Recently, the Saskatchewan Court of Appeal ruled, in a majority decision of 3 – 2, that the Greenhouse Gas Pollution Pricing Act was constitutional. Somewhat more surprisingly, given the political uproar surrounding “carbon tax,” the majority disagreed among themselves about whether the charges under the Act were even taxes at all, at least in the constitutional sense of the term. One justice ruled that the charges are the centrepiece of a regulatory plan to increase the cost of greenhouse gas emissions and thereby to mitigate them, rather than a tax. The concurring majority justices ruled that the fuel charges are indeed taxes, and though the levies on large industrial emitters are not taxes.
The distinction between a “tax” and a “regulatory charge” is important to the constitutional framework that the courts are considering, but it likely does not have much significance for businesses and practitioners who need to understand and implement the requirements of the Act. From a practical legal perspective, it is likely more important to understand that the legislation is complex and is administered by two federal departments. Under Part 1 of the Act, the Canada Revenue Agency administers the fuel “charge” in the following listed provinces: Saskatchewan, Manitoba, New Brunswick and Ontario from April 1, 2019, and in the Yukon and Nunavut from July 1, 2019. By contrast, under Part 2 of the Act, Environment and Climate Change Canada administers an output-based pricing system for large industrial emitters, commencing January 2019 in Ontario, New Brunswick, Manitoba, Prince Edward Island and Saskatchewan, and beginning in July 2019 in the Yukon and Nunavut.
Fuel charges
The fuel charge applies to certain fossil fuels and “combustible waste” (tires, asphalt shingles and other items to be prescribed by regulation) that emit greenhouse gases through combustion. The charge for 2019 is set at $20/Mt CO2e (i.e., metric tonne of carbon dioxide equivalent). Between 2020 and 2022, the charge is set to increase by $10 per year to $50/Mt CO2e. The actual rate will vary for each fuel type based on its global warming potential; for example, the fuel charge for 1Mt of coke is set at C$31.80.
The fuel charge applies, generally speaking, when fuel is delivered, transferred, used, produced, imported or brought into a Part 1 listed province. Exemptions from the fuel charge apply, mainly when fuel is delivered to a person who holds a fuel charge registration.
There are 12 types of fuel charge registrations, divided into five broad categories: fuel distributors, fuel importers, greenhouse gas emitters, industries that purchase and use fuel for purposes other than combustion (e.g., plastic manufacturing) and “carriers” (i.e., air, marine, rail and road carriers that use motive fuel to drive their vehicles).
The fuel charge registrations look similar to any other registrations with the CRA and are connected to the CRA business number, similar to a corporate tax or GST/HST program account, with different suffixes to indicate the different accounts. CRA auditors may issue Notices of Assessment for the fuel charges if a person fails to comply with its obligations under Part 1 of the Act, and the procedures for filing a Notice of Objection and appeal to the Tax Court of Canada are similar to other tax statutes.
Depending on the circumstances, the registrations may be mandatory or optional. Some, but not all, of the categories are mutually exclusive, and a person may be registered in multiple categories, and even for different kinds of fuel. Voluntary registrations allow the registrant to support exemptions from the fuel charge when they take delivery of fuel.
There are exemptions for fuel that is imported, delivered or sold in small quantities. For example, “fuel” is defined to exclude substances that are prepackaged in a factory sealed container of 10L or less, so importers of lighters and small containers of fuel (e.g., camping stoves) are not subject to the fuel charge registration and reporting requirements. Additionally, a charge is not payable for gasoline, kerosene, light fuel oil or propane where the quantity does not exceed 200L. Finally, for fuel in the supply tanks of vehicles for use in operation of the vehicle or an auxiliary component of the vehicle (or an auxiliary component of another vehicle attached to the vehicle), a registration is not required unless the person is required to be registered as a “carrier.”
All registrants must file a return with the CRA reporting the “net” fuel charge payable, taking into account all applicable charges and refunds, and remit any positive amount to the Receiver General of Canada. The reporting period is monthly for all registrants and quarterly for the registered road carriers. Non-registered persons must file a return and remit the charge payable for each month that a fuel charge becomes payable by the end of the following month. If the net charge for the reporting period is a negative amount, the person may claim a rebate of the amount in the return.
Output-based pricing system for large industrial emitters
Part 2 of the Act provides for a distinct carbon pricing system applicable to large industrial emitters operating in trade-exposed industries. This framework establishes an output-based pricing system whereby large emitters located in a listed province are exempt from the fuel charge described above for the specific fuels that are used at the covered facility (defined below). Instead, emissions from covered facilities are priced based on the portion of their emissions that exceed an annual output-based emissions limit.
A “covered facility” is defined as a facility that:
- Is located in a Listed Province,
- Has reported 50 kilotonnes (kt) or more of CO2e under the Greenhouse Gas Reporting Program established under the Canadian Environmental Protection Act, in any of the 2014 to 2017 calendar years, and
- Carries out a designated industrial activity.
There are over 35 designated industrial activities, including for:
- A natural gas pipeline transmission system: the transmission of natural gas
- A petroleum refinery: the processing of crude oil
- Any other facility: the production or generation of cement, ethanol, electricity using fossil fuels, metal or diamonds, glass, potash, pulp, refined sugar, vaccines, citric acid, etc.
A covered facility that emits GHGs in a quantity that exceeds the emission limits is required to provide compensation for any excess emissions. Compensation can be provided by the payment of an excess emission charge payment (that is set at C$20/Mt CO2e in 2019, C$30 in 2020, C$40 in 2021 and C$50 in 2020), or by the remittance of compliance units (i.e., surplus credits) that the company has obtained, or a combination of the two. If a covered facility emits GHGs in a quantity that is below the emission limit, a number of surplus credits equal to that difference will be issued to the Covered Facility.
Conclusion
The Act provides that the revenues received from fuel charges and from excess emissions charges must be distributed to the provinces or prescribed persons. No regulations have been published yet, though the federal government has committed to returning the proceeds from the carbon tax to individuals through carbon tax incentive payments. The government has not yet disclosed how proceeds of the emission charges will be distributed, except to say that it will make that decision in due course. The general scheme requiring rebates is why one justice of the Saskatchewan Court of Appeal ruled that the payments are not “taxes” for constitutional law purposes: “It is difficult to see how the Act, which is ultimately wholly disinterested in raising revenue, can nonetheless be seen as a law with a primary purpose of raising revenue for general purposes.” The Ontario Court of Appeal decision is still pending, and the cases may still be appealed to the Supreme Court of Canada.
But from the perspective of the businesses who report and pay the fuel charge, and the legal practitioners who advise them, as long as the fuel charges remain in force in listed provinces, they appear quite similar to taxes and will likely be treated as such in the normal course.
Zvi Halpern-Shavim is a partner with Blake, Cassels & Graydon LLP