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The cost of acquiring offsets andallowancesA business may also reduce its GHG emissionsby:• Acquiring an emission allowance within acap-and-trade system;• Directly funding a carbon reduction projectwith a project developer; and/or• Acquiring a carbon reduction or offset creditfrom a trader (this may include the BCgovernment’s new Pacific Carbon Trust, 2 whichis expected to sell offset credits to the public).With regard to the tax treatment for the cost ofcarbon reduction or offset credits, the CRA hasstated that while credits purchased in one yearmay be applied against a taxpayer’s emissionreductions in a future year, the costs of acquiringcredits should be included in the cost of goodsproduced by the taxpayer, where it can be shownthat the credits can only be used once and thecosts incurred are related to the cost of producingthe taxpayer’s products in the year. Consequently,a portion of the acquisition cost of a creditwould be deducted in the year as cost of goodssold, while any balance relating to unsoldproducts would be included in the cost of inventorieson hand. Otherwise, the cost of acquiringcredits would generally be deductible in thetaxation year in which it applies.In addition, the CRA has noted that the costsof acquiring credits may be considered “capital”in nature, rather than current. It has stipulatedthat in cases where credits are granted indefinitelyor for a number of years and may notbe carried forward, any capital costs shouldrepresent either an eligible capital property(indefinite life) or the cost of a depreciable propertyincluded in Class 14 (fixed term), to beamortized for tax purposes over future years.Ultimately, the facts of each situation willdetermine whether the purchase of carboncredits is considered capital or current in nature,and in which period they should be deducted.Treatment of GHG reductionproject receiptsA company may find that parts of its regularbusiness operations generate carbon or emissionoffsets, which could be validated by a qualifiedprofessional and sold to a purchaser. In BC, inaddition to private project developers and offsettraders, such purchasers now include the provincialgovernment’s Pacific Carbon Trust. Regulationsenacted by the province in December 2008 setout requirements for GHG reduction projectsthat could be recognized as official emissionoffsets in fulfilling the BC government’s commitmentto a carbon-neutral public sector by2010. Since early 2009, the Pacific CarbonTrust has begun to actively fund offset projectsthroughout the province.When it comes to the tax treatment of theproceeds received from carbon offset sales, areview of all the relevant contractual documentsand circumstances is required. Those conductingthe review should consider the tax treatment ofthe original expenditures relating to the project.For example, a farmer may adopt a new practiceof direct seeding, which may qualify as an offsetproject and generate carbon offset revenue fromthe purchaser (e.g. the Pacific Carbon Trust).This incidental revenue will likely constituteincome from the farmer’s farm business.In another example, during the course ofbusiness, an organization may consider replacingan old steam turbine engine with the latestenergy-efficient model in a project that mayqualify as a GHG reduction project or offset. Tothe extent that carbon offset proceeds may berealized in respect of the cost of acquiring thisnew depreciable property, the proceeds mayconstitute a receipt that is eligible, depending onthe circumstances, to reduce the capital cost ofthe depreciable asset acquired.Finally, the treatment of proceeds from thesale of offset credits or allowances previouslyacquired from third parties again depends on thecircumstances—including the treatment of theacquisition costs and whether or not the creditswere acquired as part of regular business operations.Preparing for changeGHG emission regulations have now beenenacted in BC, and further provincial, federal,and international regulatory developments areexpected in the near future. In the meantime,BC businesses will continue to identify incentivesand pursue ways to voluntarily reduce theircarbon footprints.A critical first step in establishing operationaland tax strategies involving carbon reductionis to identify and measure baseline emissions,existing projects that may qualify as offsets, andfuture emission reduction opportunities. A carbonadvisory specialist who understands not only theGHG-related issues but also the tax implicationsof the various alternatives can prove to beinvaluable in helping to prioritize a company’soptions and develop a comprehensive greenbusiness strategy.George Kondopulos, CA, is a senior tax managerwith KPMG LLP in Vancouver, and a memberof the firm’s growing Carbon Advisory Group,advising BC businesses on green energy, cleantechnology, carbon regulation, and sustainablebusiness practices.DisclaimerKPMG LLP states that the information containedherein is current to April 30, 2009, and is of ageneral nature that is not intended to address thecircumstances of any one particular individual orentity. Although KPMG LLP endeavours toprovide accurate and timely information, there canbe no guarantee that the information is accurate asof the date it is received, or that it will remainaccurate in the future. Readers should not act onsuch information without appropriate professionaladvice and a thorough examination of the particularsituation.2The Pacific Carbon Trust is a BC Crown corporation established to deliver carbon offsets to help organizations and individuals meet their carbon reductiongoals. The BC government and other public sector organizations will be required to purchase carbon offsets from the Trust by 2010 to achieve carbonneutrality. It is also anticipated that the Trust will make carbon offsets available for sale to businesses and individuals interested in reducing their carbonfootprints. To meet the demand for carbon offsets, the Trust purchases offsets from eligible BC-based projects that reduce or offset GHG emissions.24 ica.bc.ca June/Summer ’09