This blog was written with the assistance of Robert A. Law, student-at-law.
Long-awaited changes to federal cannabis packaging and stamping requirements are now in effect, offering cannabis excise licensees the opportunity to enter into excise service agreements that contemplate more fulsome contract manufacturing arrangements.
The Canada Revenue Agency (CRA) recently published Excise Duty Notice EDN84 (Notice) setting out the process and requirements for cannabis licensees to apply for authorization of certain service agreements contemplated in An Act to implement certain provisions of the fall economic statement (Bill C-32). Bill C-32 received Royal Asset in December 2022 and amended, among other things, the Excise Act, 2001 (Excise Act) and the Stamping and Marking of Tobacco, Cannabis and Vaping Product Regulations.
The CRA can now approve service agreements entered into between cannabis licensees that contemplate, among other things, the (1) transfer of excise stamps as well as unstamped bulk or packaged products between cannabis licensees, (2) completion of packaging and/or stamping activities and entry of cannabis products into the duty-paid market by other cannabis licensees, and/or (3) distribution of stamped packaged products from other cannabis licensees' facilities.
Selling fully packaged cannabis products does not require an authorized service agreement or approval by the CRA. CRA takes the position that any other movements of fully packaged, but unstamped, cannabis products (where responsibility for the cannabis products is not transferred) is prohibited except under a service agreement approved by the CRA.
To engage in activities that require approval, cannabis licensees must apply to the CRA at least 60 days prior to the proposed commencement date of the service agreement. The application must include the following details:
- a copy of the contract between the cannabis licensees that details the scope of the activities
- the legal names, business numbers and physical addresses of both cannabis licensees
- the class and estimated quantity of all cannabis products subject to the service agreement
- the anticipated commencement and termination dates of the service agreement
- the controls that will be in place for safeguarding the cannabis products and cannabis excise stamps
The application must be signed by an officer of each cannabis licensee and submitted to the applicable CRA Regional Excise Office. A sample of an acceptable application form is included as Appendix A of the Notice.
Any amendments proposed to an approved service agreement will be treated as a new application requiring at least 60 days' notice and must be submitted in the same form and manner set out above. Given the lengthy authorization period for amending service agreements, cannabis licensees should ensure they are building sufficient flexibility into their original contracts to allow them to adapt to market changes without having to resort to amendments in every instance. Conducting regulated activities without prior CRA authorization could result in fines of up to $25,000.
Compliance with an approved service agreement and any conditions imposed by the CRA are important. The CRA may revoke any authorization if it determines that any terms or conditions are being contravened by a cannabis licensee. In the event of a revocation, all authorized activities must cease and the appropriate cannabis licensee must retrieve all cannabis products and cannabis excise stamps in the possession of the other cannabis licensee. The parties may also be subject to assessment of excise duties and penalties on any amounts that are unaccounted for.
Where a service agreement is terminated or expires, the parties must immediately notify the CRA and cease the authorized activities. Termination and expiry are important concepts for cannabis licensees to contemplate in the original contract as the post-termination completion or sell-off provisions traditionally included in cannabis contract manufacturing agreements will no longer be compliant. As a result, the parties will need to implement any wind-down of operations and movement of inventory prior to the applicate date of termination or expiry.
While the requirements for obtaining approval of a service agreement are stringent, and there remain some inconsistencies between the product transfer rules in the Excise Act and the Cannabis Act (Canada), the new rules are a boon for cannabis licensees and finally permit the scope of contract manufacturing seen in other industries. The new amendments also provide a process for cannabis licensees: (1) that provide contract manufacturing services to materially reduce the quantum of their excise tax remittance and bond obligations where they are authorized to handle and apply third-party stamps, and (2) to significantly reduce distribution costs by engaging localized storage and distribution services from other cannabis licensees.
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.