What is a carbon tax?

Carbon taxes are designed to put a price directly on carbon emissions to reduce their use. When we burn carbon-based fuels, the emissions release carbon dioxide into the atmosphere. The emitters are targeted to encourage less reliance on the use of the carbon-based emitting fuels.

To achieve this, a fee is incurred on each tonne of emission from fossil fuels. As each fuel emits differently, there is a specific rate for each type of fuel. However, when a tonne of emission occurs, it works out to the same cost of $20 per tonne, $30 per tonne, etc. being referenced in the news for the particular year.

While tax is a source of revenue, the tax is a tool used to change behaviours. This strategy is commonly used on alcohol and tobacco products. The tax revenue is aimed at helping cover the costs to society by the effect of these goods. The tax itself increases the price of those goods to discourage their use. 

If we follow this thinking, the tax cost to the emitters should become high enough to change their behaviours. If the cost of generating those emissions becomes higher than the alternative, the emitters will choose the alternative. Those carbon-based fuels would be used less or not at all, and therefore less harmful emissions are going into the atmosphere.

If the price goes up too fast, industries and households would not be able to adjust fast enough. If the price goes up at an optimum rate, it should provide enough time to shift our behaviours to adopt less carbon-emitting fuels, and the resulting products or services created or impacted by those fuels. This is where see debate on whether $20, $30, or $50 per tonne will be enough to reverse the climate change being caused by the carbon emissions.

Consumers and many businesses will not pay the carbon tax directly. However, we will all see higher prices for goods and services as a result. 

In its simplest form, carbon tax is taxing the use and consumption of fuels that emit greenhouse gases. A fee is paid on each tonne of emissions from the fossil fuel.

Federal Carbon Tax Pricing

The federal carbon tax pricing system began on April 1, 2019. The tax targets 21 types of fossil fuels. The federal government implemented their program on provinces without a provincial carbon tax program or without a program in place in time.

The program was phased in on three different dates. As of April 1, 2019, we have Saskatchewan, Manitoba, Ontario, and New Brunswick under the federal carbon pricing system. As of July 1, 2019, we add Nunavut and Yukon. Alberta cancelled their provincial carbon tax program and will be subject to the Federal program on January 1, 2020. All other provinces and territories have an existing program in place.

How does it work?

Fossil fuels have a carbon tax applied based on the final use or consumption. Where a fuel is used in manufacturing (e.g. forming part of a manufactured good), is being used to create another type of fuel, or is outside of the provinces covered under the federal program, it would not bear a federal carbon tax amount.

This means where there is use or consumption of the fossil fuel at a place in these federally regulated provinces, a federal carbon tax amount is required to be paid. If the fuel is consumed, used or exported outside these federally regulated provinces, the federal carbon tax is not applicable. This can result in a rebate of tax paid.

Large emitters are already under a different program to be taxed on a portion of their emissions. Other categories of businesses caught under the federal program are the carriers (road, rail, air and marine), users, importers and fuel distributors. 

A registration system is needed to have a compliance and reporting mechanism for the tax, but also to allow the acceptance or issuance of exemption certificates. Exemptions to delay where the carbon tax is to be incurred, or to avoid the carbon tax from applying to a fuel purchase altogether are available in limited circumstances.

For example, a registered fuel distributor can sell fuel to a farmer, for farm use, and exempt the carbon tax on that fuel being supplied. The registered distributor would not have to remit carbon tax on the fuel being sold and the fuel price to the farmer would be not as high since the carbon tax would not have formed into the price of that fuel being purchased.

The fuel charge on the carbon tax applies where the fuel is delivered to a person that cannot provide an exemption certificate. The perception is carbon tax is being charged directly on the fuel we are purchasing. However, it is generally a cost to the supplier to self-remit the tax to the Canada Revenue Agency. The supplier factors the cost of the carbon tax into the price of the fuel being sold. The purchaser does not pay carbon tax directly, but a higher price.

Fuel sold at a retail gas station is a common example. It is being self-remitted by the fuel distributor when the fuel is sold to the retail gas station. The carbon tax is remitted by the distributor on the value of the fuel sold. That tax is then embedded into the price of the fuel sold to the gas station (e.g. a higher price than before the carbon tax). The fuel sold to a customer at the fuel pump does not have a direct carbon tax being charged. While carbon tax was paid somewhere, it is not on the last purchase in most cases.

