Small businesses still being taxed on carbon rebates, federation says

People shop in the Glebe community of Ottawa on Thursday, Oct. 15, 2020.THE CANADIAN PRESS/Sean Kilpatrick (Sean Kilpatrick/The Canadian Press)

Small businesses across Canada are still being taxed on their carbon tax rebates despite a commitment from the former finance minister that they would be tax-free, says the Canadian Federation of Independent Business (CFIB).

The business group says it has been informed by the Canada Revenue Agency that the rebate is considered government assistance to taxpayers and that it’s subject to income tax.

The federation says the CRA also told it that former finance minister Chrystia Freeland’s announcement last year that the rebate will be tax free, and the fall economic statement that made a similar commitment, “were not accompanied by proposed legislative amendments.”

The prorogation of Parliament is not making the situation any easier, says CFIB president and CEO Dan Kelly, as only new legislation presented in Parliament can override this decision.

“It’s just the most unhelpful time to provide even more tax uncertainty at a time when businesses are scrambling to deal with the potential tariff issue, and so that makes this doubly bad,” Kelly said.

Businesses had finally received clarity on the capital gains front, with the inclusion rate increase being pushed back, only to have confusion about the carbon tax rebate come up after five years of waiting for it to kick in, said Kelly.

“It really has eroded a lot of trust over the carbon tax,” said Kelly, who previously told The Canadian Press that 83 per cent of the group’s 97,000 members want the carbon price to be repealed.

The Canada carbon rebate for small businesses was a measure introduced in Budget 2024, in which $2.5 billion of carbon price revenue would be paid back to some 600,000 small- and medium-sized businesses. In October, the finance department said the government planned to return a portion of the fuel charge proceeds from 2019-20 through 2023-24 to businesses by the end of the year.

After confusion over whether or not the rebate would be taxed and years of delays, the CFIB says rebates were paid in December.

“The consumers had their rebate as soon as the carbon tax went into place in 2019 but it took Ottawa five straight years to figure out how to rebate these dollars back to the businesses that they had promised them to,” Kelly said. “Even now, after the checks have been sent out, it is taxable according to the CRA, government will have to retroactively change legislation if they want to remove the tax from this.”

The CFIB, Canada’s largest association of small and medium-sized businesses, is calling for Parliament to be reconvened to pass legislation to make the rebate tax free. It also wants the government to freeze a 19 per cent increase in the carbon tax planned for April 1 and return the small business rebate formula to nine per cent of total revenue as long as the carbon tax is in place.

Kelly said a major concern is that businesses don’t know the rules around the rebate.

“There are businesses that will be filing their income taxes incorrectly right now because they’ve received this carbon tax rebate and the only official word from government is that it’s tax free, but CRA has confirmed to us in writing that it’s not tax free unless the government changes the rules,” Kelly said. “The tax impact could be significant when you add federal and provincial corporate income taxes to this amount.”

“If the government is collecting corporate income tax on the carbon tax rebate checks, well then it’s hardly revenue neutral,” he said.

The Canadian Press has requested comment from the CRA and the office of Minister of Finance and Intergovernmental Affairs Dominic LeBlanc.

- With files from Nick Murray.

This report by The Canadian Press was first published Feb. 8, 2025.

Catherine Morrison, The Canadian Press