Proposed Excise Duty Framework for Cannabis Products

1. Introduction and Purpose

The Government of Canada is committed to providing regulated and restricted access to cannabis, to keep it out of the hands of youth and keep profits out of the hands of criminals.

Bill C-45, “an Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code, and other Acts” (referred to as the “Cannabis Act”) was introduced in Parliament on April 13, 2017, outlining the framework for legal possession, production, distribution, and sale of cannabis, with an intention to bring this Act into force no later than July 2018 (subject to Parliamentary approval and Royal Assent). As part of the Government’s commitment to legalize, regulate, and restrict access to cannabis, it is proposed to introduce a new excise duty framework that imposes duties on cannabis products.

This technical backgrounder seeks to inform Canadians and stakeholders about the proposed federal excise duty framework on cannabis products and to obtain feedback on its design. Canadian stakeholders, businesses and the public are invited to submit feedback as part of the Government of Canada’s consultation on the cannabis duty framework on or before December 7, 2017. Written comments should be sent to fin.cannabis-taxation-cannabis.fin@canada.ca.

All measures discussed in this technical backgrounder should be considered as proposals subject to Parliamentary approval.

2. Licensing Background Information

Under the proposed Cannabis Act, the federal government will generally be responsible for setting conditions and licensing the cultivation and manufacture of cannabis products while provinces and territories will generally be responsible for regulating their distribution and retail sale (e.g., selecting a retail sales model and detailing requirements for those vendors). In those jurisdictions that have not put in place a regulated retail framework at the time of legalization, individuals would be able to purchase cannabis online from a federally-licensed entity. In addition, adults would be allowed to cultivate cannabis at home (up to four plants per residence) and the current program for access to cannabis for medical purposes would be maintained.

While regulations are still being developed under the proposed Cannabis Act, strict packaging and labelling requirements would also apply at the federal level for products destined for the retail market.

In this regard, all products intended for sale to a final consumer at the retail level would be required to be put into their final packaging by a federally-licensed entity and would not be allowed to be altered any further (including repackaging) for the purposes of commercial sale or resale.

For ease of reading, in this technical backgrounder, future licence holders under the proposed Cannabis Act are generally referred to as “federal licensees.”

3. Overview of Proposed Cannabis Duty Base and Design

Budget 2017 affirmed the Government’s commitment to implement a new taxation regime on cannabis and to take steps to ensure that taxation levels remain effective over time.

The proposed federal excise duty framework will aim to support the Government’s purposes for legalizing and regulating cannabis, including restricting youth access and deterring illicit activities. This will entail keeping duties low, and working with the provinces and territories to develop and maintain a coordinated cross-country approach to taxation. The new federal excise duty framework is proposed to be in place when cannabis for non-medical purposes becomes available for legal sale.

A new excise duty framework on cannabis is proposed to be introduced as part of the existing Excise Act, 2001 (the Act), the Act that currently applies excise duties on tobacco, wine, and spirits. The duty will apply to all products available for legal purchase, which will include fresh and dried cannabis, cannabis oils, and seeds or seedlings for home cultivation.1

The proposed framework will impose an excise duty that is the higher of a flat rate (e.g., an amount per gram) applied on the quantity of cannabis contained in a final product available for sale, or a percentage (i.e., ad valorem rate) of the federal licensee’s sale price of the product it has packaged. This approach is intended to provide flexibility in helping support the above-mentioned policy goals by establishing a minimum duty amount for cannabis products while also accounting for changing market conditions and variances in product value and potency. The framework has also been designed to capture a wide variety of products to account for the expansion of available products for sale in the future (e.g., edibles).