Like the provincial sales tax, some groups need to self-remit tax on what they use or consume in the listed province. If they paid a carbon tax under the provincial program and then use some of that fuel in a federally regulated province, they must account for the federal carbon tax on what is used in the federally regulated provinces. They may also get a rebate of the federal carbon pricing where fuel is acquired in a federally regulated province but used in a province that has a provincial program or used outside of Canada. Road, rail, air and marine carriers are examples where this is likely to occur.

Who is involved?

The carbon tax is aimed at a limited group of categories and makes up a large group of businesses across Canada:

• Large industrial emitters
  • Emitters are generally large businesses participating in the Federal Output Based Pricing System because they have emissions in excess of 50 kilotons.
• Users
  • Fuel users are grouped into those that burn combustible waste to create energy, and those that use fuel to produce different fuels or in a manufacturing process to create their goods.
• Importers of fuel – both into Canada and into federally regulated provinces
  • Importers of fuel are involved to ensure the fuel supplied into a federally regulated province includes the carbon tax.
• Fuel distributors (including but not limited to fuel retailers)
  • Fuel distributors are expected to be the largest group requiring registration and accounting for the fuel charge because the tax is self-remitted when it is supplied to a person that cannot be relieved of the tax. An example is a gas utility company distributing natural gas to homes and businesses in the federally regulated provinces.
• Interjurisdictional carriers – road, rail, marine and air
  • This group consumes fuel as they haul passengers and / or freight inside and outside of the federally regulated provinces. They must account for the federal fuel charge on fuel used in the federally regulated provinces and obtain a rebate of any federal fuel charge paid in relation to use outside of the federally regulated provinces.

For those business that held fuel in inventory in a listed province, an Adjustment Day is triggered. The intention is to have held fuel be accounted for as if it were always under the federal program. An amount of carbon tax is remitted on the amount of fuel held on that day. However, this does not include fuel in the vehicle’s fuel tanks at that time. This is targeting large quantities of fuel held in storage tanks. The adjustment day is in effect when the province entered the federal carbon program, and rate increases. Alberta is now impacted as they are under the federal program beginning January 1, 2020.

There is an exemption process. Most of the exemptions will be flowing between parties that are not end users where the fuel is flowing from entry into the system, through the refining and distribution process. The goal is to trigger the carbon tax one time or to eliminate the carbon tax from applying under certain situations.

Outlying exemptions are available to specific categories of fuel purchasers:

• Farmers – only on fuel used in agricultural equipment (not licenced vehicles)
• Fisher – only on fuel used on a fishing vessel
• Remote power plant operator generating electricity with light fuel oil
• Greenhouse operator using propane or natural gas (only 80 percent exemption available)

There have not been any exemptions identified for First Nations — other excise taxes and tobacco taxes are implemented at the manufacturer level, not at the retail level. Relief is not provided on carbon taxes as a result. 

An exemption certificate can only be accepted by a registered entity. This may result in a person not otherwise required to be registered but chooses to become registered voluntarily in certain situations. However, this will result in the entity now being responsible to remit the carbon tax.

There are still regulatory proposals to be implemented. These proposals include:

• expanded relief of the fuel charge for electricity generation for remote communities
• a rebate for exports of fuel under certain conditions
• integration of the Saskatchewan output-based performance standards system with the federal fuel charge and
• expanded relief of the fuel charge for farmers to include delivery at a cardlock facility when certain conditions are met

Registration and Reporting

Registration was first available April 1, 2019 across the provinces and on July 1, 2019 for Yukon and Nunavut. Alberta comes on board on January 1, 2020 (other than the large industry emitters). The correct registration to obtain appears complex to understand, as is the reporting. A person can register for more than one type of registration. 

The registration is intended to assist in the reporting obligations to have the fuel charge accounted for by fuel type, by federally regulated provinces, and by type of registration according to the reporting period. The reporting period is generally monthly. A road carrier defaults to a quarterly filer unless they are also registered as another type of entity (e.g. distributor, user, importer, etc.). Where the road carrier is registered in more than one program, they must report all fuel charges on a monthly basis.

Navigating the Carbon Tax With MNP’s Help

MNP has a team of indirect tax specialists that can help determine whether your business falls into these new requirements, and what steps you need to take. To learn more about indirect taxes and how these changes may impact your business, contact Jeff Harrison at 306.751.7998 or [email protected] or contact your local Indirect Tax Advisor.