Backgrounder – Modifications to the Excise Duty Framework on Cannabis Products
The Government of Canada has committed to legalize, strictly regulate and restrict access to cannabis, to keep it out of the hands of Canadian children and to keep profits away from criminals and organized crime.
To that end, federal, provincial and territorial Finance Ministers agreed in principle in December 2017 to participate in a coordinated cannabis taxation framework, which has resulted in the signing of Coordinated Cannabis Taxation Agreements (CCTAs) with most provinces and territories.
The coordinated excise duty framework for cannabis taxation is designed to provide for the application of:
- a federal excise duty; and
- an additional excise duty in respect of provinces and territories.
In keeping with the agreement reached by Finance Ministers, under the CCTAs, revenues from the excise duties on cannabis products will be shared on the following basis: 75 per cent to provincial and territorial governments, and 25 per cent to the federal government.
Budget 2018 introduced measures to implement the new excise duty framework for cannabis products, and the legislative and regulatory amendments implementing this framework were included in Bill C-74, the Budget Implementation Act, 2018, No. 1, which received Royal Assent on June 21, 2018 (S.C. 2018, c.12). However, additional regulatory amendments relating to the taxation of cannabis products, including technical modifications to the overall excise duty framework for cannabis products, are required for the framework to become fully operational. The purpose of the present consultations is to receive feedback from Canadians on these draft regulatory proposals.
Summary of Draft Regulatory Proposals
The draft regulatory amendments provide the additional excise duty rates for each province or territory that has signed a CCTA with the Government of Canada, as well as the rate of a sales tax adjustment if one has been requested by the province or territory.
Under the CCTAs, provinces and territories that do not impose a general sales tax, or that have a general sales tax rate that is lower than the highest prevailing provincial general sales tax rate in Canada, can request, subject to certain conditions, that Canada apply an adjustment to the additional excise duty to account for all or part of this difference. The applicable cannabis excise duty rates can be found in the proposed regulations under the schedule specific to each province or territory and in the backgrounder titled “Cannabis Excise Duty Rates in Provinces and Territories”.
The proposals also include a proposed legislative amendment to the Excise Act, 2001 that clarifies how the value to which the ad valorem cannabis duty rates apply is to be determined.
The Government is also consulting with Canadians on proposed draft regulatory amendments that would provide:
- exemptions for certain entities to allow the possession of cannabis products stamped for multiple jurisdictions, under certain conditions;
- the ability for third parties to possess cannabis excise stamps for specific purposes; and
- exemptions from the proposed excise duty for certain cannabis-based products that are not intended for human consumption.
1. Possessing Cannabis Products Stamped for a Province or Territory Participating in the Coordinated Excise Duty Framework
All cannabis products that leave the premises of a cannabis licensee to enter into the Canadian market for retail sale will be required to have an excise stamp. For those provinces or territories participating in the coordinated excise duty framework, excise stamps will have specified colours and markings indicating the provincial or territorial market in which it is intended to be sold.
Currently, the excise duty framework generally prohibits those who do not receive a cannabis licence from the Canada Revenue Agency (CRA) from possessing cannabis products stamped for multiple jurisdictions (i.e., cannabis products bearing a stamp that is not the stamp of the province or territory in which the entity operates). Entities not licensed by the CRA are only authorized to possess and trade in products that are specifically stamped for the province or territory in which they operate.
However, the Government recognizes that the prohibition on possessing products in a jurisdiction but stamped for a different jurisdiction by non-cannabis licensees may impede the ability of certain Health Canada licensees, as well as some authorized out-of-province retailers of cannabis products, to engage in activities that are otherwise permitted.
Holders of a Licence for Sale for Medical Purposes
It is proposed that those entities that hold a licence for sale for medical purposes from Health Canada, as issued under section 62 of the Cannabis Act and in line with the Cannabis Regulations, be permitted to possess in a jurisdiction cannabis products stamped for a different jurisdiction.
Authorized Out-of-Province Retailers
Where a province or territory allows out-of-province/territory retailers to make sales of cannabis products to their residents, it is proposed that these retailers be permitted to possess cannabis products stamped for that province or territory, as well as being permitted to possess cannabis products stamped for the jurisdiction in which it operates. This would be limited to possessing cannabis products stamped for the jurisdictions in which the retailer is permitted to make sales. For example, if a retailer located in Province X is authorized by Province Y to also make sales of cannabis products to residents of Province Y, the retailer would be permitted to possess products stamped for sale for either Province X or Y. That same retailer will not be permitted to possess cannabis products stamped for sale in another province or territory participating in the coordinated excise duty framework if it is not otherwise authorized.
It is proposed that in order for a retailer to possess cannabis products stamped for a province or territory other than the one in which it operates, it be required to possess documentation that provides evidence that it is authorized to make sales of cannabis products in those other provinces or territories.
2. Allowing Third Parties to Possess Cannabis Excise Stamps for Specific Purposes
Currently, only a cannabis excise stamp manufacturer, a cannabis licensee, or a person prescribed by regulations may legally possess an excise stamp that has not been affixed to a product. The Government understands that, in order to meet their production needs, cannabis licensees may wish to enlist separate third party companies to apply adhesives to the stamps so that they may be more easily applied to packaged cannabis products.
In order to accommodate the needs of cannabis producers, it is proposed that a third party be permitted to possess cannabis excise stamps for the purpose of applying an adhesive to the stamps for a cannabis licensee. The liability or responsibility for the stamps would remain with the cannabis licensee while the stamps are in the possession of the third party.
3. Exempting Test Kits and Reference Standards from the Excise Duty Framework
Certain cannabis-based products not intended for human consumption may currently be captured by the proposed cannabis excise duty framework. It is proposed that these products, known as test kits and reference standards, be exempt from the proposed cannabis excise duty framework.
A drug test kit is an apparatus that contains a tiny amount of a controlled drug or substance that is generally used to confirm the presence or concentration of that drug or substance, such as cannabis. It is proposed that a product containing cannabis that meets the definition of a test kit as per the Cannabis Regulations and for which a registration number has been issued under those Regulations be exempt from the proposed excise duty framework.
A reference standard is a highly purified and standardized form of a given substance used as a measurement base to confirm the identity, strength, quality or purity of a substance. It is proposed that cannabis-based reference standards that are generally designed to be used for scientific or research purposes (e.g., calibrating scientific equipment), and not intended for human consumption, be exempt from the proposed excise duty framework.
Have Your Say
Canadians are invited to provide comments on the draft regulatory and legislative proposals:
Please send your comments to email@example.com by October 17, 2018. Written correspondence related to these consultations can also be mailed to:
Tax Policy Branch
Department of Finance Canada
90 Elgin Street
Note that references to “Announcement Date” in the draft regulatory and legislative proposals, and the accompanying explanatory notes included with this release, refer to today’s date (September 17, 2018). Some of these proposals may be included in a bill to be tabled in Parliament following the consultation period.