On February 27, 2018, the Minister of Finance introduced Canada’s 2018 Federal Budget (2018 Budget), which looks to implement the excise duty framework for cannabis that was proposed in November 2017 (see our November 2017 Blakes Bulletin: Federal Government Proposes Excise Duties for Cannabis Producers). The duty will generally apply to all products available for legal purchase, which at the outset of legalization will include fresh and dried cannabis, cannabis oils, and seeds and seedlings for home cultivation. Cannabis cultivators and manufacturers will be required to obtain a cannabis licence from the Canada Revenue Agency (CRA) and remit the excise duty, where applicable. The framework will come into effect when recreational cannabis becomes available for legal retail sale.
One welcome modification to the excise duty framework is that the excise duty framework will generally only apply to cannabis products containing tetrahydrocannabinol (THC), the primary psychoactive compound of cannabis. Packaged products containing concentrations of no more than 0.3 per cent THC, and consequently have little to no associated psychoactive effects, would generally not be subject to the excise duty under the proposed framework. This will likely help spur further interest and investment into the segment of the cannabis market focused on cannabidiol, or CBD (a non-psychoactive cannabis compound), a product area that many analysts and observers have predicted to be an important component of the overall cannabis market going forward.
Pharmaceutical products approved by Health Canada with a Drug Identification Number (DIN) that are derived from cannabis and that can only be acquired through a prescription will also not be subject to the excise duty. The 2018 Budget also proposes to clarify that any cannabis products that might be considered “basic groceries” (e.g., edibles) or agricultural products (e.g., seeds and seedlings), for GST/HST, purposes would not be zero-rated.
In December 2017, the federal government reached an agreement with most provincial and territorial governments on a coordinated cannabis taxation framework for the initial two years after legalization. As part of the coordinated framework, 75 per cent of the taxation revenues from a combined C$1 per gram/10 per cent excise duty rate will flow to participating provinces and territories, with the federal government receiving the remaining 25 per cent. The federal portion of cannabis excise duty revenues will be capped at C$100-million annually for the first two years after legalization, with any additional cannabis excise duty revenues being distributed to the participating provinces and territories.
However, the basic C$1 per gram/10 per cent excise duty rate is not final and could vary by province. A province or territory may ask for an adjustment to excise duty under the coordinated framework to reflect differences between the sales tax rate applicable to cannabis in the province or territory and the highest prevailing general sales tax rate, or rate of the provincial component of the HST, among provinces and territories. For example, Alberta, which has only a five per cent GST rate, might request an additional excise duty to compensate for the lower taxes that it receives from sales of cannabis than Nova Scotia, which has a 15 per cent HST rate.
The proposed amendments to the Excise Act, 2001 and the applicable regulations for excise tax on cannabis were not included in the 2018 Budget materials, so the precise wording of the legislation remains uncertain.
The 2018 Budget states that the cannabis excise duty framework is proposed to be in place by the time recreational cannabis becomes accessible for legal retail sale. The framework is proposed to be implemented to ensure the equal duty treatment of cannabis products destined for the retail market regardless of when that product was produced and/or transported to distributors/retailers. The CRA will begin accepting applications for cannabis licences and will issue excise stamps in advance of the legalization date, but no fixed date when application forms will be issued by the CRA has been set.