The Department of Finance has released draft Regulatory and Legislative Proposals Relating to the Taxation of Cannabis (Draft Proposals). The Draft Proposals propose to amend the Excise Act, 2001 and certain regulations thereunder pursuant to which the excise duty on cannabis is imposed.
What You Need To Know
Under the Draft Proposals:
- revenues from federal excise duties would still be shared between levels of government. 75% will go to the provincial and territorial governments which signed a Coordinated Cannabis Taxation Agreements (CCTA) and the remaining 25% will go to the federal government;
- federal revenues from cannabis taxation would be capped at $100 million and any excess amounts would be distributed to the provinces and territories which signed CCTAs;
- the additional excise duty rates will be imposed by each participating province or territory on the sale of cannabis.The rates are now in effect; and
- clarification is given for the method of determining the value to which the provincial ad valorem excise duty rates are to be applied. Producers will need to be aware of the applicable duty rate for each province and type of cannabis plant product as well as the formulas for calculating the base amount and dutiable amount of cannabis product subject to an excise tax.
The Draft Proposals are in keeping with the CCTAs entered into by the federal government and the Finance Ministers from all provincial and territorial governments except Manitoba, as well as the framework for the taxation of cannabis published last year.1 The framework was designed to set out the application of both a federal excise duty and as well as an additional excise duty in respect of provinces and territories.
Additional Excise Duty Rates
Under the Draft Proposals, all participating provinces and territories will apply an additional excise duty rate equal to the higher of:
- an ad valorem rate equal to 7.5% of the dutiable amount of a cannabis product packaged by a cannabis licensee when delivered to a purchaser plus, in some cases, a sales tax adjustment (that varies by province or territory); and
- a flat-rate that varies based on the type of cannabis plant product plus, in some cases, a sales tax adjustment (that varies by province or territory) as follows.
- material: $0.75 per gram.
- Non-flowering material or trim: $0.225 per gram.
- Viable seeds: $0.75 per seed.
- Seedling: $0.75 per seedling.
Some jurisdictions, including Ontario, will add an additional sales tax adjustment to each of the rates set out above.
- Alberta: 16.8% of the base amount to the flat rate; 16.8% of the dutiable amount to the ad valorem rate (for a total of 24.3% of the dutiable amount).
- Nunavut: 19.3% of the base amount to the flat rate; 19.3% of the dutiable amount to the ad valorem rate (for a total of 26.8% of the dutiable amount).
- Ontario: 3.9% of the base amount to the flat rate; 3.9% of the dutiable amount to the ad valorem rate (for a total of 11.4% of the dutiable amount).
- Saskatchewan: 6.45% of the base amount to the flat rate; 6.45% of the dutiable amount to the ad valorem rate (for a total of 13.95% of the dutiable amount).
The Draft Proposals also contain proposed amendments clarifying the method of determining the value to which the ad valorem excise duty rates are to be applied. Producers will need to be aware of the applicable duty rate for each province and type of cannabis plant product as well as the formulas for calculating the base amount and dutiable amount of cannabis product subject to an excise tax.
It is important to note the excise tax proposals would be levied in addition to the annual regulatory fee of 2.3% on gross revenue for licensed producers. The regulatory fee is one of four proposed cost recovery fees along with the application screening fee, the import/export fee, and the security screening fee. 2 Industry and financial commentators are concerned the federal and provincial governments are imposing too heavy a tax burden on the fledgling market. If the taxation regime results in the price of legal cannabis being significantly higher than the current black market price, then the federal government’s goals of keeping cannabis out of the hands of young people and profits from criminal organizations may be undermined.3
2 See https://www.canada.ca/en/health-canada/programs/consultation-proposed-approach-cost-recovery-cannabis/document.html. We have written extensively on cannabis, which you can view by visiting the practice page.
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