April 28, 2022 by Luther VanGilst

Navigating the new Canadian carbon tax credit

There are currently four Canadian provinces that do not have a provincial carbon tax: Alberta, Manitoba, Ontario and Saskatchewan. As a result, their carbon use is taxed on a federal level. In these provinces, farmers generally do not pay carbon tax on diesel and gas used for farm equipment or farm vehicles, but they do pay carbon tax on the propane and natural gas they use.

This has become a problem for these businesses because there’s no increase in the payment they receive from the grain elevator (or other customers) to compensate for this additional expense, which significantly decreases the profitability of their business.

As a result, farmers impacted by this carbon tax have been pushing for propane and natural gas to receive the same exemption as diesel and gas. Instead, the government recently introduced a new carbon tax credit to ease their tax burden.

Understanding eligibility

This new credit is a refundable tax credit that’s available to corporations, individuals and partnerships, but it gets claimed at the partner level. If two siblings are farming as a partnership, those siblings would claim that tax credit on part of their personal tax returns separately from one another.

The tax credit is based on eligible farming expenses, and the starting point is all the farming expenses deducted for tax purposes. The two exclusions are inventory adjustments and non‑arm’s length transactions. For example, if a farm paid wages to a family member, that would be non‑arm’s length, so it wouldn’t be an eligible expense. However, all other expenses are eligible for this tax credit.

The rules

The credit does not relate to the carbon tax actually paid on propane and natural gas. Instead, it is based on the eligible farming expenses and a specified rate. The rate for 2021 is $1.47 per $1,000 of eligible farming expenses and $1.73 per $1,000 of eligible farming expenses for 2022. This credit is refundable, so if a corporation or an individual doesn’t have any tax payable for the year, they could get a tax refund on their individual or corporate tax return. The credit itself is also subject to income tax, as it is considered income.

If a farm operates in multiple provinces, expenses have to be allocated between provinces, and the legislation includes some formulas for calculating that. For very small farms, there’s a lower threshold cut-off. If the eligible farming expenses are less than $25,000, the credit is reduced to zero.

Claiming the credit

On personal tax returns, the credit is claimed on form 2043 Return of Fuel Charge Proceeds to Farmers Tax Credit. However, since the credit has not yet received Royal Assent, CRA will not assess the credit if a claim is made. Not only will the credit not be assessed, but the entire tax return will not be assessed until the credit receives Royal Assent. If a farmer is going to receive a refund on their tax return (from overpayment of instalments for example), they may want to file without the credit and amend their return to claim it later, to prevent their refund from being held up. The bill that contains the credit needs one more reading in the House of Commons, and then must pass in the Senate before it receives Royal Assent.

The form to claim the credit on a corporate tax return does not yet exist.

A simple example

As an example, let’s consider a sole proprietor with $500,000 of farm expenses in 2021. If there were no inventory adjustments for tax purposes and no non‑arm’s length transactions, the full $500,000 of expenses are eligible. Since the rate is calculated per $1,000 of expenses, we multiply $1.47 by 500, resulting in a tax credit of $735. If a farmer’s year‑end straddles the calendar year, the rate changes from 2021 to 2022, so the expenses must be allocated between those two calendar years.

A more complex example

If a corporation has a June 2022 year‑end, with $2 million in total expenses and the expenses include $200,000 in wages paid to family members ⁠–⁠ which is not an eligible expense ⁠–⁠ there are eligible expenses of $1.8 million. Since their fiscal year is partially in 2021 and partially in 2022, they’ll have to calculate the carbon tax credit at two different rates. This would need to be divided based on days, not months. For the sake of example, we’ll treat it as 50/50, which would mean $900,000 at the 2021 rate of $1.47 and $900,000 at the 2022 rate of $1.73. This adds up to $1,323 for 2021, $1,557 for 2022 and a total credit of $2,880 for the full fiscal year.

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Luther VanGilst Luther VanGilst
Winchester, Ontario
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