Canada: Cannabis Excise Duties

Last Updated: November 20 2017
Article by Angelo Gentile

On November 10, 2017, the Government of Canada announced its proposed excise duty framework (including detailed draft legislation) in respect of cannabis, which includes new excise duties and detailed licensing, stamping and reporting requirements for cannabis licensees.

As expected, cannabis will be subject to excise duties under the existing Excise Act, 2001, which already provides for federal excise duties for tobacco, wine and spirits. The excise duties will apply to all cannabis products available for legal purchase, including fresh and dried cannabis, cannabis oils and seeds/seedlings for home cultivation. Industrial hemp will not be subject to the proposed excise duties on cannabis.

The Canada Revenue Agency (the "CRA") will be responsible for administering and enforcing collection of applicable duties.

As confirmed in the Department of Finance Backgrounder, "[t]he proposed excise duty framework will impose an excise duty that is the higher of a flat rate (e.g., an amount per gram) applied on the quantity of cannabis contained in a final product available for sale, or a percentage (i.e., ad valorem rate) of the federal licensee's sale price of the product it has packaged."

The proposed excise duty rates are intended to apply as follows (duty rates are set out further below):

  • There is only one person in the whole supply chain that needs to account for and pay the proposed excise duty: the last person who packages the cannabis product for final retail sale and arranges for delivery of such products to provincially-licensed retail locations/consumers (we will refer to this person as the "Final Licensee").
  • The Final Licensee needs to track two values for federal excise duty reporting purposes:

    • Value #1: The flat rate of duty that applies to the quantity of flower/trim packaged for retail sale or used in making a manufactured cannabis product (e.g., oils or edibles), or in the case of seeds/seedlings, the flat rate of duty that applies to the number of seeds/seedlings sold; and
    • Value #2: The ad valorem rate of duty computed on the sale price of the packaged cannabis product to either the provincially-licensed retailer or the final consumer.
  • The Final Licensee will then determine which of the two values is higher – i.e., Value #1 and Value #2 – and report and pay only the higher amount.
  • Accordingly, the excise duty will only become payable at the time of delivery to a purchaser.

The proposed excise duty rates will depend largely on whether the provinces and territories agree to participate in the federal excise duty framework. If a province/territory agrees to participate in the framework, then the total combined duty rates are expected to be as follows (subject to small regional variations):

Excise duty will be the higher of these two values
Cannabis Product Flat Duty Rate Ad Valorem Duty Rate
Flower $1.00/gram 10% of the sale price of the cannabis product packaged by a federal licensee to a purchaser
Trim $0.30/gram
Seed for home cultivation $1.00/seed
Seedling for home cultivation $1.00/seedling

To the extent a province or territory does not agree to this framework, then the relevant province/territory would be free to pursue its own taxation of cannabis products in the province/territory, and the federal-only excise duty rates will be half of the above amounts:

Excise duty will be the higher of these two values
Cannabis Product Flat Duty Rate Ad Valorem Duty Rate
Flower $0.50/gram 5% of the sale price of the cannabis product packaged by a federal licensee to a purchaser
Trim $0.15/gram
Seed for home cultivation $0.50/seed
Seedling for home cultivation $0.50/seedling

The goods and services tax/harmonized sales tax ("GST/HST") will generally apply to all sales of cannabis products on the final sale price to retailers, inclusive of the above-described excise duties. The Excise Tax Act (which governs the application of GST/HST) will be amended to confirm the Government of Canada's intention to impose GST/HST on cannabis seeds/seedlings and edible cannabis products (including cannabis oils). Industrial hemp will continue to be zero-rated (i.e., subject to 0% GST/HST). Finally, since cannabis will be available for sale to the public without a prescription in or around June 2018, it is expected that cannabis for medical use will also be subject to GST/HST (at present, the Excise Tax Act zero-rates supplies of certain controlled substances that cannot be sold to customers without a prescription).

Critically, the Government of Canada has made a deliberate choice to impose excise duties on cannabis sold for medical purposes. While cannabis products produced by an individual, for the individual's own medical purposes in accordance with the proposed Cannabis Act, will not be subject to the excise duty, seeds and seedlings used in this production will be subject to duty.

Many observers had thought that cannabis for medical purposes might be exempt from federal excise duties. Nevertheless, the rationale provided by the Government of Canada to impose duties on all cannabis products was to ensure that purchasers not have any incentive to try to abuse the medical cannabis system. Based on initial reactions thus far, the Government of Canada will be put under immense pressure to re-think this policy choice.

The Government of Canada has provided stakeholders until December 7, 2017, to provide comments regarding the draft legislation and the proposed excise duty framework. Written comments should be sent to fin.cannabis-taxation-cannabis.fin@canada.ca. The CRA has recently announced that it intends to issue Excise Duty Notices in early 2018 to provide important information regarding licensing, stamping and transitional rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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