Late last month the federal government announced draft legislation confirming that all payments issued through the Canada Carbon Rebate for Small Businesses would be tax-free. While the government had indicated this would be the case, legislation had yet to be introduced that would ensure that small businesses received the full financial benefit of the carbon rebate.

As Ottawa noted in a statement announcing the draft legislation, “… 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.”

Legislation to implement the changes will be introduced in the fall. The next federal budget is set to be tabled around the same time.

The Canada Revenue Agency will have the authority to process revised T2 corporation income tax returns once the legislation receives royal assent. At that stage, businesses that have included the rebate in their taxable income will receive guidance from the CRA as to how their T2s will be processed, along with an outline of the mechanism for issuing tax payment refunds.

The Canada Carbon Rebate for Small Businesses is an automatic, refundable tax credit provided to eligible small- and medium-sized businesses. It returns fuel charge proceeds from the since-cancelled federal consumer fuel charge for the period ranging from 2019 to 2024, when the fuel charge was in effect. The charge was eliminated on April 1^st, 2025.

According to the government, specific payment rates to Canadian businesses for the final 2024-25 fuel charge year will be set “… once sufficient information is available from the 2024 taxation year.” The Canada Carbon Rebate for Small Businesses payment for the 2024-25 fuel charge year will be the final payment made to eligible businesses under the program.

The announcement added that, “… eligible businesses that filed their 2023 tax return after July 15^th, 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 2024 Fall Economic Statement announced plans to expand the Canada Carbon Rebate for Small Businesses to include cooperative corporations and credit unions, while adding a minimum payment for smaller businesses and a phaseout for larger businesses. The government confirmed that it will no longer proceed with these plans.

Federal government rescinds Digital Services Tax

It would be an understatement to say that Ottawa has faced a raft of extraordinary challenges on the Canada-U.S. trade file since the inauguration of President Donald Trump. His administration has been an enthusiastic proponent of 1930s-style tariffs, adopting policies that might run counter to the Canada-U.S. Tax Treaty and even calling for Canada to become the 51^st state. But when his ‘One Big, Beautiful Bill Act’—a package of tax and spending measures—proposed a series of retaliatory taxes targeting policies deemed unfair to U.S.-based businesses, it soon became clear that at least one Canadian domestic tax policy would fall into the Trump administration’s crosshairs.

That turned out to be the federal Digital Services Tax. While negotiations between Canada and the U.S. over a renewed trade agreement and security pact have been ongoing, Trump abruptly called them off unless the contentious tax was dropped. Last week, Ottawa announced that it would immediately rescind the Digital Services Tax and would introduce legislation in the near term to make that reversal official.

The 3 per cent tax would have placed an annual levy on the Canadian income of larger foreign and domestic digital services providers—in particular U.S. tech giants such as Amazon, Meta and Apple, among others, while covering broad digital categories such as online marketplaces, online advertising services, social media platforms and sales of certain user data.

Affected businesses would have been required to file a DST return and make their first remittances by June 30^th, 2025. With the policy reversal, the requirement to pay amounts owing was cancelled. The Canada Revenue Agency is indicating that once the legislation to revoke the tax receives royal assent, companies that paid the tax ahead of the deadline will have their payments refunded in full.

The U.S. government resumed trade negotiations after receiving confirmation that the Digital Services Tax would be scrapped. The Carney government has set a July 21^st, 2025, deadline to arrive at a renewed trade agreement with the U.S.

The RH Partners Tax Team

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