Global Daily Tax News, Canada To Waive Tax On Small Business Carbon Rebates, (Jul 3, 2025)

The Canadian Government has tabled draft legislation to provide that Canada Carbon Rebates for Small Business will be exempt from tax.

Specifically, payments received by corporations in respect of the 2019-20 to 2023-24 fuel charge years would not be included in income for tax purposes, and the final payment to be made under the Canada Carbon Rebate for Small Businesses (i.e., in respect of the 2024-25 fuel charge year) will also be tax-free.

The Government will introduce legislation in Parliament to implement these changes in the fall.

Once the legislation receives Royal Assent, the Canada Revenue Agency (CRA) will have the authority to process amended T2 corporation income tax returns for those who have already included the rebate in their taxable income, ensuring the rebate is processed as tax-free (i.e., not included in the taxable income reported in the T2). Further guidance will be provided by the CRA at that time, the Government said.

The Government has also confirmed that eligible businesses that filed their 2023 tax return after July 15, 2024, and on or before December 31, 2024, will also be eligible to receive tax-free payments in respect of the 2019-20 to 2023-24 fuel charge years, once the legislation receives Royal Assent. Eligible businesses that file their 2024 income tax return by July 15, 2025, will be eligible to receive a tax-free payment in respect of the 2024-25 fuel charge year.

The Government has also announced that, with the removal of the fuel charge from law and the winding down of proceeds return mechanisms, it will no longer proceed with proposed changes announced in the 2024 Fall Economic Statement that would have expanded eligibility for the Canada Carbon Rebate for Small Businesses to cooperative corporations and credit unions, added a minimum payment for smaller businesses, and introduced a phaseout for larger businesses.