Carbon tax rebate arrives as cost of living a top concern for Canadians

Carbon tax rebate released in July

Which is why, if you are a resident of Alberta, Saskatchewan, Manitoba or Ontario, you may have been pleased to see some unexpected money in your bank account in July. This amount is the first two payments made to qualifying residents as part of the Climate Action Incentive Payment (CAIP). In 2021 the rebate ranged from as low as $93 for a single child up to $550 for an individual depending on your province.

If it feels like free money, think again. The rebate is meant to mitigate the higher costs of federal carbon taxes, which are applied to things like gasoline and natural gas.

“The federal government returns all proceeds to the jurisdictions where they were collected, with approximately 90% of direct proceeds from carbon pollution pricing returned to residents through CAI payments,” former Liberal MP Deb Schulte said.

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What is the federal carbon tax?

The federal carbon tax began in 2019, with a tax of at $20 per tonne on the CO2 emitted from burning any fossil fuel. It incrementally increases by $10 per ton each year, reaching $30 per ton in 2020, then $40 per ton in 2021, $50 per ton in 2022 until it reaches $170 per ton in 2030.

With the latest increase on April 1, this means adding another 2.2 cents to the cost of a litre of gasoline, or 11 cents total since kickstarting the carbon tax in 2019.

However, there is a helpline in at least four provinces.

Alberta, Saskatchewan, Manitoba and Ontario are called backstop provinces for not implementing their own provincial carbon tax. Therefore, they are subject to federal carbon taxes. That way Canadians in every province or territory are taxed for carbon pollution - either through their provincial government or federally.

How to receive the Climate Action Incentive Payment

Prior to 2021, the Climate Action Incentive was a refundable tax credit claimed annually on personal income tax returns. With CAI, it required a more aware constituent who is able to fill out Line 45110 when filing their income tax return. However, the Climate Action Incentive Payment (CAIP) is now automatically paid as a quarterly benefit four times a year, starting in July 2022.

With the change, residents don’t need to apply to receive the payment for the CAIP. Instead, the Canada Revenue Agency (CRA) will determine their eligibility when they file their income tax and benefit return and will send the payments directly.

Ross McKitrick, Professor of Economics at the University of Guelph, still considers CAIP a rebate, and that amount per person hasn't changed but only the way it's paid.

“People quickly forget about a refundable credit on their tax returns, whereas four payments a year will make a bigger impression,” he said.

People who are eligible must also meet at least one of these conditions during the same period:

• You are 19 years of age or older
• You have (or previously had) a spouse or common-law partner
• You are (or previously were) a parent and live (or previously lived) with your child

People who are entitled to CAIP, can expect to receive them in July (including the April payment), October and January.

The CAIP also has a rural supplement of 10% of the base amount for residents of small and rural communities. To claim it, people must complete Schedule 14 and attach it to their income tax and benefit return.

“The other 10% is used to support farmers, small businesses, Indigenous groups, schools, universities, and municipalities,” Schulte explained.

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Why do different provinces receive different amounts?

Another thing about the credit or the rebate is that different provinces receive different amounts.

In 2022-23, the increased CAI payments mean a family of four will receive $745 in Ontario, $832 in Manitoba, $1,101 in Saskatchewan, and $1,079 in Alberta.

When asked why residents in Alberta receive more in tax credit than Ontarians, Jennifer Winter, Associate Professor of Economics and Scientific Director of the Energy and Environmental Policy research division at The School of Public Policy at the University of Calgary, explained.

One reason, she explained, is that the consumption of energy is higher in Alberta than Ontario with everything else being equal such as the federal government receiving more carbon tax revenue.

Alberta and Saskatchewan generate most of their electricity from fossil fuels such as coal, natural gas, or petroleum. Manitoba and Ontario rely mostly on hydroelectricity. “Alberta's energy system is more emissions intensive than Ontario,” she added a second reason. “And so that also generates higher revenue.”

Why is there a rebate if the idea is to make carbon expensive?

McKitrick, admitted that this refund itself can offset some of the effect of the tax.

“In theory people will spend their rebate on other consumption goods as well as fuel, so the net effect will be to reduce fuel demand,” McKitrick said. “The tax makes fuels relatively more costly than they were before, which is the key mechanism,” he added.

For Schulte, the idea is to create greater awareness especially when people begin paying at the pump or the bill for home heating. “The measure to reduce atmospheric carbon was not to be a new tax, but an incentive for change, so it was structured to be revenue neutral through the Climate Action Incentive (CAI),” the former politician said. “It is to increase over time to give people time to adjust their behaviour and make lower pollution choices.”

Also, with the change from CAI to CAIP, Schulte believes that more people will be aware of the program even though earlier the government did spend quite a bit of time educating people through advertisements, outreach and working through tax advisors and preparers that it exists.

“However many Canadians rely on others to prepare their tax filing and often are not familiar with the details,” she said.

Brace for the financial pain to change

The financial burden is going to be felt because that’s the purpose itself. It’s for us to change behavior in hopes of us cutting our carbon emissions collectively.

The Parliamentary Budget Office indeed published a report earlier this year stating that the average household will pay more in carbon taxes than they get in rebates. McKitrick has also reached a similar concussion in a report for the Fraser Institute last year.

“One of the constant problems in climate policy is the government never tells people how much their plans will cost, instead they usually claim it won't cost anything or will even be a net benefit,” he said.

So is this tax inducing Canadians to finally change? So far, Leger’s June survey shows that about 68% of those polled, described hefty gas prices being the reason behind driving less as well as 64% said that energy prices pushed them to take measures in hopes of reducing their heating and cooling bills.

As people feel the pain, the end for this double-whammy combo of climate change and expensive cost of living isn't in sight anytime soon.