On November 10, the Department of Finance Canada released its proposed legislative and regulatory amendments relating to cannabis taxation in preparation for the federal legalization of recreational cannabis on July 1, 2018.1 The proposal would largely amend the Excise Act, 2001, but also the Excise Tax Act and related regulations.
What You Need To Know
The key aspects of the draft proposal on cannabis taxation are explained in detail below.
In addition to the licensing requirement under the proposed Cannabis Act,2 the draft proposal would require all cannabis producers to obtain a licence from the Canada Revenue Agency (CRA). The maximum term of such licences is two years and licensees must re-apply 30 days prior to its expiration. This proposed licensing requirement will be imposed on producers for reporting liability purposes, regardless of whether they have a duty liability. Therefore, producers need to provide acceptable security to cover one full reporting period—$5,000 minimum and $5,000,000 maximum.
Excise Duty Rate
The draft proposal would impose a federal excise duty on a licensed producer equal to the higher of the following amounts:
- A flat rate based on the quantity of cannabis, which differs depending on the type of cannabis material:
- flowering material: $0.50 per gram;
- non-flowering material: $0.15 per gram;
- viable seed: $0.50 per seed; and
- seedling: 0.50 per seedling.
- Five per cent of the licensee's sale price of the packaged cannabis product to a purchaser.
The duty would be payable at the time of delivery to a purchaser, who can be an authorized retailer or a final consumer. Provinces will enact their own cannabis tax legislation in addition to the federal taxation scheme.
Any cannabis product that enters the Canadian market must be packaged in a container intended for retail with an excise stamp affixed to the packaging. The CRA will be responsible for issuing and administering the cannabis excise stamps, which would be available for sale only through authorized providers. A person is prohibited from selling or possessing unstamped cannabis products with certain exceptions.
Licensees will be required to submit a duty and information return to the CRA on a monthly basis. This will contain information such as the quantity of products produced, the amount of excise duty payable and certain inventory details.
Persons who contravene the prohibition on sale and possession of unpackaged and unstamped cannabis products are guilty of an offence and the following penalties apply:
- conviction on indictment: a fine in the following amount or an imprisonment term not exceeding five years, or both;
- a minimum fine equal to the greater of the amount of flat rate excise duty multiplied by 400% if the offence occurred in a specified province or 200% in other situations, and $1,000; and
- a maximum fine equal to the greater of the amount of flat rate excise duty multiplied by 600% if the offence occurred in a specified province or 300% in other situations, and $2,000.
- summary conviction: a fine in the following amount or an imprisonment term not exceeding 18 months, or both;
- a minimum fine equal to the greater of the amount of flat rate excise duty multiplied by 400% if the offence occurred in a specified province or 200% in other situations, and $500; and
- a maximum fine equal to the lesser of $500,000 and the greater of the amount of flat rate excise duty multiplied by 600% if the offence occurred in a specified province or 300% in other situations, and $1,000.
For these purposes, a province will generally be a specified province if it enters into an agreement with the federal government to coordinate cannabis taxation.
Persons who contravene the licensing and packaging/labeling requirements receive for sale cannabis products that contravene the Excise Act, 2001, or sell unpackaged and unstamped cannabis products are liable to a fine of 200% of the greater of the amount of flat rate excise duty, and 5% of the fair market value.
The following cannabis products are generally exempt from the proposed excise duty framework:
- cannabis produced by an individual for personal use in accordance with the Cannabis Act, and
- cannabis produced by an individual or a designated person for the individual's medical use in accordance with the Cannabis Act or the Controlled Drugs and Substances Act.
The Government of Canada accepted comments from the public on the draft proposal until December 7. Once stakeholder feedback has been considered, a revised proposal will be published. The proposed cannabis excise duty framework is intended to apply after federal legalization of recreational cannabis, which is set for July 1, 2018.
It was announced on December 11 that Canada's Finance Ministers agreed to cap the combined rate of all federal, provincial and territorial cannabis-specific taxes to the higher of $1 per gram or 10% of a producer's selling price for two years.3 The tax room will be shared on a 75-25 split, with 75% to provincial and territorial governments and 25% to federal government. Furthermore, the federal portion of cannabis excise tax revenue will be capped at $100 million annually, with additional revenues distributed to provinces and territories.
We have written extensively about emerging trends in the cannabis industry. You can read the team's insights by visiting our dedicated cannabis page.
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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