On November 10, 2017, the federal department of finance issued long-awaited legislative and regulatory proposals for the taxation of cannabis. Effectively, the proposed rules will place cannabis producers within the existing rules that currently apply excise duties on tobacco, wine and spirits producers under the Excise Act, 2001 (Canada) (Act), 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 GST/HST. The department of finance has invited the public to submit feedback regarding the proposed rules on or before December 7, 2017.
The following are some highlights from the proposed legislation.
LICENSING AND REGISTRATION REQUIREMENTS
The proposed legislative framework will require all Health Canada-licensed cultivators and manufacturers of cannabis and cannabis products to obtain an additional cannabis licence from the Canada Revenue Agency (CRA). The CRA licence will be required regardless of whether the cannabis producer ultimately has an excise duty liability. The proposed legislation generally prohibits production of cannabis products without a CRA licence and it prohibits a purchaser from buying or receiving cannabis products from a non-CRA-licensed producer.
As a condition to qualify for a cannabis licence from the CRA, applicants will be required to concurrently qualify for the appropriate licence from Health Canada.
The specific CRA-related criteria for an applicant to obtain a cannabis licence will include that the applicant:
- Is not subject to receivership of its debts
- Has not acted to defraud her Majesty in the past five years
- If an individual, is at least 18 years of age
- Has sufficient financial resources to conduct their business in a responsible manner.
Licensing requirements will also include:
- Submitting a detailed application
- Submitting supporting documents and information proving sufficient financial resources, including a business plan
- Providing acceptable security to cover one full reporting period, with a minimum of C$5,000 and a maximum of C$5-million.
Cannabis licences will be issued for a maximum of two years and will not be automatically renewed. A cannabis licensee will have to re-apply at least 30 days prior to the expiry of their licence.
The CRA will not have forms available to apply for cannabis licences yet, and the licence regime has not even come into force yet (as discussed below). However, cannabis producers should prepare to apply for these licences in short order. Excise licence applications for licensees under the Act (i.e., for tobacco and wine/alcoholic spirits producers) currently require information including a business industry overview and plans for operations, human resources, finances and sale and marketing, so cannabis producers should expect to be required to provide similar levels of detail in their applications.
EXCISE STAMPING REQUIREMENTS
All cannabis products that will be removed from the premises of a federal licensee to enter into the Canadian market will be required to be packaged in a container intended for sale at the retail level and to have an excise stamp. As with the current tobacco stamping program, a stamp will need to be affixed to a product:
- In a conspicuous place on the package
- In a manner that seals the package (i.e., once the package is opened the stamp cannot be in a condition to be re-used)
- In a manner that the stamp remains affixed to the package after the package is opened
- In a manner that does not obstruct any information that is required under an Act of Parliament to appear on the package, including Health Canada warnings.
The issuance of stamps will be administered by the CRA and the stamps will be sold through an authorized provider. Compliance with a stamping regime within a coordinated taxation framework between federal and provincial governments with potentially different duty rates will require a high degree of diligence, because a cannabis licensee will have to apply an excise stamp with an indicator (e.g., colour) of the intended provincial market and diversion of products intended for consumption in a particular province would be subject to penalties.
The Act will also prohibit the possession or sale of any unstamped cannabis products by a person unless otherwise allowed under circumstances prescribed by regulations. These allowances would include allowances for persons licensed or registered with the CRA and may further include allowances for:
- A person who is transporting the product under circumstances and conditions prescribed by regulations
- An individual or person who has imported the product under special permit, not for final sale to consumers
- An individual who has cultivated cannabis and/or manufactured a cannabis product in accordance with personal-use/cultivation limits as provided under the Cannabis Act.
APPLICABLE EXCISE DUTIES
The proposed excise duty framework is complex. Federal licensees selling to purchasers will be liable to pay the higher of the flat rate or the ad valorem rate on the product, as described below. The applicable duty will only become payable by the cannabis licensee at the time of delivery to a wholesale/retail purchaser or consumer. The proposed rules apply to any cannabis products sold under the proposed Cannabis Act, whether for recreational or for medical purposes.
A flat rate duty is imposed on the quantity of flowering and non-flowering material (referred to by the department of finance as “flower” and “trim,” respectively) of the cannabis plant, as well as on cannabis seeds and seedlings (in the case of home cultivation).
Generally, the flat rate will be imposed on the quantity of flower/trim packaged for final retail sale or the amount of flower/trim ultimately contained in a manufactured cannabis product (i.e., cannabis oil), at the time of packaging. The rates contained in the proposed legislation are as follows:
- A higher flat rate duty will be imposed on a per-gram basis in the case of flower, seeds and seedlings (currently proposed to be C$0.50/gram)
- A lower rate per gram will be imposed on trim (currently proposed to be C$0.15/gram).
A product will generally be considered to be “packaged” by a federal licensee when it is in a container intended for sale to a final consumer at the retail level.
Ad Valorem Rate
At the time of delivery of a cannabis product from the federal licensee that packaged it to a purchaser (e.g., a provincially authorized distributor/retailer or final consumer), an ad valorem rate is imposed on the sale price of the transaction, currently proposed to be five per cent of the dutiable sale price.
As noted above, federal licensees selling to purchasers will be liable to pay the higher of the flat rate or the ad valorem rate on the product. The last federal licensee in the supply chain who packaged the cannabis product for final retail sale will be liable to pay the applicable excise duty.
Under the Canadian Constitution, provincial governments are not permitted to impose indirect taxes like the proposed cannabis excise duty. The federal government has proposed in its publications and news releases that provincial governments could participate in this taxation structure through a formalized coordination agreement. The proposed law contemplates that “additional duties” in respect of specified provinces could be imposed in a manner prescribed under regulations. The federal government has offered that the total base and additional excise tax rates could be set at a level of the greater of C$1 per gram, or 10 per cent of the dutiable sale price of a product, at the outset of legalization, with the additional duties raised (i.e., C$0.50 or five per cent) being shared with participating provinces. Depending on what is ultimately agreed between the federal government and the provinces, it is conceivable that the technicalities of the regulations could become complicated, similar to the complex HST “place of supply” rules, if different rates of “additional duties” are ultimately agreed upon by the different provinces.
All cannabis licensees will be required to submit to the CRA a monthly duty and information return. The return will be required to include the following information:
- The quantity of products produced
- The quantity of cannabis-related inputs used expressed in terms of: whole cannabis plants, cannabis flowers and trim
- The quantity of cannabis seeds and seedlings intended for home cultivation market
- The amount of excise duty payable
- Inventory details: opening, additions, reductions and closing
- The quantity of products sent for export under a special permit authorization.
All entities in the supply chain before the duty imposition point will have the same reporting liability. Inventory discrepancies or any other product unaccounted for by federal licensees will be subject to the relevant duty applicable under the Act and will become payable immediately by that particular licensee.
COMING INTO FORCE
The cannabis excise duty framework is proposed to generally apply on the date that legal cannabis for non-medical purposes becomes accessible for retail sale, which is intended to be in July 2018 (the “commencement day”). Some provisions of the Act, such as licensing and stamping requirements, are proposed to come into force earlier to facilitate a smooth transition in the period leading up to legalization. For example, the new licensing provision is proposed to come into force on the later of the day on which these amendments receive Royal Assent and the Cannabis Act receives Royal Assent, but the prohibition against producing cannabis products without a licence does not come into force until the commencement day.