Small Business Carbon Tax Rebate and Canada

Author(s): Scott Douglas Jacobsen

Publication (Outlet/Website): The Good Men Project

Publication Date (yyyy/mm/dd): 2025/03/26

Dan Kelly, President and CEO of CFIB, discusses the small business carbon tax rebate and the federal government’s failure to distribute the promised 10% rebate to businesses since 2019. Despite accumulating $2.5 billion, the government struggled to create a rebate formula. CFIB developed a headcount-based system, which was included in the 2024 budget, but the rebate was later deemed taxable. Parliament’s prorogation stalled corrective legislation, creating uncertainty. With a potential leadership change and carbon tax policy shifts, CFIB continues lobbying for a legislative fix to ensure rebates remain tax-free and businesses receive overdue funds.

Scott Douglas Jacobsen: Today, we are here with Dan Kelly. He is the President, CEO, and Chair of the Canadian Federation of Independent Business (CFIB), representing 100,000 small and medium-sized business members across Canada.

He began his career at CFIB as a policy analyst in Winnipeg in 1994, later taking on leadership roles in Calgary and Ottawa, where he helped shape Canada’s first Code of Conduct for the Credit and Debit Card Industry. Now based in Toronto, Dan has led CFIB through the challenges of COVID-19, advocating for relief measures such as wage subsidies and rent support. He has served on multiple committees and is recognized as one of Canada’s leading advocates on issues related to taxation, regulation, labor, and payments.

Dan holds a Bachelor of Commerce from the University of Manitoba and lives with his family. Thank you for joining me today. I appreciate it.

Dan Kelly: Thanks, happy to be here.

Jacobsen: Regarding the small business carbon tax rebate, what is the main issue that people should be aware of? This is not a small amount of money.

Kelly: No, it certainly is not. Let me take you back and provide a quick overview of the history of the federal carbon tax as it relates to small businesses since 2019.

When the federal government introduced the carbon pricing system, it established what was called the federal carbon backstop for provinces that did not implement their own carbon pricing plans. Initially, this applied to Saskatchewan, Manitoba, Ontario, and New Brunswick. Over time, more provinces were added, and now eight provinces are subject to the federal carbon pricing system. Quebec and British Columbia remain outside of this system because they have their own provincial carbon pricing mechanisms.

At the outset, the federal government made a commitment to return all revenue collected through the carbon tax back to Canadians and businesses. The stated goal was to encourage lower emissions while ensuring that the tax did not become a net cost to the economy.

The carbon tax revenue was supposed to be split as follows:

• 90% of the revenue was designated for direct rebates to individuals through quarterly Climate Action Incentive payments (also known as “carbon tax rebates”).
• 10% was set aside for small and medium-sized businesses, Indigenous groups, and non-profits.

The consumer rebate program has been active, and millions of Canadians receive quarterly payments. You may have heard the Prime Minister and other officials claim that 80% of Canadians receive more back in rebates than they pay in carbon tax. However, this claim is widely debated. Even if true, the reason some individuals receive more in rebates is that businesses receive little to nothing in return—effectively subsidizing the consumer rebates.

Now, here’s where the issue lies: Since 2019, the federal government has not returned the 10% share meant for small businesses. While these funds have been accounted for on paper, they have never been distributed to business owners.

The government attempted to implement two programs to return these funds:

1. The first program was announced but quickly abandoned.
2. The second program was proposed but never implemented.

As a result, billions of dollars in carbon tax revenue that were supposed to go back to small businesses remain unreturned. Businesses continue to pay the tax, but they are not receiving the promised rebates.

From 2019 to 2023, the federal government collected carbon tax revenue from both businesses and consumers. While 90% of the revenue was rebated back to consumers as promised, the 10% allocated for small businesses was never returned. However, to their credit, the government did not spend that money elsewhere—it simply sat in an account in Ottawa for five years.

