Tax & Accounting September 21, 2018

A summary of the new draft cannabis proposals

As indicated previously on the Blog, on September 17, 2018, the Department of Finance introducded new draft legislative and regulatory proposals regarding the taxation of cannabis. The following intends to summarize and clarify the proposals. It is first important to remember that taxation of cannabis involves a two-step process. Firstly, a federal  flat –rate duty  or ad valorem  duty rate of 10%  applies to sales of cannabis. This duty is paid at the packaging level and is included in the price cannabis retails for. Secondly, as a general rule, PST, GST or HST and QST will apply at the applicable rate in the province of distribution. Following an agreement between the federal and provincial Finance Ministers, the federal duty rate is to be shared with the provinces on the basis of 2.5%  for the Federal Government and 7.5% for the provinces. As indicated in the original Framework for the taxation of cannabis published last year, provinces with lower PST or HST rates could request an adjustment to the proportion of the federal excise duty they receive to compensate for the lower amount of revenue generated by the lower PST or HST rate. The proposed draft regulations and amendments to the Excise Act, 2001 under which the excise duty on cannabis is imposed addresses the above issue and clarifies the rates of excise duty to be shared by the federal government and provinces. Accordingly, generally, all provinces that signed a Coordinated Cannabis Taxation Agreement (“CCTA”) with the federal government will receive the basic 7.5% provincial portion of the duty rate. This includes all provinces and territories with the exception of Manitoba which appears to impose its own provincial 7.5% levy instead of entering a CCTA agreement with the federal government. The provinces with lower (or non-existent) provincial sales taxes rates or lower HST rate may request compensation in the form of an additional share of the excise duty. Accordingly the following provinces  or territories will receive the basic 7.5% duty (applied on the dutiable amount) and a supplementary duty rate:
  • Alberta 5% base duty + additional duty of  16.8% for a total of         24.3%
  • Nunavut 5% base duty + additional duty of   19.3% for a total of 26.8%
  • Ontario 5% base duty + additional duty of     3.9%  for a total of 11.4%
  • Saskatchewan 5% base duty + additional duty of    6.45% for a total of 13.95%
Similar adjustments are provided to the various flat-rate duty rates. It is notable that some provinces and territories with lower or non-existent provincial sales tax have not requested any adjustments.  There is no indication whether or not additional provinces or territories will be added to this list. Accordingly, in addition to monitoring which of the flat-rate duty rate or ad valorem duty rate is applicable, it will be important to ensure the appropriate various provincial rates are used to calculate the amount of excise duty payable. The draft proposals include other regulatory proposals that would provide:
  • Exemptions for certain entities to allow the possession of cannabis products stamped for multiple jurisdictions, under certain circumstances
  • 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
In addition to the proposed regulations, certain related amendments to the Excise Act, 2001 were also proposed, Canadians are invited to provide comments on the draft regulatory and legislative proposals by October 17, 2018.
Jacques Roberge
Independent Consultant
Jacques Roberge, B.A.A., has more than 30 years of experience in commodity tax. He initially worked for Revenue Canada, and was later employed by three of the Big Four accounting firms to develop commodity tax consulting services.
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