Excise Act Review: 2
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Part II
Scope of the Review and Criteria
for a Revised Excise Framework

Scope of the Review

The scope of the review is comprehensive, including both new legislation and an updated administrative function, but does not include rates of taxation.

To facilitate discussion on a wide range of topics, the Department of Finance and Revenue Canada entered into a consultative process with industry associations and provincial liquor jurisdictions. Some of the key areas discussed included:

• operational issues;
• administration;
• preventative considerations;
• treatment of imports; and
• production for personal consumption.

Several themes emerged through the consultative process, including the mutual desire to replace outdated supervisory controls and onerous administrative requirements with a modern approach based on self-assessment and after-the-fact verification. There was also a common recognition that the proposal for a revised excise framework must incorporate control measures sufficient to ensure the integrity of the production process; protect government revenues; and form the basis for an effective enforcement function.

Operational Issues

From an operational perspective, the Excise Act exerts broad, often outdated and intrusive supervisory controls over physical plant facilities, production processes, storage and transportation practices of Canadian manufacturers.

The need for strict supervision was originally based on the significant revenues raised through excise duties in the first half of this century, as well as the potential for diversion of non-duty-paid goods by marginal manufacturers. While these practices were consistent with the accounting and auditing practices of the day, their efficacy has been reduced by the technological advances realized across modern production processes. Retaining a strict supervisory framework is generally viewed by the alcohol and tobacco industries as an impediment to achieving greater operational efficiency.

The federal government recognizes that despite the marked changes in the operating practices of the alcohol and tobacco industries, few changes have been made to the legislative structure to respond to modern commercial practices. At the same time, any movement toward a new excise system must continue to ensure the integrity of producers and production, and provide the tools necessary to ensure that all excisable goods enter the domestic market on a duty- and tax-paid basis.

Administration

From an administrative perspective, the Excise Act is both archaic and arcane, posing serious problems for administration and compliance.

For many years, administration of the Excise Act was rooted in direct supervision of manufacturers through the presence of on-site excise officers. While this practice has been relaxed over recent years as Revenue Canada has updated its administrative function, the limitations of the Excise Act continue to constrain efforts in this regard. The structure of the act simply is not flexible enough to accommodate the increased use of information technology that is commonplace among government and industry. As a result, both government and industry are unable to achieve the efficiencies in administration and compliance that would provide a more certain, fair and effective taxation system.

A revised excise framework that incorporates the fundamental principles of self-assessment and after-the-fact verification would allow administration and compliance in respect of excise levies to be brought up to the standards that currently exist among other taxes, facilitating Revenue Canada's integrated approach to all taxpayers and reducing the compliance costs to industry.

Preventative Considerations

The Excise Act performs an important preventative function with respect to the illicit production, distribution and possession of excisable goods. For the most part, this function has been realized, with domestic manufacturing and distribution of excisable goods characterized by integrity and respect for the requirements of the excise framework.

At the same time, specific taxation of alcohol and tobacco products and the potential for diversion continue to attract contraband pressures. Alcohol and tobacco products remain attractive to illegitimate operators, exerting a detrimental effect on industry, government and consumers. It is critical, therefore, that the revised excise framework be designed to achieve ongoing and greater efficiencies in the enforcement of provisions related to unauthorized production, distribution and possession of excisable goods.

Treatment of Imports

In addition to regulating domestic goods, the excise framework also extends to imported alcohol and tobacco products, whether in bulk form for further processing or packaged for retail sale.

There is general consensus among producers that the provisions governing the importation of foreign goods should not provide any competitive advantage over the domestic production of similar goods.

Industry and government share a common concern with respect to ascertaining the quality, quantity and destination of all import shipments and with a view to detecting and deterring any illicit undertaking.

Production for Personal Consumption

Recently, the production of beer and wine has included an increasing portion undertaken by individuals for personal consumption. Although this production is not intended for commercial use and still accounts for a small portion of total output, the rate of growth for this new industry has attracted the attention of both government and industry.

For years, this type of production was based in the home and undertaken on a small scale with rudimentary equipment. The cost of acquiring commercial quality brewing or fermenting apparatus, and the difficulty in securing the necessary raw materials, limited both the quantity and quality of production.

The establishment of commercial brew- or ferment-on-premises facilities in certain provinces, however, has brought about a fundamental shift in the method of production for personal consumption. These commercial operations provide the public with all the requisite raw materials, high quality equipment and technical advice necessary for the brewing of beer or fermenting of wine.

The services offered by these operations raise concerns about the application and integrity of the excise framework. There are questions as to what functions and level of service can be provided by the brew- or ferment-on-premises operator before the undertaking enters the realm of a commercial brewer or vintner. There is also a concern that the collection of commercial grade equipment in brew- or ferment-on-premises facilities and the quality of the final product create the potential for diversion of production away from personal to commercial use.

Criteria for a Revised Taxation Structure

The alcohol and tobacco industries have undergone change and modernization over the course of the last 50 years. Virtually all aspects of the commercial undertaking have been reworked. Production processes, financial and accounting systems, product development, marketing efforts and distribution networks are all geared toward creating competitive advantage in a changing, consumer-driven marketplace.

Other factors surrounding alcohol and tobacco products remain as prominent today as they were 50 years ago. Specific taxation of alcohol and tobacco products continues to contribute significant revenue to the federal government, while the nature of the products requires that the taxation function incorporate controls to protect the integrity of the domestic market, and respond to societal concerns over the production and disposition of these goods.

The challenge that faces government is to reform the legislative and administrative framework in a manner that recognizes and accommodates the needs of all parties. To assist in the development and assessment of possible taxation models, the following factors were identified as fundamental evaluation criteria:

• Control and protection of revenue -- point of imposition for excise charges must provide a reliable and stable source of revenue and help to combat the contraband trade in alcohol and tobacco products;
• Modern administrative function -- must be based in law and incorporate the concepts of certainty, consistency and a standard forum to contest assessments, as well as the ability to accommodate standard business systems and function under Revenue Canada's proposed integrated tax administration program;
• Ease of compliance -- the legislative and administrative structure must be certain and simple, allowing for easy and accurate computations of tax liability and contributing to the commercial efficiency of the alcohol and tobacco industries;
• Fairness -- legislation and administration must treat participants in an equitable manner and address existing inequities under the current system; and
• Flexibility -- the excise framework must be designed to recognize and respond to the significant shift in business practices and the impact of competitive pressures across the alcohol and tobacco industries.

These criteria represent a strong foundation for proposing changes to the excise framework that will enhance the efficiencies of both government and industry.

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