After more than 100 meetings with officials from Environment Canada and the Department of Finance, we realized the main issue was not a lack of intent to return the money, but rather a lack of understanding on how to distribute it. The government had no clear mechanism for determining how to rebate the money or how to ensure businesses received it in the correct proportions.

This created a massive political and logistical mess that remained unresolved for years. As an advocacy organization for small businesses, CFIB said, “Wait a minute—this fund has now accumulated $2.5 billion, with a B, that rightfully belongs to businesses.” Most of this money was owed to businesses in Ontario, Manitoba, Saskatchewan, and Alberta, but in 2023, the government expanded the program to include the four Atlantic provinces as well.

This money could have been critical for struggling businesses, especially during the COVID-19 pandemic, yet it remained untouched. We quickly realized that the federal government was not going to create a formula on its own. So, working with our economists, we devised a rebate system based on headcount—a simple, fair way to return the money to businesses.

In spring 2024, we met with Chrystia Freeland, then Deputy Prime Minister and Minister of Finance, and pushed for a solution. To her credit, she acknowledged the issue and incorporated our proposed framework into the 2024 federal budget. She even publicly credited CFIB for our role in developing the plan.

The plan stated that businesses would receive their long-overdue rebates by the end of 2024. Over the next several months, we worked with the government to finalize the implementation details. Eventually, they confirmed that payments would be distributed in December 2024.

At that point, we asked a key question: “Like the consumer rebates, these payments will be tax-free, correct?”Officials at Finance Canada assured us multiple times that yes, the rebates would not be taxed.

However, about a month before the checks were set to go out, the Canada Revenue Agency (CRA) informed us that the government had classified the payments as taxable government assistance for businesses. This was completely unnecessary and counterproductive, as it meant small businesses would lose a portion of their long-overdue rebates to taxes.

We lobbied for weeks to get Finance Canada to overturn the Canada Revenue Agency’s (CRA) decision to tax the rebate. However, at the time, the government had bigger political concerns, including the ongoing tensions between the Prime Minister and the Deputy Prime Minister.

When we realized we were getting nowhere, CFIB issued a news release in November 2024, warning small businesses that their long-overdue carbon tax rebate would be taxable. The announcement sparked immediate and overwhelming backlash from business owners and advocacy groups.

That same day, Deputy Prime Minister Chrystia Freeland personally called me and issued a public statement, announcing that the rebate would now be tax-free. That was in November 2024.

However, on December 16, 2024, the Deputy Prime Minister resigned, in part due to the fallout from the failed GST holiday, which we had also criticized publicly. Shortly after, the Prime Minister announced his resignation and prorogued Parliament, effectively stalling all legislative processes.

Then, in January 2025, the CRA informed us that the Deputy Prime Minister’s promise to make the rebate tax-free was never implemented. This required a legislative change, but since no bill was ever introduced in the House of Commons, the rebate remained taxable.

The only way to change this now is for the government to introduce a legislative proposal—a Ways and Means motion in the House of Commons—to formally remove the tax. But with Parliament prorogued, this cannot happen.

Meanwhile, the $2.5 billion in rebate checks were already distributed to businesses in December 2024 and January 2025—and, ironically, they were sent by mail during a postal strike, further delaying payments.

Honestly, it feels like a bad political satire.

Even now, the CRA is confirming that the rebate remains taxable, while Finance Canada insists they are working on a fix—but they lack the power to implement one without Parliament reconvening.

Adding to the uncertainty, the current Finance Minister may not even be in office in a few weeks, depending on who takes over as the next Liberal Party leader. Meanwhile, the Conservative Party is campaigning on scrapping the carbon tax altogether, which raises the question: Will they even bother fixing this rebate issue if they come into power?

This has been a political football kicked around for five years, and small businesses are still paying the price.

Jacobsen: Given all this, why is CFIB calling for Parliament to be reconvened immediately?

