Budget 2021 proposes to update Canada’s current excise tax and duties regime through changes to both the Excise Tax Act (the “ETA”) and Excise Act, 2001 (the “EA”), and to also impose a special sales tax on certain luxury items. These changes will designate new classes of “taxable goods”, by imposing excise duties on vaping products, and the sales tax on new, personal use luxury vehicles, aircraft and boats. In addition, excise duties on tobacco products are increased. Finally, the excise tax rebate mechanism for provinces is modified.
The following bulletin provides an overview of these proposed changes.
Rebate of Excise Tax for Goods Purchased by Provinces
Under s. 125 of the Constitution Act, 1867, provinces are exempt from paying the federal excise taxes imposed on motive fuels, air conditioners for motor vehicles and fuel inefficient vehicles under Part III of the ETA. However, certain provinces have specific agreements in place with the federal government under which they agree to the mutual payment of the other’s taxes.
For the provinces that have not entered into such agreements, the ETA provides a provincial-use rebate for the excise taxes. Under the current legislation, the rebate for the excise taxes paid can be claimed by either the province or the vendor of the goods, in which case the province would not have been expected to pay the embedded tax.
Budget 2021 aims to clarify which party should claim the rebate by specifying that only the vendor is eligible to claim this rebate if it jointly elects with the province to be eligible. Without this joint election, only the province would be eligible to obtain the rebate. The proposed ETA amendments to modify the rebate mechanism would apply to goods purchased or imported on or after January 1, 2022.
Excise Duty on Tobacco
In Canada, tobacco products are subject to an excise tax duty imposed under the EA. Effective April 19, 2021, Budget 2021 proposes to increase the excise duty by $4.00 per carton of 200 cigarettes, and to increase excise duties for individual cigarettes (from $0.62725 to $0.72725 per five cigarettes), tobacco sticks (from $0.012545 to $0.14545 per stick), manufactured tobacco (from $7.84062 to $9.09062 per 50 grams) and cigars.
Inventories of cigarettes held by certain manufacturers, importers, wholesalers and retailers at the beginning of April 20, 2021 will be subject to an inventory tax of $0.02 per cigarette (subject to certain exemptions). The return and payment of the cigarette inventory tax will be due by June 30, 2021.
According to the federal government, these excise duty increases on tobacco products are designed to discourage tobacco consumption in Canada to meet the government’s goal of less than 5 per cent of the Canadian population using tobacco by 2035.
Excise Duty on Vaping Products
According to Budget 2021, the federal government proposes to impose excise duties on vaping products under the EA. This new duty would apply to vaping liquids that are produced in, or imported into, Canada for use in a vaping device, whether or not they contain nicotine. Cannabis vaping products would be exempt from this duty, because they are already dutiable under the EA as cannabis products. There would be certain other exemptions, such as for vaping products (i) taken for analysis or (ii) destroyed in accordance with government regulations.
Proposed Duty Rate
The proposed framework would impose a single flat rate duty on every 10 millilitres (ml) of vaping liquid. Budget 2021 does not specify the exact duty rate, but proposes a duty rate “that could be in the order of $1.00 per 10 ml or fraction thereof, within an immediate container (i.e., the container holding the liquid itself).” This duty would be imposed and payable at the time of packaging for final retail sale, with the last federal licensee in the supply chain liable for the duty, or on importation into Canada by a licensee liable to pay the duty at the border. Imports would not be subject to the duties if not in a state ready for final retail sale to consumers. Exports of the vaping products for consumption abroad would not be subject to the excise duties.
Licensing and Compliance
Manufacturers and importers of dutiable vaping products would be required to obtain a license from the Canada Revenue Agency (the “CRA”). This license requirement would include any vape shops that purchase non-duty paid vaping products to mix or manufacture dutiable vaping products on site for retail sale to consumers. Applicants for a license will have to meet certain criteria, such as not having acted to defraud the government in the past five years. Licensees will also be required to report monthly duty information to the CRA. However, licenses will not be required for individuals who prepare vaping liquids for their own personal consumption.
As is the case with tobacco and cannabis products, vaping products will be required to bear an excise stamp indicating that duties have been paid. The stamp should appear on the container intended to be used for retail sale of the products. The CRA will issue the stamps to licensees, and the possession or sale of any unstamped vaping product will be prohibited, unless allowed under the EA.
The CRA will administer, collect and enforce the duties on vaping products. The federal government has indicated its intention to work collaboratively with any provinces and territories that may be interested in a federally coordinated approach to imposing duties on these products. Such a regime already exists for cannabis products.
The government is seeking input from industry and stakeholders on the excise duty proposals for the purpose of final design and details of the excise duty regime in order to introduce the necessary amendments to the EA. The deadline to submit written comments is June 30, 2021.
Sales Tax on Select Luxury Passenger Vehicles, Personal Aircraft and Boats
Budget 2021 proposes to impose a special sales tax on the retail sale of new “luxury” motor vehicles and personal aircraft priced over $100,000, and personal use boats priced over $250,000, effective January 1, 2022. The amount of the tax would be the lesser of:
- 10 per cent of the full value of the vehicle, aircraft or boat, and
- 20 per cent of the value above (a) $100,000 for a vehicle or aircraft, or (b) $250,000 in the case of a boat.
The GST/HST would be calculated on the final retail sale price, inclusive of the proposed sales tax. Alternatively, in the case of an import of a luxury vehicle, personal aircraft or boat by the consumer, the proposed sales tax would apply at the border at the time of import and be collected in the same manner as any customs duty, GST/HST or provincial sales tax. The customs duty, GST/HST and possibly the PST would be included in the value on which the luxury sales tax is calculated. Exports for personal use abroad would not be taxed.
The luxury tax applies to a new passenger vehicle typically suitable for personal use on public roads, including passenger vans and minivans equipped to accommodate less than 10 passengers, and passenger pick-up trucks. Off-road vehicles, such as all-terrain vehicles, motorcycles, snowmobiles, racing cars owned solely for racing and not legal for public roads, and motor homes, would be excluded from the application of the luxury vehicle tax. So would commercial vehicles and public sector vehicles, such as police cars and ambulances.
Personal aircraft subject to the luxury sales tax include airplanes, helicopters and gliders. Larger aircraft typically used in commercial activities, such as those equipped for carrying passengers and having maximum carrying capacity of more than 39 passengers, would also be exempt. Smaller aircraft used in certain commercial and public sector activities would also be exempt.
The luxury sales tax on new boats would cover such pleasure craft as yachts, recreational motor boats and sailboats, typically suitable for personal use. Smaller personal watercraft, such as water scooters, would be excluded from the tax (although typically would not be above the $250,000 threshold in any event). Floating homes, commercial fishing vessels, ferries, and cruise ships would be exempt from the tax.
If the luxury personal use conveyance is leased to a consumer, the full amount of the proposed sales tax would be payable upfront on the retail sale price of the conveyance, not over time on the lease payments. The lessor or seller would be responsible for charging, collecting, reporting and remitting the sales tax.
There is no proposed legislation yet. The federal government will announce further details in the coming months.