Small businesses are being taxed by the Canada Revenue Agency (CRA) on its carbon rebates, prompting pushback from taxpayer advocates.

Chrystia Freeland, then-finance minister, previously promised the rebates would be tax-free, according to the Canadian Federation of Independent Business (CFIB).

It took her department over five years to reimburse $2.5 billion to Canadian entrepreneurs.

When Ottawa introduced the carbon tax in 2018, they pledged to make it revenue neutral. “If the government is collecting corporate income tax on the carbon tax rebate checks, then it’s hardly revenue neutral,” said Dan Kelly, CFIB president and CEO.

Nearly 89% of the proceeds ($11.4 billion) were returned to households through rebates. The feds only allocated 7% ($2.5 billion) of revenues to small and medium-sized businesses, which they did not receive for over five years.

There was no mechanism in place to rebate businesses, though the CFIB says payments were given last 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. 

Payouts amount to $1.3 billion for Ontario businesses, followed by Alberta ($718 million), Saskatchewan ($301 million) and Manitoba ($144 million).

While the CFIB said most businesses (52%) disliked the carbon tax, many supported efforts to offset their emissions and costs through retrofit grants. 

Meanwhile, former finance minister Chrystia Freeland said the rebate would be tax-free in Budget 2024 and the most recent fall economic statement, though it was not accompanied by proposed legislative amendments.

“Even now, after the checks have been sent out, it is taxable according to the CRA, the government will have to retroactively change legislation if they want to remove the tax from this,” Kelly said.

“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,” he added, noting prorogation has made matters worse.

Entrepreneurs also do not agree the rebate constitutes government assistance, which thereby subjects recipients to income tax.

Some 83% of the group’s 97,000 members no longer want a carbon tax, according to media reports.

Under the current regime, “increases in the carbon tax, coupled with minimal compensation, made the cost of doing business substantially higher, negatively impacting thousands of businesses,” said the CFIB report Fueling Unfairness: Carbon Pricing And Small Business.

The organization is calling for Parliament to be reconvened to make the rebate tax-free and to freeze the carbon tax in keeping entrepreneurs happy.

According to the CFIB, three in five small businesses incurred 10% higher energy costs last year, despite using the same amount of power as in previous years.

Should the carbon tax increase to $170 per tonne in 2030, over half (56%) of small businesses said they would have to increase their prices to offset costs, continues Fueling Unfairness.

Over four in 10 (45%) said it would increase pressure on them to freeze or cut salaries and wages, while 40% said they would have to reduce investment in their business.

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