Budget 2022: Excise Tax Quick Analysis

Since legalization in 2018, Canada’s cannabis supply chain has evolved from one of vertical integration (with a licensed producer often performing all cultivation, processing and packaging activities itself) to one often involving several different licence holders, each focussing on a core competency.

This evolution has been stifled, however, by the excise duty regime that came into effect with legalization. This framework requires an excise stamp to be applied to cannabis products by the processor who completes packaging. Further, the processor who applies the stamp must own the product and the stamps, and must be the party to remit duty. This has hindered co-manufacturing and co-packaging relationships, which are typically performed on a fee-for-service basis with no transfer of title to the service provider. Various strategies have been utilized to cope with these restrictions (such as the co-packer leaving a nominal but required element of packaging or labelling incomplete to defer the obligation to apply stamps and remit duty), but these strategies ultimately increase cost and/or time to market.

The Cannabis Council of Canada’s Excise Task Force has worked diligently to present these challenges to the Ministry of Finance, and is pleased to see that its compelling case for reform was well-received. Today’s Budget proposes amendments to the Excise Act, 2001 that will permit the cannabis industry to maximize efficiencies by fully utilizing B2B relationships. Licensed processors will be permitted to transfer excise stamps, and packaged but unstamped products, between them. The obligation to apply the excise stamp will no longer be tethered to the party who packaged the product and the obligation to remit duty will no longer be tethered to the processor that applied the stamp. This will permit true co-manufacturing and co-packaging relationships, eliminate the unnecessary movement of cannabis solely for excise compliance, and unlock the full potential of a mature CPG supply chain.

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Quick Analysis Note from Trina Fraser from Brazeau Sellers in Ottawa. Trina Co-Chairs the C3 Excise Task Force