CANADA - Non-residents of Canada impacted by federal Carbon Pricing Backstop
Certain non-residents of Canada may be subject to new reporting, taxes, and possibly penalties if they are not registered for Canada’s new Carbon Pricing Backstop that came into effect 1 April 2019. The new federal provisions will apply to non-residents that:
- Import fuel for distribution, or
- Use fuel in commercial vehicles (including trucks, rail cars, aircraft, and marine vessel) to transport goods or passengers in and out of the provinces of New Brunswick, Ontario, Manitoba, or Saskatchewan.
As part of its effort to address greenhouse gas pollution (carbon pollution) while encouraging growth in the economy, in 2016 the Canadian government introduced the Pan-Canadian Framework on Clean Growth and Climate Change (referred to as the benchmark). The benchmark provided Canadian provinces and territories with the flexibility to put in place their own carbon pricing system by the end of 2018. So long as they met the federal benchmark, provinces and territories could implement either:
- An explicit price-based system,
- A carbon levy and output-based pricing system, or
- A cap-and-trade system.
Under the benchmark, jurisdictions without a pricing system in place by 2018 would be subject to a federally imposed carbon pricing system referred to as the Backstop.
The Backstop, which is legislated by the Greenhouse Gas Pollution Pricing Act, 2018, imposes a carbon pollution pricing system comprised of two elements:
- A fuel charge/carbon tax that applies to fossil fuels used in a Backstop jurisdiction (any jurisdiction that does not meet the federal benchmark). This portion of the Backstop is administered by the Canada Revenue Agency (CRA). Generally, the fuel charge will apply to fuel that is produced, imported, or brought into a Backstop jurisdiction.
- An output-based pricing system (OBPS) for certain industrial facilities that have reported emissions exceeding particular thresholds. This portion of the Backstop is administered by Environment and Climate Change Canada.
Effective 1 April 2019, the federal carbon Backstop applies in the provinces of New Brunswick, Ontario, Manitoba, and Saskatchewan. These are all provinces that have not put in place a carbon pricing system.
Under the Backstop, the carbon tax applies at a rate of CAD 20 per tonne of carbon dioxide (CO2) equivalent in 2019, increasing by CAD 10 per tonne annually until it reaches a rate of CAD 50 per tonne in 2022.
For purposes of the Backstop, businesses and individuals are placed into one of four categories: registered fuel distributors, registered fuel importers, registered fuel users (includes OBPS facilities), and non-registered persons. (Because the carbon tax portion of the Backstop is administered by CRA, that is the agency those subject to the tax must register with.) It is important to understand which category you fit into, the timing of any taxes and reporting requirements, and the penalties associated with failing to register (which may be as high as CAD 2,000). The new tax is not limited to Canadian persons but instead may extend to anyone distributing and/or consuming fuel for commercial purposes in Canada.
Please contact a member of BDO Canada LLP’s indirect tax team for assistance.