Tax Update: December 14, 2021

Dec 17, 2021 | Education & Outreach

On December 14th, the Economic and Fiscal Update was tabled in the House of Commons. In the Annex, several tax measures were announced.

Annex 3

Tax Measures – Supplementary Information

Returning the Proceeds from the Price on Pollution Directly to Farmers

Under the federal carbon pollution pricing system, the government applies a price on pollution in jurisdictions that do not have their own system.

The Government of Canada does not keep any direct proceeds from pollution pricing. All direct fuel charge proceeds are returned to the province or territory of origin in the following way:

  • For those jurisdictions that have voluntarily adopted the federal system, direct proceeds are returned to the governments of those jurisdictions.
  • For those provinces that do not meet the federal stringency requirements (referred to as “backstop jurisdictions”)—currently, Ontario, Manitoba, Saskatchewan and Alberta— approximately 90 per cent of direct proceeds are returned to residents of those provinces through Climate Action Incentive payments. The other 10 per cent is used to support small businesses, Indigenous groups, and other organizations.

Recognizing that many farmers use natural gas and propane in their operations, and consistent with the Budget 2021 commitment, the government proposes to return fuel charge proceeds directly to farming businesses in backstop jurisdictions via a refundable tax credit, starting for the 2021-22 fuel charge year.

Eligible Farming Businesses

The return of fuel charge proceeds would be available to corporations, individuals and trusts that are actively engaged in either the management or day-to-day activities of earning income from farming (i.e., the raising of animals and harvesting of plants in a controlled environment) and incur total farming expenses of $25,000 or more, all or a portion of which are attributable to backstop jurisdictions. This would include where they carry on business through a partnership.

Credit Determination

The credit amount in respect of an eligible farm business for an applicable fuel charge year would be equal to the eligible farming expenses attributable to backstop jurisdictions in the calendar year when the fuel charge year starts, multiplied by a payment rate, as specified by the Minister of Finance for the fuel charge year. Consistent with the general treatment of business tax credits, credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed.

Where an eligible farming business is carried on through a partnership, the credit would be claimed by a corporation, individual or trust that is a partner in the partnership at the end of the partnership’s fiscal period. The partnership would calculate the total amount of eligible farming expenses and each partner would then calculate their credit entitlement based on their proportionate interest in the partnership. Special rules would apply to calculate a partner’s credit entitlement where a partnership interest is held indirectly through one or more partnerships.

Eligible Farming Expenses

For the purposes of calculating this tax credit, eligible farming expenses are amounts deducted in computing income from farming for tax purposes, excluding any deductions arising from mandatory and optional inventory adjustments and transactions with non-arm’s length parties.

Where taxation years do not align with the calendar year, eligible farming expenses would be allocated to each calendar year based on the number of days in each calendar year over the total days in the taxation year, and subjected to the applicable payment rate for the calendar year.

  • For example, if a corporation has a taxation year that starts on July 1, 2021 and ends on June 30, 2022, its eligible farming expenses would be prorated to both the 2021 and 2022 calendar years according to the proportion of days in each year.

To be eligible farming expenses, expenses must also be attributable to one or more backstop jurisdictions. For businesses operating in multiple jurisdictions, eligible farming expenses as described above would be apportioned by jurisdiction according to the following allocation rules.

  • For an individual, trust or partnership, eligible farming expenses must be allocated to each province or territory in the same proportions that income is allocated according to Part XXVI of the Income Tax Regulations.
  • For a corporation, eligible farming expenses must be allocated to each province or territory in the same proportions that taxable income is allocated according to Part IV of the Income Tax Regulations.

Payment Rates

The Minister of Finance has specified payment rates for eligible farming expenses that are incurred in the 2021 and 2022 calendar years, which correspond to returns of fuel charge proceeds from the 2021-22 and 2022-23 fuel charge years respectively. Businesses can claim these refundable tax credits through their tax returns that include the 2021 and 2022 calendar years.

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