Federal Natural Resources Minister Joe Oliver says the new ratings will provide consumers with a more accurate reading of a vehicle's fuel efficiency by taking into account factors such as cold weather, air conditioner use and rapid acceleration and braking.
The government will also publish a list of the most fuel-efficient vehicles this year, which will include a online searchable database where consumers can go for information on different vehicles.
As part of the initiative, new labels will also be put on 2016 model vehicles, and will indicate how the vehicles compare with others in the same class in terms of CO2 emissions.
Last spring, a survey of nearly 600 car dealerships across the country found that labels were only affixed on 63 per cent of new vehicles being sold in outdoor lots.
Some dealers refused to use the previous labels claiming they gave inaccurate or misleading information about fuel efficiency, impeded the vision of customers test driving the cars and included the retail price.
Michael Hatch of the Canadian Automobile Dealers Association, which represents more than 3,000 dealers, said the new versions are supported by the industry as they provide more information to the consumer.
"We want accurate information to be disseminated and a more rigorous testing regime on fuel consumption and fuel efficiency," said Hatch, the group's chief economist.
Although CADA supports the new methodology and criteria for the new labels, it does not want them mandatory on all vehicles because most of the information is already available to consumers elsewhere.
"Why would we mandate two million pieces of papers when all of that information is available for free on the Internet?" he asked. "It goes against the reality."
Meanwhile, the Canadian Automobile Association said providing consumers with how vehicles measure up in terms of fuel efficiency is key.
"Fuel consumption is becoming an increasingly important part of the purchasing decision for consumers, given the price of gas," said CAA spokesman Ian Jack.
He noted that it's a step forward for the labels to now include information about hybrid and electric cars.
"These vehicles are not taking over the market today but we do think they will become increasingly important over time, over the next few years, as people look to save money whenever they can when they're driving," said Jack.
— By Linda Nguyen in Toronto
Note to readers: This is a corrected version. An earlier story misspelled 'desseminated' in a quote in paragraph 8Suggest a correction