One argument in favor of legalizing recreational cannabis was that it would allow the government to collect taxes on previously black-market activity. Concurrent with Canada’s de-criminalization of recreational cannabis production, sale, and use in October 2018, the federal government imposed taxes on cannabis sales. Specifically, the government levied excise duties on all purchased cannabis products in Canada pursuant to the Excise Act, 2001, subject to certain exemptions (“Cannabis Duties“). This post provides a brief overview of this regime.
Calculation and payment of Cannabis Duties takes place at the producer level. The government requires licenced cannabis producers to package cannabis products sold to consumers in Canada with duty-paid excise stamps. Companies can only sell cannabis products packaged with duty-paid stamps to consumers in Canada. Licensed producers are responsible for purchasing and applying the stamps, calculating the duty on sales, and reporting and remitting the appropriate Cannabis Duties to the Canada Revenue Agency.
Canada calculates Cannabis Duties as the greater of:
(1) a flat-rate tax based on a cannabis product’s weight/quantity at the time of packaging; and
(2) an ad valorem rate based on the cannabis product’s sale price.
When calculating Cannabis Duties using the flat-rate tax, different rates will apply to different types of cannabis products. The following table provides a snapshot of the base rates of Cannabis Duties in Canada:
The provinces can also impose additional Cannabis Duties beyond the base rates. However, for all provinces except Manitoba, such additional duties must be in accordance with the “sales tax adjustment” mechanism found in the Coordinated Cannabis Taxation Agreements (“CCTAs”) made between the federal and provincial governments. The sales tax adjustment mechanism effectively permits provinces to apply an upward adjustment to federal Cannabis Duties to account for the difference between a province’s sales tax rate and the highest provincially imposed sales tax rate in Canada. The sales tax adjustment calculation (if applicable) will differ based on whether the flat-rate or ad valorem rate applies.
As part of the bargain for agreeing to limit provincially imposed Cannabis Duties in accordance with the CCTAs, the federal government agreed to provide the provinces with 75% of the Cannabis Duties revenue. The CCTAs also cap the federal government’s share of revenue from Cannabis Duties at $100 million per year for the first two years after legalization, with amounts collected beyond that going to the provinces.
A new set of cannabis products is coming to market, and the government intends to apply a new Cannabis Duties calculation to the products. Later in 2019, the sale of edible cannabis, cannabis extracts, and cannabis topicals will be legal. The March 2019 Federal budget proposed to subject those three new classes of cannabis products to Cannabis Duties based on the quantity of total tetrahydrocannabinol (THC) contained in a final product at the time of packaging. The current Cannabis Duties on recreational cannabis will be unaffected by the proposed changes, with the exception of cannabis oils, which will be subject to Cannabis Duties based on THC content starting May 1, 2019.