The proposed excise duty framework will be applied as follows:

  • A flat rate duty will be imposed on the quantity of flowering and non-flowering material (referred to as “flower” and “trim,” respectively, in this technical backgrounder) of the cannabis plant, as well as on cannabis seeds and seedlings (in the case of home cultivation).
    • Flower: the whole or any part, other than viable seeds, of an inflorescence of a cannabis plant at any stage of development, including the infructescence stage of development.
      • This generally refers to the hairy, sticky, or crystal-covered parts of mature female cannabis plants harvested for their high-potency content.
    • Trim: any part of a cannabis plant other than flowers, viable seeds, and a part of the plant referred to in Schedule 2 of the Cannabis Act.
      • This generally refers to the plant material, to be used in a cannabis product, after the flowers are removed.
    • Seedling: a cannabis plant that has not yet produced flowers, fruits or seeds, or other reproductive structures.
      • This generally refers to clones/immature plants sold for home cultivation purposes.
    • Seed: would generally represent a viable cannabis seed sold for home cultivation purposes.
  • 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 flat rate duty will be imposed on a dollar-per-gram basis, or dollar-per-seed/seedling basis in the case of seeds/seedlings.
    • A lower rate per gram will be applied for trim in relation to flower.
    • 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.
  • 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 will also be imposed on the sale price of the transaction.
  • 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 applicable duty will only become payable at the time of delivery to a purchaser.
    • 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.

An illustration of this proposed excise framework within the cannabis supply chain, and the types of products captured in the base, can be seen in the figure below:

Illustration of Proposed Cannabis Duty Framework
Illustration of Proposed Cannabis Duty Framework

4. Treatment of Cannabis for Medical Purposes

Any cannabis products sold under the proposed Cannabis Act for medical purposeswill be subject to the duty rates and conditions of the excise duty framework, which will become applicable as per the transitional rules section below. Cannabis products that are produced by an individual (or a designated person) for the individual’s own medical purposes in accordance with the proposed Cannabis Act will not be subject to the excise duty. Seeds and seedlings used in this production will be subject to duty.

5. Duty Rates and Federal-Provincial-Territorial Taxation Coordination

The Government is committed to working with provinces and territories on an ongoing basis to ensure a coordinated cross-country approach to the taxation of cannabis. Provincial and territorial governments will also have a stake in supporting the objectives of cannabis legalization by ensuring any cannabis-specific levies do not lead to prices that may indirectly promote or perpetuate the illicit market. This will mean keeping overall taxes low, with the federal government working with provinces and territories on an ongoing basis to ensure a coordinated approach.

The federal government believes that the total2 of federal duty rates and provincial-territorial taxes (or the portion of provincial Crown monopoly mark-ups that are, from a revenue-generating standpoint, similar to a taxation measure) on cannabis products should, subject to modest regional variations to reflect local circumstances, be set at a level of the greater of $1.00 per gram, or 10 per cent of the sale price of a product, at the outset of legalization. Where provinces and territories agree, coordination could be achieved through the implementation of this level of taxation through federal legislation. Participation in a formalized coordination agreement with the federal government will be the prerogative of provincial and territorial governments.

  • This coordinated framework could include a federal rate, with an additional rate in respect of provinces and territories choosing to participate.
  • Revenue-sharing would be determined by the actual duty paid by federal licensees in respect of cannabis products intended for the provincial or territorial markets where the products will be sold to the final consumer, less any refunds related to the destruction of duty-paid products intended for those markets.

The proposed federal-only excise duty rates applicable as part of the cannabis excise duty framework can be found in Table 5.1, while potential combined federal and additional cannabis excise duty rates (assuming similar rates) as part of a coordinated framework can be found in Table 5.2.

Table 5.1: Proposed Federal-Only Excise Duty Rates on Cannabis
  The Higher of the Two Rates Applies

Cannabis Plant Product Flat Rate Ad Valorem Rate
Flower $0.50 / gram 5 per cent of the sale price of a cannabis product packaged by a federal licensee to a purchaser.
Trim $0.15 / gram
Seed for home cultivation $0.50 / seed
Seedling for home cultivation $0.50 / seedling
Table 5.2: Potential Combined Federal and Additional Excise Duty Rates on Cannabis
  The Higher of the Two Rates Applies
 
Cannabis Plant Product Flat Rate Ad Valorem Rate
Flower $1.00 / gram 10 per cent of the sale price of a cannabis product packaged by a federal licensee to a purchaser.
Trim $0.30 / gram
Seed for home cultivation $1.00 / seed
Seedling for home cultivation $1.00 / seedling

For illustrative examples of potential applicable excise duty rates for certain cannabis products (i.e., how the duty flat rate and ad valorem rate interact in practice), please see Table 5.3 for potential federal-only excise duty liabilities and Table 5.4 for potential combined federal and additional excise duty liabilities.

