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Canada Tax on Cannabis is…Taxing

By Millie Bojic

Since the legalization of cannabis in Canada as of October 17, 2018, cannabis producers and investors are set to gain traction full-swing in this burgeoning industry. As the only G7 country legalizing cannabis to date, all eyes are on the Canadian government and the implementation of its taxation and regulatory regime on cannabis.

While the government has stated it plans to keep taxes on cannabis low, many producers and investors are finding it challenging to navigate through the various applicable taxes and fees now in force by way of statute. In particular, producers and licence-holders that are selling to provincially authorized distributors and retailers must be vigilant with respect to the taxes that apply on the sale of cannabis product, in addition to the new regulatory fees that apply.

What Taxes and Regulatory Fees should Producers Worry About?

Excise Tax
As of October 17, 2018, GST/HST/QST (“Excise Tax”) applies on cannabis products in Canada and is generally reduced to two options – either a $1.00/gram standard or 10% of the product price (whichever is the highest applicable per product). The tax is charged by a licensed cannabis producer when the cannabis products they package are delivered to a purchaser. It applies irrespective of whether the product is for recreational or medicinal use. The tax also varies depending on whether flowering or non-flowering (“Trim”) material is concerned – the lower tax on trim is $0.30 per gram.

The Excise Tax in question applies to the sale of fresh cannabis, dried cannabis, cannabis oils, seeds and seedlings for home cultivation. A tax exemption applies where the psychoactive component of the cannabis product, THC, is less than 0.3%; and on pharmaceutical products derived from cannabis (provided the cannabis product has a Drug Identification Number and can only be acquired via prescription).

Given the Excise Tax applies on the sale of cannabis products, it is vital that Canadian companies establishing separate entities along their supply chain from production through to distribution and retail are aware that the tax kicks in at the point of sale. By way of example, if a cannabis business incorporated one entity to produce the product and a separate entity to sell the product, the taxable event would fall on the entity selling the product to a provincially-authorized distributor or retailer.

As such, a robust transactional excise tax plan should be laid out to mitigate any risk of oversight.

Regulatory Fees
Back in 2017, the Canadian government announced it would implement a cost recovery regime upon cannabis producers above and beyond the Excise Tax regime previously described. Its stated rationale for cost recovery is to avoid having the public bearing the costs of government activities designed for the chief benefit of cannabis producers. Subsequently, the ministerial Cannabis Fees Order, which came into force on October 17, 2018 (the “Order”), authorizing cost recovery via regulatory fees on cannabis licence-holders in conjunction with the Cannabis Act (subsection 142(1)). Since then, fees apply to the following classes of licences:

  • cultivation (standard, micro, nursery)
  • processing (standard, micro); and
  • sales for medical purposes.

There are several applicable fees:

  • a fee for screening licence applications;
  • a fee for conducting security clearances;
  • a fee for processing applications for permits to import/export cannabis for scientific or medical purposes; and
  • an annual regulatory fee to cover other regulatory costs, including:
    • detailed review of licence applications
    • review and issuance of licence amendments
    • inspections, compliance and enforcement activities.

Of the four, the broadly-applicable annual regulatory fee poses the greatest burden, at a rate of 2.3%. A lower fee rate of 1% has been set for micro-cultivators (i.e. cultivating a plant canopy area of no more than 200 square metres); micro-processors (i.e. processing no more than 600 kilograms of dried cannabis per calendar year) and nursery licence-holders; each of which have less than $1 million in “cannabis revenue” (based on a metric of cannabis sales and purchases as defined by the Order). A minimum fee amount of $23,000 applies for licences with respect to standard cultivation, standard processing, and sale for medical purposes; while a minimum fee amount of $2,500 applies for licences with respect to micro-cultivation, micro-processing, and nurseries. Fee exemptions primarily exist for companies producing industrial hemp, conducting analytical testing, and conducting research. The annual regulatory fee is calculated on a pro-rated cannabis revenue basis, varying for entry year, first year and subsequent years of production.

While the Canadian government stands to generate significant revenue as a result of the additional regulatory fee described above, its application invariably makes it challenging for Canadian cannabis licence-holders to sustain a foothold over a competitive black market. If legitimate licence-holders are to thrive, not merely survive, careful and efficient tax planning should be conducted to ensure awareness and compliance with the new cannabis taxation and regulatory fee regime.