Kelly: This isn’t the only issue, but it is a major one. If Parliament is reconvened, Finance Canada can introduce a Ways and Means motion to remove the tax on the carbon tax rebate.

If they do that, the CRA will administer the rebate as tax-free, even before the legislation formally passes. This would give Parliament time to officially pass the change while ensuring businesses get the full amount they were promised.

Kelly: Even if the government changes, having draft legislation in place increases the likelihood that any new government will follow through and finalize the process of making the rebate tax-free.

We have received an informal commitment from the Conservatives that they will implement this change if they come to power. If Chrystia Freeland becomes Liberal Party leader, one would assume she would proceed with the legislation, given that she led the effort while in office.

As for Mark Carney, who knows? There is still a lot of uncertainty.

At this moment, businesses are filing corporate income taxes throughout the year, and as things stand, they must pay tax on the rebate. This is why we need Parliament to reconvene.

And this isn’t the only issue. Businesses are also facing new tariffs that will have significant economic impacts, and we need to be prepared for that.

Additionally, two outstanding issues related to capital gains legislation remain unresolved. These have been controversial, but if Parliament resumes, we could at least push forward two positive changes proposed by the Liberals last year, even if the overall capital gains increase is unfavorable.

Jacobsen: How does the tax treatment of the small business carbon tax rebate compare to the rebates given to Canadian families?

Kelly: From the start, it was made clear that the carbon tax rebates for Canadian households in the eight affected provinces would be tax-free—and they have been.

Yet for businesses, the government has classified the rebate as taxable government assistance, which makes no sense.

This is supposed to be a tax rebate. Imagine if you file your income taxes, receive a refund because you overpaid, and then the government imposes a tax on your refund—that would be absurd. And yet, that’s exactly what’s happening here.

Not only is this deeply unfair, but it also undermines the fundamental principle of the carbon tax that the Liberals have insisted upon.

They have repeatedly claimed that the carbon tax is revenue-neutral—that every dollar collected would be returned to Canadians to help cover costs.

However, with $2.5 billion in rebates sent out to businesses, the government could collect $300–400 million in corporate income taxes on that amount.

That means the federal government is now generating revenue from the carbon tax—despite explicitly promising that it would not.

Jacobsen: What discrepancy exists between the CRA’s decision and the information available on the Department of Finance website?

Kelly: The Department of Finance website still states that the carbon tax rebate is tax-free.

In fact, former Finance Minister Chrystia Freeland even tweeted that the rebate would be tax-free. That post still exists.

Additionally, in our CFIB news release, we linked to an official government webpage that still claims the rebate is tax-free.

However, despite these statements, Finance Canada has clarified that, while they intend for the rebate to be tax-free, they cannot implement the change without legislation.

The problem is, with Parliament prorogued, they lack the authority to fix this right now.

Given the current political uncertainty, there is no guarantee that this issue will be resolved.

Meanwhile, the CRA still has not updated its website to confirm whether the rebate is taxable or not.

The only reason businesses even know about this issue is because the CRA privately informed us that the rebate is taxable.

And that’s unacceptable. Accountants and tax professionals have not been formally notified that businesses are expected to pay tax on these rebates.

Jacobsen: What legislative changes does CFIB want or recommend regarding the small business carbon tax rebate formula while the carbon tax remains in effect?

Kelly: All the Department of Finance needs to do is introduce a Ways and Means motion, just as it did for many—though not all—of the capital gains changes.

Once that is in place, it would officially designate the small business carbon tax rebate as a tax rebate rather than government support, meaning it would no longer be taxable.

This is a simple legislative fix.

I suspect we could get all-party support to pass it. But we cannot move forward until Parliament is in session, and right now, it is not.

Jacobsen: What else could go comically wrong?

Kelly: Well, a few things.

To complete the absurdity of this situation, after five years of struggling to get rebates to small businesses—the 10% share of carbon tax revenue originally promised—the government has now decided to reduce that percentage to 5%.

