Taxation of Marijuana Producers– A Canadian Tax Lawyer Analysis
The Marijuana Act which was introduced in Bill C-45 by the Trudeau government in 2017 is currently undergoing a second reading in the Senate. The government has provided an expected legalization date of July 1, 2018, though it may take additional weeks or months after that for proper distribution and retail services to bet set up. However, the government has revealed their taxation policy with regard to Marijuana in the 2018 Budget.
Income Tax on Marijuana Producers
Producers of marijuana for medical purposes are currently being taxed on their income similarly to any other business in Canada and this is not expected to change once recreational marijuana is legalized. As such, the particular tax rate that a producer pays depends heavily on the structure being used to run the business. Where the business is being operated as a sole proprietorship, the profits from the business are taxed at the individual level in the sole proprietor with income taxes depending on the individual's particular marginal tax rate, with a maximum of 53.53% for income earned over $220,000 in Ontario.
On the other hand, if the business is being run through a corporation, then the tax rate will typically be lower than that paid at the individual level. The general corporate tax rate varies by province, but ranges between 26.5% in Ontario and the Northwest Territories at the lowest, and 31% in Nova Scotia and Prince Edward Island at the highest. This is the standard tax rate paid by corporations in Canada that are not eligible for the small business deduction. Where the small business deduction is available, the corporate tax rate drops to a low of 10% in Manitoba, and a high of 18% in Quebec. The small business deduction is available for Canadian Controlled Private Corporations on the first $500,000 of income. Speak to one of our top Canadian tax lawyers and learn more about income tax and corporate structures.
Excise Tax on Marijuana Production
A new excise tax will apply on the production of all cannabis products with some exceptions. Products which contain low amounts of Tetrahydrocannabinol (THC), the chemical which causes the characteristic "high" from using marijuana, will be exempt from the new excise tax. Additionally, pharmaceutical products that are derived from cannabis, have a Drug Identification Number, and can only be acquired with a prescription will also be exempt from the new excise tax. Notably, both recreational marijuana and medical marijuana will be subject to this excise tax. Speak to one of our experienced Canadian tax lawyers to learn more about what is or is not exempt from the excise tax.
The excise tax will be levied in the form of a flat rate based on the weight, or as a percentage of the sale price, with the greater of the two methods being applied. The tax room is calculated as either a flat rate for dried cannabis of $1.00 per gram or a percentage rate of 10% of the base sale price with the greater of the two methods being applied. In this context, tax room refers to the maximum amount of excise tax that can be levied on the marijuana, but the actual amount of excise tax can vary from province to province because each provincial government has the authority to set a different excise tax rate as long as it does not exceed the tax room. Where a cannabis product is not typically measured by weight, such as cannabis oil, the percentage rate is used, but where the $1.00/g rate is applicable, then the greater of the two methods applies – i.e. cannabis with a sale price of $9.00/g will have the $1.00/g flat rate applied for a total of $10.00/g, but Cannabis with a sale price of $12.00/g would have the 10% rate applied which would equal $1.20/g for a total price of $13.20/g.
The tax room for the excise tax will be split between the federal government and the provincial governments at a 1:3 ratio. Which means, if a gram of cannabis is sold for $10.00/g, a maximum excise tax of $1.00/g is applicable, with the federal government having discretion to tax (or not tax) $0.25/g and the provincial/territorial government having discretion to tax (or not tax) $0.75/g. This means that the actual excise tax imposed on cannabis may vary from province to province, as the federal government will undoubtedly choose to tax their full portion of the excise tax, but provinces may choose to charge less than their full allotment, similar to how income tax rates fluctuate from province to province in Canada. For example, if the federal government decides to tax their full $0.25 portion and a province decides not to tax their portion, the excise tax in that province would only be $0.25/g (the amount taxed by the federal government) of cannabis or 2.5% of the sales cost. Furthermore, the federal government will receive a maximum of $100 million in tax revenue from this new excise tax for the first 2 years and any amounts in excess of that will be provided to the provinces and territories, though details of how it will be distributed back to the provinces have not yet been released.
Sales of marijuana and cannabis products are subject to GST/HST and the particular rate varies from province to province and the seller is required to collect and remit the appropriate amount of GST/HST. However, individuals and corporations that have gross revenues equal to or less than $30,000 in the 4 preceding quarters fall under the small supplier exemption and are not required to register for a GST/HST number and are also not required to collect or remit GST/HST. Notably, GST/HST is calculated after the excise tax is included. For example, if the a marijuana producer is located in Ontario and wants to sell a gram of dried cannabis for $10, a $1 excise tax will apply, bringing the base sale price to $11. Furthermore, HST would then apply on that $11 when the gram of cannabis is sold, bringing the final price to $12.43.
GST/HST registrants should also be aware that they are entitled to claim Input Tax Credits (ITCs). The GST/HST system in Canada is designed to be a value added tax, meaning that the tax is ultimately borne by the end user/customer. As such, a business that paid GST/HST when purchasing materials or services that are used for their operations is entitled to claim an ITC which refunds the GST/HST to the business. For example, if a marijuana producer purchases $10 worth of seeds and pays $1.30 of HST on that purchase, the producer is entitled to claim that $1.30 back as an ITC. However, GST/HST registrants need to make sure that they keep the necessary documentation, such as receipts and invoices, to support their ITC claims or their ITCs may be denied if audited. Furthermore, businesses only have four years to claim ITCs, so it is important not to delay in filing HST returns.
As is the case for other businesses, there are numerous different taxes that apply to marijuana producers at various levels, rates, and with various reporting and remitting requirements. The amount of taxes owed can also change drastically depending on how the business is structured and whether it is eligible for different deductions and credits and in what province it is carried on. It is imperative that business owners seek professional tax advice when setting up their business so that they can make sure that their business structure is as tax efficient as possible as well as making sure that they are keeping up with all their tax filing and payment obligations and not inadvertently subject to painful penalties for failing to meet their tax obligations. Contact our expert Canadian tax firm and make sure everything is being done right.