Canada

Federal fuel charge: Impact on energy sector and Alberta businesses

TAX ALERT  | 

On December 6, 2019 the federal government announced that Alberta’s Technology Innovation and Emissions Reduction (“TIER”) program was accepted as being equivalent to the federal carbon pricing scheme under the federal greenhouse gas emissions policies and the federal fuel charge backstop province for large emitters in the province. TIER replaces the Carbon Competitiveness Incentive Regulation (“CCIR”) program under the previous provincial government, and remains an output-based pricing system for heavy industrial carbon emitters, that remained in place after the Kenney government repealed the Alberta carbon levy legislation this past May.

The previous 2020 benchmark price of $30 per tonne established under CCIR, for emissions of 100,000 tonnes or more of carbon dioxide equivalent (CO2e) per facility also remains the same under TIER for heavy industrial facilities in sectors such as oil and gas, electricity, agriculture, and chemical manufacturers. TIER has been given equivalency to the federal regime for the time being, but is subject to annual review and will ultimately need to keep pace with the gradual increases in the federal fuel charge price on carbon of $50/tonne of GHGs by 2022.

The federal fuel charge, which works in concert with TIER, together will apply to various businesses and organizations of all kinds  and last, but not least, individual consumers. For businesses with facilities that do not have emissions that are not part of the TIER regime, the federal backstop will apply, subject to businesses with facilities with emissions levels that allow them to opt-in to the TIER regime. It will apply to all fossil fuels used in Alberta, and is intended to be a broad-based price on carbon combustion and use across Canada where a provincial/territorial equivalent is not in place, and as such, will considerably increase (again) business operating costs in 2020 and beyond.

TIER and the federal fuel charge are intended to work in harmony to meet federal requirements under the Greenhouse Gas Pollution Pricing Act (“GGPPA”), and will both become effective on various taxable fuels delivered in Alberta on January 1, 2020. The federal fuel charge will apply to most taxable fuels ranging from home heating fuels and natural gas to transportation fuels such as gasoline and diesel sold on a volumetric basis, subject to certain exemptions available to farmers, fishers, remote power plant operators, certain transportation companies, registered distributors as well as qualifying registered emitters, the latter of which, are taxed under the Alberta TIER regime.

What actions can Alberta businesses take before 2020?

Heavy industrial emitters will be exempt from reporting and paying the federal fuel charge if they qualify or are able to opt-in to Alberta’s TIER program. Facilities previously opted-in under CCIR are automatically opted-in to TIER, as are facilities with emissions of 100,000 tonnes of CO2e per year. Unregulated emitters who qualify for TIER must submit an application to the Alberta government on, or before, September 1, 2020 to be regulated under TIER for 2020 and subsequent compliance years. Annual compliance reports will be required to be submitted by a third party assurance provider for all regulated facilities by June 30 of every year.

Facilities with emissions of less than 100,000 tonnes of CO2e per year may qualify to opt-in to TIER if the facility competes directly with larger emitters automatically regulated under TIER in certain sectors such as natural gas processing, oil sands, agroindustry, chemical, or refining. Facilities with greater than 10,000 tonnes of CO2e emissions annually in any year since 2017 may also qualify to be regulated under TIER if the facilities operate in an Emissions Intensive Trade Exposed (“EITE”) sector. EITE sectors include oil and gas extraction, pipeline transportation, coal mining, electric power generation, agricultural chemical manufacturing, and metal mills. Conventional oil and gas facility owners also have the option of applying to have two or more facilities combined and considered in aggregate to be regulated under TIER.

For smaller conventional oil and gas facilities that are new to opting in to TIER (i.e. they had not opted-in to CCIR), the CRA has noted that such facilities should demonstrate that they have made steps to apply to opt-in before January 1, 2020, even though they are not required to do so under TIER until September 2020. CRA’s position suggests that if TIER opt-in registration becomes effective retroactive to January 1, 2020, CRA may not allow for a retroactive refund of the federal fuel charge paid on inputs to such facilities.

Notwithstanding the “made in Alberta” approach to emitters, with Alberta becoming a listed province for the federal fuel charge effective January 1, 2020, it is important for fuel producers, fuel wholesalers, fuel distributors, and air, marine, rail, and road carriers to ensure they are registered with the CRA prior to the effective date if they were not previously registered with CRA because they only operated in Alberta and previously only affected by the Alberta carbon levy. Once registered, exemption certificates can be provided to fuel providers on otherwise taxable fuel deliveries to receive an exemption from the federal fuel charge.

Registered distributors that are currently registered as such under the federal fuel charge, do not need to update their registration with CRA to include Alberta as a listed province in which they operate, since their first return in January with volumes and/or fuel charge included showing Alberta activity, will automatically be updated by CRA to reflect Alberta as a listed province in which activity or sales occur. Further, if a registered distributor adds new taxable fuels to their reporting in Alberta (or any listed province) in any month, CRA will automatically update the person’s registration to reflect this change.

Registered distributors do not need to update their registration to reflect their exemption certificate issuance to counter-party sellers, when purchasing otherwise taxable fuels in Alberta, simply because it has become a listed province. The prior versions of various exemption certificates did not specify the fuel type; however recently updated versions on CRA’s website do allow certificate issuers to specify the fuel types they are seeking exemption from.

Exemption certificates can also be provided to registered fuel distributors by greenhouse operators, farmers and fishers as well as remote power plant operators for certain fuels used in their operations in order to purchase these fuels exempt from the federal fuel charge. It is important for the exemption certificates to be provided to fuel distributors prior to the effective date of January 1, 2020 to avoid payment of the federal fuel charge.  Lastly, for specified air, marine and rail carriers, there are also no changes required to their exemption certificates simply because Alberta has become a listed province effective January 1, 2020.

AUTHORS


Subscribe to our newsletters

Subscribe


HOW CAN WE HELP YOU?

Contact us by phone +1.855.420.8473 or submit your questions, comments or proposal requests


CONTACT

Maria Severino

National Tax Leader


Recent Tax Alerts

Restrictive covenant and the share sale veto right

The Canada Federal Court of Appeals decision in Pangaea raises new considerations on the definition of restrictive covenants.

  • August 12, 2020

FCA confirms that a space trip is taxable to company shareholders

Find out how shareholder benefits could arise and the potential income tax implications as a result of the In Laliberté vs Canada decision.

  • August 04, 2020

Tax updates in Canada in response to COVID-19

Our tax alert summarizes the latest tax measures by federal and certain provincial government authorities amid the coronavirus pandemic.

  • July 28, 2020

Tax characterization of derivative contracts

The Supreme Court of Canada (SCC) released its decision recently, clarifying the treatment of derivative contracts for tax purposes

  • July 08, 2020

Ways to optimize estate planning in the wake of COVID-19

A Capital Dividend Account allows a shareholder to access corporate surplus tax-free, but timing is critical.

  • June 24, 2020