Carbon Taxes and Rebates in Canada Explained

April 3, 2020

The federal government’s carbon tax has generated no shortage of debate. With various political parties proclaiming either the carbon tax’s virtues or bad intentions, it can be a challenge to cut through the clutter and get to the truth. Let’s discuss how the carbon tax affects gas prices and how much it will ultimately cost the average Canadian.

The carbon tax – established by the federal government to reduce carbon pollution nationally – has been vilified by many. Some claim the tax will damage the economy, hit average Canadians in the pocketbook, and not do enough to make an impact. Others insist that putting a price on pollution is the only meaningful response to growing concerns over climate change and our reliance on fossil fuels. 

Let’s clear the smokescreen of misinformation and better understand why the carbon tax is being implemented, how it will affect you, and what kind of rebate you might be entitled to.

How does carbon tax work In Canada?

In the summer of 2018, Prime Minister Justin Trudeau’s government passed the Greenhouse Gas Pollution Pricing Act, dubbed the carbon tax, as part of a 2015 campaign pledge to put a price on pollution. The bill gave his government the authority to implement a carbon pricing system for provinces which do not have an adequate carbon pricing model of their own. The tax will start at $20 per ton in 2019 and rise $10 per ton each year until reaching $50 per ton in 2022. 

The goal, in part, is for Canada to meet its obligation to the Paris Agreement. That means cutting Canada’s carbon pollution by 30% below 2005 levels by 2030. 

The government of Canada calls the tax “revenue neutral” because all direct proceeds of the program go directly back to residents in the provinces where the federal system will be forcefully adopted. This rebate is called the Climate Action Incentive, and the amount will range depending on which province you reside in, plus the size of your household.

More on Carbon Tax Rebates later ⇨

Source: Carbon pricing is now in effect across Canada. What is it anyway? (Globe & Mail)

How much Is the carbon tax?

We hear a lot about how the carbon tax is designed to go after the big polluters in various industries, but if you’re driving a conventional fuel-burning car, or heat your home using natural gas, for example, you will be paying extra too. 

Under the carbon tax, filling up your gas tank will cost 4.4 cents more per litre in 2019, which equates to roughly $3 more a fill or a $100 year (assuming a typical 20,000 km of driving per year at an average 10 litres/100 km fuel economy). As the tax increases each year, the levy will plateau at 11 cents per litre in 2022; something to consider if you’re weighing up the costs of switching to an energy-efficient electric vehicle.

Those who heat large homes and drive frequently will be paying more under the plan. The government estimates an average yearly cost of $244 for a household in Ontario, for example. In Saskatchewan, another province without a provincial carbon tax, the yearly estimated cost would be higher at $403 per family. The average cost impact per household of the federal system can be found here.

What provinces in Canada have carbon tax?

As of February 2020, the provinces that are forced to use the federal government’s carbon pricing system include: Saskatchewan, Manitoba, Ontario and New Brunswick. Alberta was added to the federal carbon tax list in January 2020, but the prairie province has so far been successful in its battle with Ottawa to repeal the tax. The Alberta Court of Appeal declared the federal carbon tax unconstitutional. The matter will now go to the Supreme Court of Canada in March. (Editor's note: this hearing has been postponed due to the COVID-19 pandemic).

Governments in the four compliant provinces will not receive any funding taken from the carbon tax. Instead, it will bypass provincial coffers and be sent directly to Canadians in the form of the Climate Action Incentive.

Other provinces and territories that already have their own carbon tax system, or are in the process of implementing a federal-approved one, include British Columbia and Quebec. BC implemented their carbon tax in 2008 (it is currently $35 to $40 per ton) and it has since generated billions in government revenue. The BC government claims this revenue is used to provide “carbon tax relief, maintain industry competitiveness, and encourage green initiatives."

In February 2019, Quebec passed the $3 billion mark in total revenues from its cap-and-trade pollution pricing system. The province has been a pioneer on the file, starting its carbon pricing system in 2007 – the first in Canada. While Quebec mostly targets energy producers with its system, drivers in the Montreal area cough up a tax of 3 cents per litre on gas.

Meanwhile, Manitoba is hoping to follow suit and introduce its own provincial carbon tax in July 2020 to replace the imposed federal tax.

What is the cap-and-trade program?

The everyday user of greenhouse gas-emitting vehicles shouldn’t be too concerned about a cap-and-trade system because it mostly targets big polluters in industries like oil & gas. Under cap-and-trade, a regulatory body like the provincial or federal government sets a “cap” on emissions output, setting a limit to how much industry sectors are allowed to pollute each year. The government body will issue permits, allowances if you will, for industries to pollute and these can be “traded” or sold to other companies who need to emit more. 

For example, a company that emits 10 tons below its cap can trade its extra 10 allowances in the market or bank them for future use. As part of the carbon tax, the federal government is calling this an output-based pricing system where compliance obligations can be met by paying carbon pollutions price ($20/t currently) or purchasing credits from industrial facilities that beat their standard.

What is the Climate Action Incentive?

For the provinces refusing to adopt a carbon tax, Trudeau wasn’t about to reward those unaccommodating provinces with billions in new tax revenue. That’s why the feds created the Climate Action Incentive (CAI) – to make sure taxpayers are on the receiving end of the carbon tax revenue. It also softens the blow for those cringing at increased power bills and pump prices.

Who gets the CAI carbon tax rebate?

Residents of Saskatchewan, Manitoba, Ontario, and New Brunswick are currently eligible for the rebate. The rebate payments will increase over time and vary between provinces and household size. It can be as low as $256 this year in New Brunswick to as high as $1,459 for a family of four living in Saskatchewan in 2022. There will also be an allocation of the tax revenue directed to universities, schools, municipalities, non-profits and Indigenous communities, as well as small and medium-sized businesses.

The CAI rebate (Line 45110) can be claimed on your income tax return and it will automatically be applied to your balance owing for the year or added to any refund you are entitled to. That means if you're wondering about carbon tax rebate cheque dates, it depends how soon you're able to file your tax return. The sooner you file your return, the sooner you'll get your rebate. You can usually start filing your taxes once you get your T4 on the last week of February.

Upgrade for better fuel economy with Canada Drives

If the sound of paying more at pumps due to the carbon tax has you fumed, Canada Drives can connect you with fuel-efficient vehicles across the nation. For your consideration, we also did a recent roundup of electric and hybrid vehicles that are currently on the market.

Canada Drives has been helping Canadians find vehicles with great auto finance rates since 2010. We’re partnered with dealerships all across the nation that offer incentives and promotions for people facing all types of credit situations. 

Apply with Canada Drives to learn more and see what you're eligible for.


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