Table 5.3: Examples of Proposed Federal-Only Excise Duty and GST/HST Liabilities on Certain Cannabis Products
Product Quantity of Dried Cannabis Flower Used1 (g) Total Flat Duty at $0.50/g ($) Sale Price Pre-Duty ($)2 Total Ad Valorem Duty at 5% of Sale Price ($) Duty Type Applicable GST/HST (e.g.,13%) ($) Final Price ($)
Dried cannabis 1 0.50 8.00 0.40 Flat 1.11 9.61
0.50 11.00 0.55 Ad Valorem 1.50 13.05
Cannabis oil (60 ml bottle) 10 5.00 130.00 6.50 Ad Valorem 17.75 154.25
Cannabis oil (soft gels) 5 2.50 52.50 2.63 Ad Valorem 7.17 62.30
* Totals may not add due to rounding.
1 Assuming the use of only the flower portion of the cannabis plant. Quantities are illustrative and may not  necessarily reflect the actual quantity of cannabis used in the products detailed here.
2 Prices are illustrative and assume direct sale from a federal licensee to a final consumer.
Table 5.4: For Illustrative Purposes Only–Examples of Proposed Combined Federal and Potential Additional Excise Duty Liabilities, and GST/HST Liabilities, on Certain Cannabis Products
Product Quantity of Dried Cannabis Flower Used1 (g) Total Flat Duty at $1/g ($) Sale Price  Pre-Duty ($)2 Total Ad Valorem Duty at 10% of Sale Price ($) Duty Type Applicable GST/HST (e.g.,13%) ($) Final Price ($)
Dried cannabis 1 1.00 8.00 0.80 Flat 1.17 10.17
1.00 11.00 1.10 Ad Valorem 1.57 13.67
Cannabis oil (60 ml bottle) 10 10.00 130.00 13.00 Ad Valorem 18.59 161.59
Cannabis oil (soft gels) 5 5.00 52.50 5.25 Ad Valorem 7.50 65.25
* Totals may not add due to rounding. 
1 Assuming the use of only the flower portion of the cannabis plant. Quantities are illustrative and may not necessarily reflect the actual quantity of cannabis used in the products detailed here.
2 Prices are illustrative and assume direct sale from a federal licensee to a final consumer.

6. Administration

The Canada Revenue Agency (CRA) will be responsible for administering and enforcing the new cannabis duty framework, including ensuring compliance with the general application and administrative rules contained within the Act.

To promote compliance with the cannabis duty regime, penalty and offence provisions broadly similar to those applying to alcohol and tobacco duties will be put in place.

7. Licensing and Registration Requirements

The proposed legislative framework will require all Health Canada-licensed cultivators and manufacturers of cannabis and cannabis products to obtain a cannabis licence from the CRA. Health Canada-licensed cultivators and product manufacturers will be required to obtain a cannabis licence from the CRA for reporting liability purposes, regardless of whether they have a duty liability.

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.

In line with the current rules under the Act, and in addition to the above requirement, the specific CRA-related criteria for an applicant to obtain a licence will include the following:

  • The applicant is not subject to receivership of its debts;
  • The applicant has not acted to defraud her Majesty in the past five years;
  • The applicant, if an individual, is at least 18 years of age; and
  • The applicant 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; and
  • Providing acceptable security to cover one full reporting period, with a minimum of $5,000 and a maximum of $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.

8. 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 will be required 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; and
  • 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. With respect to stamping within a coordinated taxation framework between federal, provincial, and territorial governments with potentially different duty rates:

  • A cannabis licensee (i.e., the manufacturer who packages a product for final retail sale) would have to apply an excise stamp with an indicator (e.g., colour) of the intended provincial or territorial market.
  • 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 (see section 12: Imports and Exports below), not for final sale to consumers; or
  • 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.

9. Reporting Requirements

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; and,
  • 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.

