Doug Richardson and Julie D’Avignon -
Prior to the federal budget of March 22, 2016 (Budget 2016), the tax treatment of emissions allowances was governed by general principles of income tax law. Budget 2016 proposes to introduce a specific regime that applies to emissions allowances.
Pursuant to Budget 2016, emissions allowances will be treated as inventory. However, due to the potential volatility in the value of such allowances, the allowances will not be subject to the “lower of cost or market” method for the valuation of inventory. Any free allowances received by a regulated emitter will not be included in income. The emitter will be entitled to a deduction for an accrued emissions obligation to the extent that the obligation exceeds the cost of any emissions allowances acquired by the emitter and used to settle the obligation. If a deduction is claimed in respect of an emissions obligation that accrues in one year (for example, 2017) and that will be satisfied in a subsequent year (for example, 2018), the amount of the deduction will be brought back into income in the subsequent taxation year (2018) and the taxpayer will be required to evaluate the deductible obligation again each year, until it is ultimately satisfied. The amount of the deduction will be equal to the cost of the emissions allowances acquired by the taxpayer and which can be used to settle the emissions obligation, plus the fair market value of any emissions allowances needed to full satisfy the obligation