Canada: Background On Cannabis Duties In Canada

Last Updated: September 28 2018
Article by Larry Nevsky, Eric Foster and James M. Wishart

On September 17, 2018, the Minister of Finance (the "Minister") released draft regulatory and legislative proposals (the "Proposals") under the Excise Act, 2001 (the "EA") that provide for the additional excise duty rates for each province or territory that has signed a Coordinated Cannabis Taxation Agreement (CCTA) with the federal government (each a "specified province"). To date, every province other than Manitoba has signed a CCTA. In keeping with the agreements reached between the provinces and the federal government, revenues from these excise taxes will be allocated 75 percent to provincial and territorial governments, and 25 percent to the federal government (capped at $100 million per year for the first 24 months). The Proposals have been released in anticipation of the legalization of cannabis for non-medical purposes, which is scheduled to occur on October 17, 2018, and are open for public consultation until October 17, 2018.

Generally, the federal portion of duties on cannabis products produced in Canada are imposed pursuant to section 158.19 of the EA at the time they are packaged in the amount determined under section 1 of Schedule 7 to the EA (referred to as the "flat-rate cannabis duty"), as well as at the time they are delivered to a purchaser in the amount determined under section 2 of Schedule 7, based on the value of the cannabis (the "ad valorem duties"). The cannabis duty actually payable by the cannabis licensee that packaged the cannabis products is the greater of the flat-rate and the ad valorem cannabis duties. The lesser of the flat-rate and ad valorem cannabis duties is relieved at the time the greater cannabis duty becomes payable. Similar rules apply for imported cannabis pursuant to section 158.21 of the EA and is payable by the importer, owner or other person that is liable under the Customs Act to pay duty under section 20 of the Customs Tariff. The federal portion of the import duty is the greater of the amount determined under section 1 of Schedule 7 to the EA and section 3 of Schedule 7 of the EA.

Section 158.2 of the EA also specifies that an additional duty in respect of a specified province will be imposed on cannabis products produced in Canada in "prescribed circumstances" in an amount determined in a "prescribed manner". This additional cannabis duty would be payable by the cannabis licensee that packaged the cannabis produced at the time of its delivery to a purchaser. In addition, as is the case with the federal portion of the duty, the additional cannabis duty applied in respect of the importation of cannabis to a specified province is set out in section 158.22 of the EA and is to be determined in a prescribed manner. The Proposals address the prescribed rules applicable to applying the additional cannabis duty payable in respect of a specified province.

Summary of the Proposals and the additional excise duty rates

Under subsection 5(1) of the Proposals, the "prescribed circumstances" as to when the additional cannabis duty is payable is when cannabis products produced in Canada are for consumption, use, or sale to consumers in a specified province.

For the purpose of section 158.2 of the EA, the Proposals provide a similar method of applying the additional cannabis duty, whereby the greater of the flat-rate additional cannabis duty and the ad valorem additional cannabis duty would be applied by each specified province.

Certain provinces (at the time of writing Ontario, New Brunswick, Prince Edward Island, Alberta, Saskatchewan, Newfoundland and Labrador, and Nunavut), are "listed specified provinces" and have imposed a further amount payable referred to as an adjustment to the additional cannabis duty. For listed specified provinces, the additional cannabis duty is the sum of (a) the greater of the flat-rate additional cannabis duty and the ad valorem additional cannabis duty, and (b) the adjustment to the additional cannabis duty. The adjustment rate is applied to the "base amount," which is the fair market value when it is made available otherwise than by purchase. However where purchased, the base amount is the dutiable amount less the flat-rate duty and less the flat-rate additional duty where the cannabis is sold into a listed specified province, multiplied by a factor of 1/(1+the applicable base rate).

As a result of these rules, all cannabis products that leave the premises of a cannabis licensee to enter into the Canadian market for retail sale will be required to have an excise stamp. For those provinces or territories participating in the coordinated excise duty framework, excise stamps will have specified colours and markings indicating the provincial or territorial market in which it is intended to be sold.

Those possessing cannabis are cautioned that the enforcement of the rules may result in penalties or fines where cannabis is purchased without the correct stamps. Currently, the excise duty framework generally prohibits those who do not receive a cannabis licence from the Canada Revenue Agency (CRA) from possessing cannabis products stamped for multiple jurisdictions or possessing cannabis in a province that is stamped for another province (i.e. cannabis products bearing a stamp that is not the stamp of the province or territory in which the entity operates). Entities not licensed by the CRA are only authorized to possess and trade in products that are specifically stamped for the province or territory in which they operate.

Dentons' leading Cannabis group will continue to work closely with industry stakeholders, and provide frequent insights on these important developments. Our team regularly advises on compliance with the Excise Act and also the Cannabis Act.

Rate of cannabis duty and additional cannabis duty

Cannabis product1 Flat rate
cannabis duty
Ad valorem
cannabis duty2
Flat rate additional cannabis duty Ad valorem additional cannabis duty
Flowering material $0.25 per gram 2.5% $0.75 per gram 7.5% of the dutiable amount for the cannabis product
Non flowering material (this includes flowering material that is industrial hemp by product) $0.075 per gram 2.5% $0.225 per gram 7.5% of the dutiable amount for the cannabis product
Viable seed $0.25 per viable seed 2.5% $0.75 per viable seed 7.5% of the dutiable amount for the cannabis product
Vegetative cannabis plant $0.25 per vegetative cannabis plant 2.5% $0.75 per vegetative cannabis plant 7.5% of the dutiable amount for the cannabis product

1. In each case included in the cannabis product or used in the production of the cannabis product

2. In each case the percentage is applied to the dutiable amount for the cannabis product

Adjustment rate for the additional cannabis duty in listed specified provinces

Province Adjustment Rate
Ontario 3.9%
New Brunswick 0%
Prince Edward Island 0%
Alberta 16.8%
Saskatchewan 6.45%
Newfoundland and Labrador 0%
Nunavut 19.3%

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

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. Specific Questions relating to this article should be addressed directly to the author.

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