Government of Canada Releases Explanatory Notes and Legislative Proposals Relating to the Taxation of Cannabis

The Government of Canada has released legislative proposals relating to the taxation of recreational cannabis.  On April 13, 2017, a federal bill was introduced that would legalize cannabis for recreational purposes, with the intent of having the rules come into force by July 1, 2018.  To provide information on the proposed rules surrounding the taxation of cannabis, the Department of Finance has released the following documents:

• Proposed Excise Duty Framework for Cannabis Products;
• Legislative and Regulatory Proposals Relating to the Taxation of Cannabis; and
• Explanatory Notes Relating to the Excise Act, 2001, the Excise Tax Act and Related Regulations.

Excise Duty

Under the current proposals, cannabis will be subject to a new excise duty framework to be implemented through amendments to the Excise Act, 2001, which currently imposes excise duties on tobacco and alcohol products.  As part of this regime, the government has proposed the implementation of the following combined federal and provincial or territorial excise duty rates upon legalization:

• $1.00 per gram of cannabis plant flower (as will be defined in the legislation);
• $0.30 per gram of cannabis plant trim (which is plant material, other than the flower, used in a cannabis product); and
• $1.00 per seed or seedling for home cultivation.

In addition, where a 10 percent ad valorem rate, based on the sale price, would be higher than the flat duty rates for a cannabis product (as noted above), then the 10 percent rate would be used to determine the amount of duty imposed on that product.  The proposed rates presuppose coordination with provincial and territorial governments at similar taxation rates.  Indeed, the proposed federal duty rates, on their own, are exactly half of the amounts noted above.  However, it remains to be seen how many provinces or territories will decide to approach the taxation of cannabis under the federal government’s proposed coordinated framework, and at what rates.

The Canada Revenue Agency (CRA) will be responsible for the administration and enforcement of the proposed cannabis duty regime.  

GST/HST

The federal government has affirmed that GST/HST will apply to the sale of cannabis products.  As quickly reported by the mainstream media, GST/HST will be calculated on the selling price of such products, after the inclusion of the applicable excise duty.  Several consequential amendments to the Excise Tax Act have been proposed in order to ensure that cannabis product sales do not benefit from the existing zero-rating provisions for basic groceries and agricultural seeds and grains, nor the exemption for certain sales by volunteers in the course of fund-raising activities for public service bodies.  In addition, various changes have been proposed to preserve the tax relief afforded to grains, seeds and straw qualifying as industrial hemp.     

The announced proposals also deal with the licensing, registration, stamping and reporting requirements for cannabis manufacturers and distributors. 

The federal government is encouraging all stakeholders to provide feedback on these proposals by December 7, 2017.  Written comments can be sent directly to the government at fin.cannabis-taxation-cannabis.fin@canada.ca.