Tax Alert - Federal Government Proposes Excise Duty Framework for Cannabis Products

November 2017

Federal Government Proposes Excise Duty Framework for Cannabis Products

On November 10, 2017, the Department of Finance announced a proposal to introduce an excise duty framework for cannabis products which are intended to be legalized in Canada by July 2018. This framework includes a new excise duty on the sale of cannabis products. GST/HST would apply to the price including the new excise levy—therefore the final price will vary across the country due to varying sales tax rates between the provinces.

Under the proposed Cannabis Act, the Federal Government will generally be responsible for the licensing of the cultivation and manufacturing of cannabis products. Provincial and territorial governments will be responsible for the distribution and retail sales of cannabis.

The proposed federal excise duty will be the levied on licensed persons (federal licensees) and computed as follows:

The greater of:

  1. a flat tax rate (i.e. an amount per gram) applied on the quantity of cannabis contained in a final product; or
  2. a percentage (i.e. ad valorem rate) of the licensee’s sale price it has packaged.

The proposed federal-only flat rate is $0.50 per gram, levied on the flower that is packaged for final retail sale or the amount of the flower contained in a manufactured cannabis product (oils or other items).The same flat rate will also apply to seeds and seedlings. A lower flat rate of $0.15 per gram will apply on trim due to lower potency levels as compared to the flower. The proposed federal-only ad valorem rate is 5 percent of the selling price of the cannabis product packaged by a federal licensee. The excise duty payable would be the greater of the two amounts.

The federal government is committed to working with the provinces and territories to ensure a coordinated approach to the taxation of cannabis. In this regard, they believe that the combined excise duty rates (i.e. federal and provincial) should be set at the outset at either $1.00 per gram or per seed/seedling for the flat rate and 10% of the sale price packaged by the federal licensee for the ad valorem rate.

The following is an example provided by the Department of Finance in their proposal on how the excise duty will be levied using the combined federal and potential additional excise duty rates.

cannibas.png

The Canada Revenue Agency (“CRA”) will be responsible for the licensing, registration, and administration of the excise duty on the sale of cannabis. It is proposed to be very similar to the conditions and processes that are currently in place with respect to excise duties for alcohol and tobacco.

All federally licensed cannabis dealers will be required to file monthly returns with the CRA. The proposed reporting requirements will require 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 cannabis products will be required to be packaged and affixed with an excise stamp from a federally licenced vendor in a manner consistent with the excise rules for tobacco and alcohol.

The only exceptions to the cannabis duty rates is the export of cannabis for medical or scientific purposes through an authorized permit or if the cannabis is reworked or destroyed in a manner approved by the Minister. This means that cannabis that is imported or domestically produced for medical purposes will generally be subject to the excise duty.

There will also be changes made to the Excise Tax Act to ensure that the GST/HST will apply to edible cannabis products and to ensure that seeds and seedlings are taxed.

MP Bill Blair, head of the cannabis legalization taskforce, noted that the level of taxation and price must be competitive with the illicit market while not being so low as to encourage excessive consumption. The government estimates this excise tax could generate $1 billion in annual revenues.

The government has invited feedback on their proposed taxation framework. The consultation period ends December 7, 2017.

We are committed to keeping you updated on current tax changes. Should you have any questions on this matter and how it may impact you, please contact Shelley Smith, Indirect Tax Practice Leader, or a trusted BDO advisor.

Learn more about our Indirect Tax team.


The information in this publication is current as of November 14, 2017.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.