Jeremy Scott Tax Law

Jeremy Scott Tax Law | The Impact Of Carbon Tax On Canadian Corporations

Since 2008, British Columbia has applied a carbon tax. In 2019, the Government of Canada implemented this tax nationwide. While Canada allows provinces to either adopt the federal pricing system or create their own, this flexibility may cause confusion for those responsible for ensuring tax compliance in Canadian corporations. What is this carbon tax? Who pays it? What effects does it have on doing business in Canada? If you have questions about this or other Canadian tax issues, Jeremy Scott Law may be able to assist you. Consider scheduling a consultation by calling (902) 403-7201.

What Is Carbon Tax?

Carbon tax is a price set by the government for companies that emit greenhouse gases (GHG). The tax applies to all GHGs emitted but is named carbon because carbon dioxide accounts for the bulk of GHG emissions

For each ton of GHG emissions, the party responsible for emission must pay the amount set by the carbon tax. As of 2023, the price is $65 per ton. In 2024, this will increase to $80 per ton. The rate will continue to increase each year until it reaches $170 per ton in 2030, per the Government of Canada’s schedule. This is to encourage Canadian corporations to reduce their emissions, use cleaner energy sources, and transition toward greener options for manufacturing and other emission-heavy commercial activities.

What Are the Effects of the Carbon Tax in Canada?

The carbon tax has had many effects on Canadian corporations and citizens. Most of the effects have been positive thus far. Examples of these impacts to date include:

  • Encouraging industries to become more efficient and use cleaner technology
  • Spurring new and innovative approaches to decrease pollution, use energy in different ways, and save money
  • Creating the Climate Action Incentive, which gives approximately 90% of fuel charge proceeds as a quarterly payment to Canadian families (particularly beneficial for low-income households and has assisted in reducing one of the drawbacks of the tax, which is higher energy costs, according to the International Monetary Fund.)
  • Paying an additional 10% Climate Action Incentive payment to rural and smaller area residents to account for having fewer clean options

Households that opt to make changes to their energy usage (such as home energy upgrades or cleaner vehicle purchases) reduce their emissions, thus avoiding paying the pollution price, and still get the Climate Action Incentive payment. In addition, the Fuel Charge Proceeds Return Program created by the Government of Canada provides funds to small and medium businesses in emissions-intensive and trade-exposed sectors so they can compete with innovating and becoming more efficient. A number of other initiatives, tax credits, and agreements have emerged to provide funds to farmers, indigenous people, and targeted support for farmers, fishers, aviation fuel users in the territories, greenhouse operators, and remote community power plants that generate electricity.

How Would Carbon Tax Affect Companies?

Because British Columbia started collecting carbon tax in 2008, it is possible to see how the tax has already affected some companies, as well as to speculate about the possible impacts the tax could have. Jeremy Scott Law may be able to discuss how the tax may impact your Canadian corporation.

British Columbia Effects

Since the implementation of the tax in 2008, British Columbia has seen a reduction of up to 15% in emissions compared to their projected rates without the carbon tax. The province has also seen a 12.5% increase in clean economy jobs since 2010. Additionally, British Columbia’s clean economy gross domestic product (GDP) has increased 19.3% from its 2010 numbers, according to United Nations Climate Change.

Other Possible Effects

Canada implemented the nationwide carbon tax in 2019. While four years may seem like enough time to see results, it is important to remember that the intention is to reduce or reverse effects of carbon pollution that have taken decades to occur. In addition, the carbon tax has been designed to transition Canada away from GHG emissions gradually, which means that the effects to date are based on a relatively small degree of change compared to the intended endpoint in emissions reduction.

Some of the effects that have already begun to appear or that can be reasonably expected based on current evidence include:

  • Encouraging clean technology, sustainable economic activity, and green jobs while reducing emissions
  • Influencing the market and Canadian corporations who emit GHGs to innovate and find cost-efficient methods of reducing emissions to avoid paying the tax
  • Creating market-based financing opportunities, giving a competitive advantage to low-carbon businesses

Will Companies Pass on the Cost of a Carbon Tax To Consumers?

Initially, some companies may have passed on, or may even still be passing on, the cost of their carbon tax liability to their consumers. There are two considerations in the payment of carbon tax that might contribute to the decision to pass on the cost to consumers: the industries that pay the tax and who within those industries is paying the tax.

Taxed Industries

Canada’s federal pricing system has two parts: a regulatory charge on fossil fuels such as gasoline and natural gas, and an Output-Based Pricing System which is a performance-based system for industries. Some provinces and territories have chosen to implement their own systems, further complicating the tax situation for Canadian businesses and consumers.

Some industries produce more GHGs than others. Therefore, businesses in some industries may see little to no increase in their operating costs from the carbon tax, meaning that in these industries there may not be much of an expense for businesses to pass on. Other industries may pay much more, creating a larger expense that they might then pass on to consumers.

Taxed Companies

Within the industries that are charged, whether the expense is passed on to consumers may depend on who is charged. For example, the Peter G. Peterson Foundation explains that fossil fuels such as petroleum or coal could be taxed at three different points:

  • When the petroleum or coal is extracted
  • When the petroleum or coal is refined
  • When the fuel is consumed and the GHGs are emitted (when the consumer buys the fuel for use in their vehicle or home)

However, another factor that determines whether the expense is passed on is a company or sector’s ability to respond to the tax. A company that produces power is likely to be able to reduce their emissions much more easily and less expensively than a transportation company. Transportation relies heavily on fossil fuels and does not offer a lot of inexpensive, easily accessible alternatives. Both people and companies often have limited options for changing their driving habits to reduce emissions, even though they may be interested in doing so. This means a transportation company is more likely to pass on the expense of a carbon tax than a power company or energy trader.

The Climate Portal information page from the Massachusetts Institute of Technology (a United States university known for its emphasis on research in science-related fields) points out that the burden of this expense can be reduced by giving the tax money back to citizens, as the Climate Action Incentive does. The same resource further predicts that companies emitting high amounts of GHGs will likely eventually face pressure to reduce their emissions. As their competitors begin to offer lower-carbon options that are less expensive (because they do not have to pay the tax), these companies will be forced to innovate to remain competitive and eventually, their emissions will be reduced, their tax burden decreased, and thus, no longer need to pass on the expense to their consumers.

Do You Have Other Questions About Carbon Tax?

Carbon tax, like any other tax, can be confusing and complicated. Fortunately, you do not have to wade through all the information and try to understand it alone. An experienced tax attorney may be able to explain the tax, how it affects Canadian corporations and consumers, and what you can do to reduce your carbon tax burden. If you would like more information on this or other taxes, Jeremy Scott Law may be able to answer your questions. Call (902) 403-7201 to schedule a consultation.