On May 14, 2018, the Canada Revenue Agency (CRA) published its first guidance for cultivators, producers and packagers of cannabis products, as well as the application forms for excise duty licences and the cannabis excise stamping regime. The CRA has also committed to publishing at least one additional excise duty notice to explain how the proposed additional cannabis duty, which is imposed on behalf of the provinces, would be administered.
Cannabis producers with Health Canada licences can now apply for excise duty licences with the CRA. This was a required step in advance of the legalization date for recreational cannabis, because the transitional rules for excise duty and stamping required the excise duty framework to be in place by that date (for more information on the excise duty framework, please see our March 2018 Blakes Bulletin: 2018 Federal Budget: Excise Tax on Cannabis).
The proposed transitional rules require cannabis producers to stamp cannabis products delivered to a purchaser in advance for sale or distribution on or after the legalization date for recreational cannabis with the cannabis excise stamp to indicate the provincial or territorial market in which it is intended to be sold or distributed. For example, if a licensed producer sold recreational cannabis to a retailer for sale on or after legalization, the producer would have to stamp the cannabis with an excise duty stamp. This means that licensed producers who will be packaging cannabis products should take steps in preparation for legalization to purchase excise stamps and package their products as required.
The excise duty (including any additional duties imposed on behalf of the provinces) would be imposed on cannabis products produced in Canada and delivered to a purchaser in advance for sale or distribution after legalization. The cannabis duty and additional duties on cannabis products that are produced in Canada and delivered to a purchaser before legalization would be payable on the date of legalization, and should be remitted on the monthly return for the month that includes the legalization date.
EXCISE LICENCES AND STAMPS
The excise duty licence application forms (Form L-300E) require the cannabis producers to provide a business plan, including a business overview, sales and marketing plan and a financial plan that explains the business’s sources of funds. For licensed producers that already have a Health Canada licence and have undergone significant scrutiny by the federal government, the CRA should not require significant documentation. For new entities, this process may be more rigorous.
The application forms also require the applicant to have set up a federal business number before the CRA may issue an excise licence. While corporations, partnerships, individuals or unincorporated bodies (a “person”, as defined in the Excise Act, 2001) can all obtain an excise licence, the CRA will only activate the excise licence once the person’s Health Canada licence is also activated, and Health Canada may impose additional restrictions on the kind of entity that can become licensed.
The CRA also requires personal information about all directors, officers, partners and, in the case of corporations, shareholders holding more than 20 per cent shares.
For persons who will be packaging cannabis products, a separate application form (Form L-301E) is required to register for the cannabis stamping regime. Cannabis excise stamps will be delivered as dry (non-adhesive) individual stamps wrapped in bundles of 500. The unit price of cannabis excise stamps for the period of April 1, 2018 to September 30, 2019 is C$0.00714.
EFFECT AND DURATION OF EXCISE LICENCE
Once CRA decides to issue a licence, the CRA regional excise duty office will issue a cannabis licence approval letter, specifying the following: the legal name of the entity that holds the licence; complete mailing address; premises authorized under the licence; activities that may be carried on under the licence; and the effective and expiry dates of the licence.
The cannabis licence would be effective from the date indicated on the licence approval letter and would generally remain in effect until the expiry date indicated in that letter. A licence remains in effect for a maximum period of two years, provided that it is not suspended or cancelled prior to expiration.
A CRA excise license is connected to an entity’s federal business number and cannot be transferred to another person. In the case of a change of legal entity (e.g., a sole proprietorship incorporates, or a corporation amalgamates or merges with another corporation), the existing cannabis licence would be cancelled and the person would have to apply for a new licence.