There has been much speculation on how Canada will tax cannabis, which is expected to be legalized for retail sale in Canada by July 2018. The much anticipated draft tax legislation was released by the Department of Finance on Friday November 10, 2017, and is out for consultation until December 7, 2017.
Proposed Tax Regime
Under the proposed cannabis tax regime, most supplies of cannabis will be subject to GST/HST (at rates currently ranging from 5-15% across Canada). Cannabis, both for recreational or medical use, will also be taxed under the Excise Act, 2001 (Canada) (the "Act"), which currently imposes federal excise duty on spirits, wine and tobacco product made in Canada. Both taxes on cannabis will be administered by the Canada Revenue Agency.
Similarly to the current GST/HST regime, the provinces and territories will be offered the option of joining the federal tax regime for cannabis taxation, in which case the excise duty on cannabis will be made up of the federal rate, plus an additional rate for the participating province or territory. The division of tax revenues is currently under discussion between the federal government and the provinces, which will be responsible for controlling the distribution and retail sales of cannabis in each province. In this regard, the federal government has indicated its goal of setting the maximum total excise duty rate at the greater of $1 per gram or 10 per cent of the sale price of the product.
Licensing, Stamping and Production
The proposed legislation requires cannabis producers to obtain a license from the Canada Revenue Agency under the Act ("Cannabis Tax License"), in addition to the license issued by Health Canada under the Cannabis Act. The Cannabis Tax License is also required to package or stamp a cannabis product, or to sell, purchase or possess a cannabis product that is not packaged and stamped as required. The licensee will be subject to a requirement to post security in an amount ranging from $5,000 to $5,000,000, depending on the expected amounts of duty payable, and will be valid for a maximum of two years, unless renewed.
It should be noted that GST/HST registration may also be required, in addition to the foregoing cannabis license registrations, where the small supplier threshold of $30,000 per annum is exceeded. Provincial sales taxes may also need to be considered, as cannabis would be considered tangible personal property, and therefore may be subject to tax under provincial sales tax legislation in applicable jurisdictions.
Cannabis licensees will also need to apply for cannabis excise stamps, with the intended provincial or territorial market, indicating that duty has been paid. The possession of counterfeit cannabis excise stamps, the unlawful possession of cannabis excise stamps or unstamped cannabis products, as well as diversions and other contraventions, will be subject to penalties, and may also fall under existing and new cannabis-specific offence provisions.
The proposed legislation also addresses the packaging of cannabis for retail markets, which will be required to include information as prescribed in the regulations. Regulations will also address additional conditions for the licensing, production and sale of cannabis, including where and what activities may be conducted under a license.
Rates of Excise Duties
Cannabis products produced in Canada will be subject to excise duty at the manufacturing level. The tax will also be applied to both cannabis for medical purposes and to cannabis for non-medical purposes, which was apparently deemed necessary due to the potential compliance and diversion issues that may arise with differing tax treatment.
The federal excise duty will generally apply to fresh and dried cannabis, cannabis oils, and seeds and seedlings for home cultivation at the time that they are packaged, at the higher of the following two amounts:
- a flat rate per gram (50 cents for flowering cannabis, viable seed, vegetative cannabis plant; 15 cents for non-flowering cannabis)
- an ad valorem duty calculated as a percentage (5%) of the sale price of the packaged cannabis at the time of delivery from the federal licensee
The tax will only be payable at the time of delivery to the purchaser, or on certain importations, to the extent they are allowed. Excise duty will also apply to cannabis that is unaccounted for, or is taken for consumption, analysis or destruction.
The excise duty regime for cannabis generally will not apply to cannabis products that are produced in Canada by an individual for the individual's own personal use/medical purposes (or by a designated person for the medical purposes of another individual) that is in accordance with the relevant rules in the Cannabis Act or Controlled Drugs and Substances Act, as applicable. Duty relief is also available in limited cases, including the taking of cannabis for destruction in prescribed circumstances.
Entry into force
The cannabis tax regime is proposed to come into force on commencement day (when adults will be able to legally purchase and possess cannabis for non-medical purposes). Certain provisions, including licensing and stamping requirements, are proposed to come into force as at an earlier date. Cannabis products that are delivered to a purchaser before commencement day, for sale and distribution after that day, will be subject to excise duty.
Cannabis products will also be subject to GST/HST, with limited exception. In this regard, the proposed amendments exclude from the zero-rated supplies in Part III of Schedule VI to the Excise Tax Act (Canada), food and beverages that are cannabis products, and viable seeds that are cannabis. The foregoing does not apply to viable grains or seeds that are industrial hemp for purposes of the Cannabis Act, which will continue to be zero-rated.