until 2018 to adopt a carbon pricing scheme and implement a provincial carbon tax, or the federal government will step in and impose a carbon price for the provinces.

What is Carbon Tax?

Carbon tax is a levy on greenhouse gas emissions (GHG) generated from burning fuel that is harmful for our climate system. The carbon tax levy does not fix the environmental issues by itself, but it should encourage citizens to avoid it by choosing cleaner fuel alternatives or reducing fuel consumption by adopting new technology, thus reducing harm to the environment.

What is a "Cap-and-Trade" System?

In a cap-and-trade system, government puts a strict limit (or cap) on the overall level of carbon pollution from industry with a gradual reduction of that cap annually to reach a set carbon pollution target. As the cap decreases each year, it limits the level of GHG emission set by regulation, and forces polluters who exceed their emission quota to buy unused quota from other companies.

The pollution quotas are distributed by the government through an auction to create incentives for firms to reduce their GHG emissions and be able to sell rather than purchase pollution quotas. The carbon credits are traded in an open market similar to the stock exchange system where the market determines the price of quotas. (For example, a Hydro company earns carbon credits through the use of electric energy and polluters will be able to bid in an open market to purchase the unused carbon credits from the Hydro company to offset its GHG emission quota exceeding the regulated limit.)

The emission cap ensures that total pollution goes down and companies are given an economic incentive to reduce harmful GHG emissions and support clean energy.

B.C. Carbon Tax

The province of B.C. is the first province that has implemented carbon tax to-date (since July 1, 2008).

The B.C. carbon tax is revenue neutral, in that all the carbon tax receipts are recycled through tax reductions:
o Income tax credits for low income individuals
o Lowering the personal income tax rates for each of the two lowest tax brackets by 5%
o Providing northern and rural homeowners a benefit of up to $200 annually
o Lowering business taxes

B.C. Motor Fuel Tax and Carbon Tax Refunds

The final selling price of fuel at the gas pumps includes both the provincial motor fuel tax and carbon tax totaling more than 20 to 30 cents per litre depending on geographic regions within B.C.

There are numerous exemptions from B.C. Motor Fuel Tax and/or Carbon Tax available for various Industry Sectors (e. g., Farmers, Commercial Air and Marine Services, Logging and Mining Industries, Oil and Gas Industry, IFTA Common Carriers and Transportation Services, First Nation Individuals and Government, Diplomats and Foreign Consular Corp, Persons with Disabilities, etc.)

Certain operational activities are also exempt from B.C. Motor Fuel Tax and/or Carbon Tax, such as fuels sold or exported outside B.C., natural gas used in stationary engines (e.g., cement mixing truck, lawn mowers, construction crane, etc.), fuel used in logging and mining operations, fuel used in oil and gas or pipeline operations, fuel used in aluminum smelting operations, etc.)

Alberta Carbon Tax

Alberta's carbon levy will be implemented on January 1, 2017 by the Climate Leadership Implementation Act (known as Bill 20). The Alberta carbon levy of $20 per ton will come into effect on January 1, 2017 and will rise to $30 per ton on January 1, 2018. The carbon levy will apply to fossil fuel that produce GHG emission when combusted. These include transportation an heating fuels such as diesel, gasoline, natural gas and propane. It will not apply directly to consumer purchases of electricity.

The Alberta carbon tax revenue is earmarked for renewable energy infrastructure projects such as transit improvements and to provide subsidies and rebates to lower and middle income Albertans and certain industries (e.g., coal industry and its communities). In addition, Alberta's small business corporate income tax rat e will be reduced by one third, from 3% to 2% effective January 1, 2017. It is estimated that 6 in 10 Albertan households will be eligible for the full rebate, and an additional 6% of households will receive a partial rebate.

Alberta Carbon Tax Exemptions

Some exemptions will apply, including the following:
o the use of heating fuels on sites subject to Specified Gas Emitters Regulations (SGER) or performance standards regime
o natural gas produced and consumed on site by conventional oil & gas producers (until January 1, 2023)
o industrial exemptions in cases where fuel is used in industrial processes but not combusted
o purchases of furl on-reserve by eligible First Nations individuals and bands for person and band use
o marked gasoline and diesel used by farmers in farming operations
o biofuels, including bio-methane, biodiesel and ethanol
o inter-jurisdictional flights
o fuel sold for export

Alberta Fuel Tax Exemptions

Similar to B.C., the Alberta Fuel Tax Act is a direct tax on consumers for the purchase of all unmarked fuel in Alberta. This includes gasoline, diesel and propane, except where the fuel is delivered and consumed outside Alberta.

Alberta provides tax exemptions and rebates on fuel used off-road for commercial purposes. In addition, the Alberta Farm Fuel Benefit Program reduces the cost of fuel used in farm vehicles by eligible Alberta farmers, providing an exemption from the fuel tax of 9¢ per litre on both diesel and gasoline.

Crowe MacKay Tax Recovery and Tax Advisory Services

If you have paid these taxes on your fuel purchases and your business is an exempt industry or if your business activities and business purposes qualify for exemption from the Motor Fuel Tax and/or Carbon tax, you may be eligible for the tax refunds.

Our tax professionals at Crowe MacKay can help you assess all possible tax refund opportunities for your business and file for the tax refunds. In addition, we can assist you in establishing the documentation requirements necessary for the tax refunds and in the applying for registration as a tax exempt fuel purchaser in B.C. or applying for a carbon levy exemption certificate in Alberta.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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