Essentially, the government found the rebate process too complicated, so instead of fixing the issue, they cut small businesses’ share in half.

Meanwhile, the carbon tax continues to be collected for 2024 and into 2025. While we expect it may be scrapped, given that both major Liberal leadership candidates and the Conservatives have promised to eliminate it, the tax is still scheduled to increase by 19% on April 1, 2025.

No one in government has signaled otherwise.

Additionally, with small business rebates now reduced to just 5%, I am concerned that businesses may never receive the money they are owed.

If the carbon tax is repealed, will the government still follow through and return every dollar collected up to that point?

That will likely become a major lobbying battle because these are billions of dollars flowing into Ottawa, and governments can always find other ways to spend it.

Jacobsen: What could be the long-term implications of the CRA’s decision for the relationship between small businesses and the federal government?

Kelly: Unfortunately, this is not the first time we’ve seen a disconnect between the Department of Finance and the Canada Revenue Agency (CRA).

One of the basic expectations in a functioning democracy is that when a government sets tax policy, it is implemented as intended. However, to ensure this happens, the rules must be legislated.

This is not the only example. I was on the other side of this issue when dealing with the capital gains tax changes. In that case, the CRA attempted to enforce new tax rules before the legislation was even passed. We need to create a tighter legislative window to prevent these kinds of problems.

CFIB is actively lobbying for Canada to adopt a rule similar to the United Kingdom, where if a government introduces new tax measures, it must pass legislation within a fixed timeframe—we suggest three to six months.

If the government fails to pass the legislation within that period, then the tax rules would automatically revert to their previous state.

This would provide clarity and accountability in tax policymaking, which is especially critical in a country where minority parliaments are common. We need a better system for tax policy decisions than the one we have today.

Jacobsen: Does the prolonged delay and unclear guidance from Finance Canada and the CRA affect CFIB’s credibility with some of its members?

Kelly: I have worried about that, yes. I don’t want to be the boy who cried wolf—saying “it’s taxable”, then the government switches gears, and suddenly “it’s not taxable”, only to have them reverse course again.

I have been concerned about this, but at the end of the day, if small business owners are looking for an honest broker on tax policy, they are more likely to trust CFIB than they are to rely on Finance Canada or the Canada Revenue Agency right now.

And that is deeply troubling.

Small businesses shouldn’t have to turn to a non-profit business association to get accurate tax policy information. That is the government’s responsibility, and the fact that we are in this situation today is entirely avoidable.

This mess never needed to happen.

Jacobsen: One final question: Throughout this conversation, we’ve touched on it, but what timelines should people reasonably expect—whether they’re following CFIB’s advocacy work or monitoring the political developments we’re seeing domestically?

Kelly: As of now, Parliament is scheduled to return on March 24, 2025, when the prorogation ends. Before that, on March 9, 2025, the Liberal Party is expected to announce its new leader, who will likely become Prime Minister.

Following that, we assume a new cabinet will be formed, and government operations will resume.

However, it is unclear how long Parliament will sit—it could be days or even just hours, as multiple parties have indicated they no longer have confidence in the government.

We are pushing to get this issue on the immediate legislative agenda.

Right now, all we need is a Ways and Means motion.

We don’t even need full legislation to pass yet—we just need the government to introduce it. That alone would set the process in motion and allow the CRA to change its tax interpretation.

Regardless of who is in power—Liberal, Conservative, or some other coalition—we will need to continue lobbying to ensure this legislation is finalized.

I am hoping that by spring, we can at least get the CRA to change its initial interpretation.

Most businesses have not yet filed their corporate income taxes for this year, so if we act quickly, we may be able to fix this issue before they are forced to file tax amendments.

That is our goal.

Jacobsen: Dan, thank you for your time today. I appreciate it. It was great to meet you.

Kelly: Not at all. Pleasure to meet you as well, and congratulations on the business you’ve built.

Jacobsen: Thank you.

Kelly: Cheers! Have a great day.

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