10. 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. The Cannabis Act is proposed to come into force on a day or days to be fixed by order of the Governor in Council. Subject to Parliamentary approval and Royal Assent, the Government has indicated that this is proposed to be no later than July 2018. 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.

11. Transitional Rules

Under the current Access to Cannabis to Medical Purposes Regulations (ACMPR), licensed producers are expanding production and capacity in anticipation of supplying the cannabis market for both medical and non-medical purposes.

Subject to Royal Assent of the bill implementing the proposed amendments to the Act, on the date that cannabis sales for non-medical purposes become legal, the cannabis duty framework will be implemented to ensure the equal duty treatment of cannabis products destined for the retail market regardless of when that product was produced and/or transported to final distributors/retailers.

  • Duty will become payable for federal licensees on any cannabis products they have already delivered in advance of the legalization date for eventual retail sale, with the exclusion of cannabis previously delivered directly to final consumers through the mail under the ACMPR.
    • All cannabis products delivered through the mail under the Cannabis Act on or after the date of cannabis legalization for non-medical purposes will be subject to the appropriate duty.
  • Administrative information, as well as excise stamps, will be available with sufficient time to facilitate this transitory process.

12. Imports and Exports

Under the proposed Cannabis Act, it will be illegal to import into or export from Canada cannabis and cannabis products except under very specific circumstances. Import and export of cannabis or cannabis products for medical and scientific purposes will continue to be allowed with the proper permits issued by the Government. In addition, industrial hemp will be allowed to be imported and exported.

  • Any exportation of cannabis for medical or scientific purposes through an authorized permit or licence will not be subject to excise duty.
  • Any importation of cannabis for medical or scientific purposes through an authorized permit or licence will be subject to excise duty, unless duty is not payable or relieved through an approved manner (see below).

13. Non-Dutiable Uses of Cannabis and Cannabis Products

Aside from exports of non-duty paid cannabis,the Act will provide certain circumstances in which non-dutiable uses of cannabis and cannabis products will be permitted. For example: 

  • Duty will not be payable on cannabis and cannabis products taken for analysis or re-worked/destroyed (in a manner approved by the Minister) by a licensee or by the Minister.
    • This will include product delivered to a person prescribed by regulations for destruction by that person in circumstances prescribed by regulations.
  • The legislation will also provide the power to relieve the duty on a product prescribed by regulations, or a product used in a circumstance prescribed by regulations, in the future as appropriate.

14. Application of GST/HST

The Goods and Services Tax/Harmonized Sales Tax (GST/HST) applies to a broad base of goods and services with only limited exceptions. In keeping with the broad-base application of the GST/HST, sales of cannabis products (including seeds and seedlings) will be taxable under the GST/HST (as is currently the case).

Amendments to the GST/HST basic groceries provisions of the Excise Tax Act are proposed to ensure that any sales of edible cannabis products permitted in the future would be subject to the GST/HST in the same way as sales of other types of cannabis products. In addition, amendments are proposed to relieving provisions for agricultural products to ensure that sales of cannabis products, including seeds and seedlings, will not be relieved under these provisions.

How to Provide Input

Canadian stakeholders, businesses and the public are invited to submit feedback as part of the Government of Canada’s consultation on the cannabis duty framework on or before December 7, 2017.

Closing date: December 7, 2017

Written comments should be sent to:
fin.cannabis-taxation-cannabis.fin@canada.ca

In order to add to the transparency of the consultation process, the Government of Canada may make public some or all of the responses received or may provide summaries in its public documents. Therefore, parties making submissions are asked to clearly indicate the name of the individual or the organization that should be identified as having made the submission.

In order to respect privacy and confidentiality, when providing your submission please advise whether you:

  • consent to the disclosure of your submission in whole or in part;
  • request that your identity and any personal identifiers be removed prior to publication; and/or
  • wish any portions of your submission to be kept confidential (if so, clearly identify the confidential portions).

Information received throughout this submission process is subject to the Access to Information Act and the Privacy Act. Should you express an intention that your submission, or any portions thereof, be considered confidential, the Government of Canada will make all reasonable efforts to protect this information.


1 Industrial hemp would not be considered cannabis products and would not be subject to excise duties.

2 Before GST/HST and general application provincial sales taxes.