As emissions and cap-and-trade regimes develop, the tax issues relating to such regimes evolve and receive further consideration. One aspect of Alberta’s emission reduction regime is the Climate Change and Emissions Management Fund (the Fund). A greenhouse gas emitter that is subject to Alberta’s provincial emission reduction target may pay $15 per tonne into the Fund to the extent its emissions are in excess of the emissions target set by Alberta’s regime. The money collected by the Fund is intended to be invested into projects, initiatives and technologies relating to reducing emissions.
One of the tax issues relating to this type of regime is the nature of contributions to the Fund for tax purposes, and in particular whether the contributions are deductible for tax purposes.
The Canada Revenue Agency (CRA) was recently asked whether the administrative penalty that may be assessed on a person who has failed to meet the emissions limits established by Alberta’s Climate Change and Emissions Management Act is deductible for income tax purposes[i]. CRA noted that section 67.6 of the Income Tax Act (Canada) prohibits a deduction in respect of any amount that is a fine or penalty imposed under federal and provincial law by any person or public body that has authority to impose the fine or penalty. Accordingly, CRA’s view was that amounts described as penalties under Alberta’s Climate Change and Emissions Management Act are not deductible in computing taxable income. An interesting result for many taxpayers who may have taken the position that the payments to the Fund are remedial payments, as opposed to penalties, and therefore have claimed deductions as such.