Excise Act Review: Annex V
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Annex V
The Design of the Excise Duty on Tobacco

Introduction

Current System

Tobacco products are currently subject to both excise duty imposed as a production levy and excise tax imposed as a sales levy.

Excise duties are imposed under the Excise Act on domestic cigarettes, cigars, tobacco sticks, other forms of manufactured tobacco (fine cut) and Canadian raw leaf tobacco at the time these products are packaged for consumption. A customs duty equivalent to the excise duty is imposed under the Customs Tariff on imports of these products.

Excise taxes are currently imposed under the Excise Tax Act on domestic and imported cigarettes, cigars, tobacco sticks and other forms of manufactured tobacco (fine cut) at the time the manufacturer delivers these products to a purchaser or at the time of importation. An excise tax is also imposed on exports of tobacco.

Prior to 1994, federal excise duty and excise tax rates were the same in every province. With the announcement of the National Action Plan on Smuggling in February 1994, however, the federal government reduced excise tax rates on most tobacco products by a base amount across the country and by various additional amounts in Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island to match provincial tobacco tax reductions. While there have been modest federal excise tax increases in some of these provinces over the interim, federal excise tax rates on tobacco products continue to vary from one province to another.

Proposed System

The fundamental structure of the excise duty on tobacco will remain substantially the same under the revised excise framework. Excise duty will continue to be imposed and payable by the manufacturer at the time domestic tobacco is packaged for consumption. Duty will also continue to be imposed and payable on imported tobacco by the importer at the time of importation, although the system will be simplified by imposing the duty directly under the Excise Act rather than as a customs duty equivalent under the Customs Tariff.

While the fundamental structure will remain substantially the same, a number of changes are being proposed that will simplify, streamline and update the excise duty system. The key change will be that the excise taxes currently applied under the Excise Tax Act will be rolled into the excise duty structure. The rate of excise duty on cigarettes, tobacco sticks and manufactured tobacco will vary from one province to another to reflect the differences in current excise tax rates, but the overall tax burden will not be increased as a result of this proposed change. The export tax on tobacco products will be maintained.

The new system also proposes that the time for remittance of excise duty on domestic tobacco be extended from the end of the month the tobacco is packaged for consumption, to the end of the month following the month the tobacco is packaged for consumption. The duty on imported tobacco will be remittable under customs rules. This change represents an important step toward the implementation of Revenue Canada's integrated accounting system.

In addition, the duty-deferral system for tobacco intended for duty-free sale or export, which currently involves both excise bonding and customs bonded warehouses, will be consolidated into the single channel of excise warehouses. As a result, under the new system, tobacco will no longer be permitted to enter into customs bonded warehouses.

Finally, pervasive controls on the premises and manufacturing process will be replaced with a system based on self-assessment and after-the-fact verification of books and records. To modernize the administration of excise duties, the requirement to post guarantee bonds will be eliminated and new assessment, appeal and collection systems will be introduced.

A. Basic Operation

A.1. Licensees

Tobacco and cigar manufacturers will be required to be licensed as excise licensees under the new system. Tobacco packers will continue to be licensed as packers.

Excise licensees will be entitled to an exemption for imports of partly manufactured tobacco for the purpose of further processing. The exemption from licensing under the Excise Tax Act for small manufacturers whose sales do not exceed $50,000 in a calendar year will no longer be available.

A.2. Domestic Tobacco

Under the proposed system, excise duty will continue to be imposed on domestic tobacco products at the time they are packaged for consumption. As well, manufacturers will continue to be required to stamp tobacco products at the time of packaging to signify that duty has been paid at the rates applicable in the province where the tobacco is to be sold for consumption.

Exemption from excise duty will be available for domestic tobacco placed in an excise warehouse, so long as it is marked to reflect the fact that it is intended for duty-free sale or export. The excise warehouse licensee who has physical possession of the tobacco will be liable for penalties for diversion to the domestic market.

A.3. Imported Tobacco

Under the current system, imports of tobacco are subject to a customs duty equivalent under the Customs Tariff and an excise tax under the Excise Tax Act at the time of importation.

To simplify the tax structure, the new system will replace the two existing levies with an excise duty. Excise duty will be imposed on imported tobacco under the Excise Act at the time of importation. There will continue to be a requirement that imported tobacco be stamped at the time of importation to signify that excise duty has been paid at the rates applicable in the province where the tobacco is to be sold for consumption.

Exemption from excise duty and regular customs duty will be available for imported tobacco placed in an excise warehouse, so long as it is marked at the time of importation for duty-free sale or export.

The system will be streamlined by consolidating the current excise bonding warehouses and customs bonded warehouses into a single excise warehouse. As a result, imported tobacco will no longer be permitted to enter a customs bonded warehouse. To promote the equal treatment of imported and domestic tobacco, deferral of GST on imported tobacco will not be available under the proposed system.

B. Excise Warehouses

Excise warehouse licences may only be held by excise licensees, provinces or persons who are not retailers. Domestic and imported tobacco products for the duty-free market or for export will continue to be closely regulated under the new consolidated excise warehouse system.

B.1. Domestic Tobacco

Domestic tobacco intended for export or duty-free shops may only be held in the excise warehouse of the excise licensee who packaged the tobacco. Similarly, domestic tobacco destined for accredited representatives may only be held in the excise warehouse of the excise licensee who packaged the tobacco, or by the excise warehouse licensee authorized by the excise licensee to sell to accredited representatives. Finally, domestic tobacco intended for ships' stores may be held in any excise warehouse that is making duty-free supplies to persons authorized to buy ships' stores.

B.2. Imported Tobacco

Any excise warehouse licensee may import tobacco for sale to duty-free shops, accredited representatives, as ships' stores or for export. In addition, duty-free shops and accredited representatives may import tobacco directly.

B.3. Marking

Domestic tobacco intended for export or the duty-free market must be marked at the time it is placed in an excise warehouse. Packages of tobacco destined for export must be marked "Not for Sale in Canada" while tobacco for duty-free sale in Canada must be marked "Duty Not Paid".

Imported tobacco intended for export or the duty-free market must be marked at the time of importation. Packages destined for export must be marked "Not for Sale in Canada" while tobacco for duty-free sale in Canada must be marked "Duty Not Paid".

When tobacco is imported into Canada in packages that do not meet stamping or marking requirements, it must be put in a customs sufferance warehouse until the packages are properly stamped or marked.

B.4. Diversion

Tobacco that has been placed in an excise warehouse will continue to be prohibited from entering the duty-paid domestic market -- it must be exported, sold to duty-free purchasers or destroyed. Where tobacco marked as non-duty-paid is found in the duty-paid domestic market, it will continue to be treated as a diversion of product.

C. Transition

C.1. Inventory Conversion Under the Excise Tax Act

As a result of excise tax being rolled into excise duty, tobacco manufacturers will be in a position where they are holding tax-free inventories of tobacco that will now be required to be duty paid. On the date of implementation, excise tax will become payable and will be required to be remitted at the end of the following fiscal month.

C.2. Customs Bonded Warehouses

On the date of implementation, inventory held in customs bonded warehouses free of regular customs duty and the customs duty equivalent may be converted into inventory held in excise warehouses free of regular customs duty and excise duty.

Deferral of GST will no longer be available under the proposed system. As a result, the GST on tobacco held in customs bonded warehouses on the implementation date will become payable under regular customs rules.

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