Carbon Tax

What does the federal carbon tax really mean for your business?

The first week of the federal election campaign, most pundits griped, was a notably dull affair. At least until Time magazine published ‘brown face’ photos of Prime Minister Justin Trudeau. That’s when the horserace to elect our next government got interesting. Whether the PM survives the scandal remains to be seen. But when the dust settles and the parties get back to debating issues of policy—where our attention should be focused—we’ll likely be reminded of the extent to which climate change and the new federal carbon tax have emerged as central issues in this election.

Not that any of the federal parties doubt the former is happening, of course. They (now) all officially recognize that our planet is warming, climate patterns are becoming more erratic and humanity is (at least partially) to blame. It’s how to fix this stormy mess where they disagree. The New Democratic Party and Green Party would have us phase out fossil fuels entirely, and by dates so laughably ambitious they aren’t worth serious consideration. The Conservatives argue that carbon pricing will be the death of our economy, or at least a hindrance to growth. They want to scrap the Greenhouse Gas Pollution Pricing Act, which introduced a carbon tax earlier this year. For the Liberal Party that drafted and passed the law, the tax is a sensible, economist-endorsed strategy to discourage big businesses from spewing countless tonnes of carbon into the atmosphere with impunity. So, who’s right?

That’s ultimately for voters to decide. But from the perspective of medium-sized business owners operating in energy-intensive industries, the carbon tax is problematic for a number of reasons. Of course, the service businesses that comprise nearly 80 per cent of our economy will be minimally impacted by the tax. It was not designed with them in mind, even if they may feel some of its ripple effects.

As noted on the Canada Revenue Agency website, the legislation will be administered by the CRA and will “provide for 12 types of registrations and applies a fuel charge on 21 types of fuel and combustible waste.” The second part of the Act will be administered by Environment and Climate Change Canada, and will introduce “an output-based pricing system (OBPS) for industrial facilities.”

While there are various exceptions, in many cases companies ranging from fuel producers to importers and trucking companies must register and remit a fuel charge on the carbon they consume, produce or transport. This is similar to the way that businesses remit HST collected on goods and services:

Generally, a charge applies on 21 types of fuel delivered, transferred, used, produced, imported or brought into a listed province. It also applies on combustible waste that is burned, such as tires and asphalt shingles, in a listed province, for the purpose of producing heat or energy.

In most cases, the charge applies early in the supply chain and is payable by a registered distributor. End users generally have no obligations in respect of the fuel charge. The fuel that they purchase will already have the charge embedded in the price.

Under the pollution pricing system, larger industrial facilities emitting 50,000 tonnes of carbon dioxide equivalent per year or more are subject to those aforementioned output-based charges.

To mitigate the impact of the carbon tax on consumers, the Trudeau government implemented a refund system in the form of the Climate Action Incentive tax credit, redeemable when they file their federal income tax forms. In Ontario, a family of four could receive a tax credit totalling up to $307 for 2019. Carbon taxes collected are also intended to fund environmental projects. It’s worth noting that the price of gas in the province jumped by 4.42 cents per litre, while the fuel charge for natural gas used in home heating increased by 3.91 cents per cubic metre—rates that will continue to increase over time—when carbon pricing took effect.

Whether this is all potentially catastrophic for our economy depends on who you ask. The Canadian Federation of Independent Business has called for an immediate repeal of the tax. Environmental groups argue that companies operating in provinces such as British Columbia, the first to implement pollution pricing, have taken the opportunity to reduce their carbon footprint, find new efficiencies and reap the ensuing financial benefits.

The bottom line is that when a business faces added compliance requirements, and must collect, remit or pay a tax, it must account for those added energy and administrative costs and will ultimately pass them on to their customers—and, eventually, consumers. At some point even lower-carbon service businesses will experience a trickle-down effect. Many in the business community have also argued that a carbon tax impairs competitiveness for companies already struggling to keep pace with international rivals, in particular those in the U.S. where, under the Trump administration, a federal carbon tax is a non-starter. Their argument is largely valid.

While it’s encouraging that the government took action to buttress the bank accounts of the middle-class voters whose votes it desperately needs this election, medium-sized business owners also need support. Simply dumping added costs onto their balance sheets and expecting them to either accept lower profit margins, raise prices or cut costs in other ways (e.g., layoffs, finding new efficiencies) is unfair and unrealistic.

More should be done to help the businesses that drive our economy. Climate change is real. It must be addressed. But not on the backs of entrepreneurs already drowning in high taxes and red tape.

Marshall Egelnick, Managing Partner

Marshall Egelnick

905-946-1300, x. 226