Department of Finance Canada released draft legislation to make Canada Carbon Rebates for Small Businesses tax-free.
The rebate is an automatic refundable tax credit for eligible corporations. It returns fuel-charge proceeds from the now-cancelled federal consumer fuel charge to small and medium-sized businesses.
Finance Canada said the rebate is delivering more than $2.5 billion in tax-free payments to more than 600,000 Canadian businesses for the 2019-20 to 2023-24 fuel charge years.
The draft legislation confirms that payments for those years would not be included in income for tax purposes. The final payment for the 2024-25 fuel charge year would also be tax-free.
The department said the finance minister would later specify payment rates for the final year once enough 2024 tax-return information is available. That final payment is meant to return $623.1 million in proceeds for the 2024-25 fuel charge year.
Once the legislation receives Royal Assent, CRA would be able to process amended T2 corporate tax returns for businesses that already included the rebate in taxable income.
Eligibility timing also matters. Businesses that filed their 2023 tax return after July 15, 2024 and on or before December 31, 2024 would be eligible for tax-free payments for the 2019-20 to 2023-24 years once the legislation is enacted. Businesses filing their 2024 return by July 15, 2025 would be eligible for the 2024-25 payment.
Finance Canada also said it would no longer proceed with earlier proposals to expand eligibility to co-operative corporations and credit unions, add a minimum payment for smaller businesses, and phase out payments for larger businesses.
The business impact is direct: the same cash payment is worth more when it is excluded from taxable income, and amended returns may be needed for corporations that reported the rebate before the tax-free treatment is enacted.