The federal government recently gave royal assent to the Budget Implementation Bill, 2018, No. 1, which amends the Excise Act, 2001 in order to implement a new framework for the taxation of cannabis. The new rules effectively place cannabis producers within the existing rules that currently apply excise duties on tobacco, wine and spirits producers under the Excise Act, 2001 (Canada), with modifications as applicable. These rules include a new tax licensing regime for cannabis producers, stamping and marking rules, ongoing reporting requirements, and applicable excise duties payable by licensed cannabis producers on both recreational and medical cannabis products, in addition to goods and services tax and harmonized sales (GST/HST) tax. The cannabis excise duty is to come into force on the date that legal cannabis for recreational purposes becomes accessible for retail sale under the Cannabis Act, subject to certain transitional rules. The government has indicated that the implementation date will be October 17, 2018.
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.
However, the precise rates of excise duty were not known because a province or territory may ask for an adjustment to excise duty under the coordinated framework. The adjustment would 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 more information, please see our March 2018 Blakes Bulletin: 2018 Federal Budget: Excise Tax on Cannabis. On September 17, 2018, the government released for consultation a set of technical draft regulatory and legislative proposals relating to the rates of excise duty for each province and territory.
DELIVERY OF CANNABIS PRODUCTS TO “SPECIFIED PROVINCES”
Provinces and territories that have entered into an agreement with the Government of Canada to coordinate the collection of excise duties on cannabis are referred to in the draft legislation as “specified provinces.” At present, all provinces and territories have entered into such an agreement, with the exception of Manitoba. As such, the higher of the provincial flat rate and the ad valorem duty (i.e., $0.75/gram or 7.5 per cent) will be owed in addition to the federal duty if cannabis products are delivered to a purchaser in any specified province or territory. If cannabis products are delivered to Manitoba, only the higher of the federal flat rate or ad valorem duty (i.e., $0.25/gram or 2.5 per cent) will be owed under this regime.
ADJUSTED EXCISE DUTY IN “LISTED SPECIFIED PROVINCES”
With respect to specified provinces, certain provinces will impose additional excise duty to account for the discrepancy between a given province’s sales tax rate relative to the highest prevailing provincial GST/HST rate in Canada. The provinces applying adjusted rates are referred to by the legislation as “listed specified provinces,” and include Alberta, Nunavut, Ontario and Saskatchewan. For example, in Ontario an additional duty of 3.9 per cent will be charged in addition to the standard provincial excise duty of 7.5 per cent in order to approximate the revenues earned through higher HST rates by the maritime provinces. For sales to Alberta, the adjustment is 16.8 per cent, which may be higher than some were expecting. The proposed rates and associated adjustments on a province-by-province basis can be found on the Department of Finance website.
The date on which recreational cannabis is to become legalized is October 17, 2018. This is known as “commencement day”, or the day that cannabis will no longer be listed in Schedule II to the Controlled Drugs and Substances Act.
For cannabis products that are produced and delivered within Canada in anticipation of commencement day, the legislation includes a transitional rule to facilitate the preparation. Excise duty will be imposed in the same manner as cannabis products distributed following commencement day, except that for cannabis products packaged and sold before commencement day, the applicable excise duty is deemed to be payable on commencement day itself. For medical cannabis sold before commencement day, as long as it is not “delivered to a purchaser before commencement day for sale or distribution on or after that day”, the excise duty should not apply.