On June 30, 2017, TEI filed comments on the Technical Paper on the Federal Carbon Pricing Backstop released by the Canada Department of Finance. TEI's comments were prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is David Card. Committee members Kevin Thorn, Mike Polanchek, Chantal Groulx, and Kim Berjian contributed to the development of TEI's comments. Pilar Mata, Tax Counsel for TEI, coordinated the preparation of TEI's comments.
On behalf of Tax Executives Institute ("TEI"), we write to comment on the Technical Paper on the Federal Carbon Pricing Backstop ("Technical Paper") released by the Department of Finance ("Finance"). TEI appreciates the opportunity to provide feed-back as part of the Canadian Government's consultation regarding the federal benchmark ("Federal Benchmark" or "Benchmark") and federal backstop ("Federal Backstop" or "Backstop") for carbon pricing. TEI notes the implementation of the Federal Backstop raises significant challenges requiring input and collaboration from many government agencies and stakeholders to ensure Canadians are provided a fair and consistent national carbon policy.
About Tax Executives Institute
TEI was founded in 1944 to serve the professional needs of in-house tax professionals. Today, the organization has 56 chapters in North and South America, Europe, and Asia, including four chapters in Canada. Our approximately 7,000 members represent 2,800 of the largest companies in the world, many of which either are resident or do business in Canada.
As the preeminent association of business tax professionals worldwide, TEI has a significant interest in encouraging the uniform and equitable enforcement of tax laws, and reducing the cost and burden of tax administration and compliance to the benefit of taxpayers and government. TEI is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance, is consistent with sound tax policy, is easy to administer, and is efficient.
Comments on the Technical Paper
The Pan-Canadian Framework on Clean Growth and Climate Change ("Framework") is Canada's plan to grow the economy while reducing greenhouse gas emissions and building resilience to adapt to a changing climate. The Federal Benchmark published by the Canadian government in October 2016 mandated the application of carbon pricing to a broad set of emission sources throughout Canada by 2018. The Federal Benchmark provided provinces and territories flexibility to implement their own carbon pollution pricing systems and committed to implement a Federal Backstop that would be imposed upon any province or territory that did not have a qualifying carbon pricing system in place by 2018.
The Federal Backstop will apply in jurisdictions that do not have a carbon pricing system or do not have carbon pricing systems that fully meet the Federal Benchmark. The Federal Backstop is composed of two key elements--a federal carbon levy ("FCL") applied to fossil fuels and an output-based pricing system for industrial facilities emitting above a certain threshold, with an opt-in capability for smaller facilities with emissions below the threshold. The Technical Paper seeks to inform Canadians and stakeholders about the proposed Federal Backstop and to obtain feedback on its design.
Timing to Implement the Federal Backstop
The Technical Paper states the FCL will become effective in 2018 and the OBS will not become effective prior to January 1, 2019. The request for comments on the Technical Paper are due June 30, 2017, at which time the Parliament will be in recess, not to reconvene until the fall of 2017.
TEI recommends legislation be introduced in Parliament at the earliest opportunity during the fall session and any related regulation(s) be released by March 1, 2018, with an FCL implementation date no earlier than July 1, 2018. Such delay is necessary to provide time for the Canada Revenue Agency ("CRA") and businesses across the country to learn the new rules and develop compliance processes/systems (for the CRA, registration forms, registration systems, memoranda, policy papers, etc. and for businesses, new reporting processes, systems functionality, and other resources) prior to the implementation date. An earlier implementation date would create considerable administrative burdens for the CRA and businesses alike.
Point of Taxation
The Technical Paper states that, in most cases, the FCL will be applied early in the supply chain of each fuel used in a Backstop jurisdiction. Further, the end user of a fuel will generally not have any special rights or obligations with respect to the FCL, as the end user will purchase levy-paid fuel in most cases.
The proposed Federal Backstop places onerous reporting obligations upon non-taxable transactions and will be complex to administer. TEI thus maintains that the point of taxation should be moved further downstream to the point at which the fuel is put into use or sold to an end user. Such treatment is analogous to the manner in which gasoline and diesel are taxed under the Federal Excise Tax ("FET") applied to fuels under the non GST/HST portion of the Excise Tax Act ("ETA"). The methodology proposed by TEI would substantially reduce the administrative impact on businesses across the country while still meeting the carbon pricing requirements set forth in the Benchmark.
Evaluation of Provincial Carbon Pricing Systems and Integration of the Federal Backstop in Provinces Not Meeting the Federal Benchmark
The Technical Paper does not indicate how provincial carbon pricing programs will be evaluated for compliance with the Federal Benchmark. Moreover, it is not clear how the Federal Backstop will be integrated if the Federal Government determines a province's carbon pricing system does not meet the Federal Benchmark's...