Finance Minister Bill Morneau tabled the 2019 budget plan on March 19, which included a section adjusting the rules of cannabis taxation.
Whitney Abrams, an associate at Minden Gross LLP in Toronto, says the 2019 budget contained two main changes that will impact lawyers working with clients in the cannabis industry or personal tax advisors.
Firstly, she says, the budget changes the way excise tax is calculated now: the greater of either a flat rate tax based on a cannabis product’s weight or quantity in its packaging or a rate calculated based on the cannabis product’s sale price.
The government will determine federal tax “on the quantity of tetrahydrocannabinol — or THC — contained in a final product” for cannabis products to be legalized later this year (edible cannabis, cannabis extracts and cannabis topicals,) as well as already-legal cannabis oils, the budget plan said.
The goal of the new rules, scheduled to take effect May 1, is to “simplify the excise duty calculation for specific cannabis products and ease compliance issues,” according to the budget plan.
“Cannabis oils are treated slightly differently under the current regime, where the flat-rate tax is based on the amount of cannabis material used in the production process,” said Abrams.
“Lawyers who are advising licensed producers or anyone looking to get into the cannabis edible, topical or extract market, once available, should be aware of these changes and know how to advise their clients accordingly on this aspect.”
Zvi Halpern-Shavim, a partner at Blake Cassels & Graydon LLP in Toronto, says the excise tax change could come as a surprise for clients that have built existing tax schemes into prices in contracts, especially for products that are high in THC.
“If you have locked into a certain price for a product over the next X number of years, that could really affect your bottom line,” says Halpern-Shavim.
“So, one takeaway for our clients, I know, and I think other people’s as well, is it’s definitely time to go back and look at contracts and see what prices they have in place. When you do price contracts, make sure there’s a change in law concept that if the taxes go up or down, there’s an ability to adjust prices.”
Halpern-Shavim says another area for lawyers to keep an eye on is disputes with the Canada Revenue Agency, where a future audit could question which tax should have been charged.
Abrams says the change is the federal government’s response to some of the difficulties that licensed producers have been having in terms of taxation of cannabis oil products.
“It can be difficult to calculate the amount of oil in certain products, so, rolling those oil products into the definition of ‘extract,’ which will also include topicals, and edibles, should, in the government’s eyes, streamline the process,” she said in an emailed statement.
While the calculations may become simpler, Halpern-Shavim says the government also missed an opportunity to bring clarity to the issue of when stamps are attached to products.
“Different provinces have different tax rates . . . The stamps are supposed to be attached when the product is packaged, which is when the tax is payable, all at the same moment. You may not know at that time who your ultimate customer is going to be,” says Halpern-Shavim.
Montreal lawyer Antoine Desroches, a partner at Norton Rose Fulbright Canada LLP, says the new excise tax change is also an additional piece of work for lawyers in the sense that you have two parallel regimes depending on the class of cannabis product.
Desroches and other lawyers at Norton Rose Fulbright Canada wrote in a summary that the budget also brings “helpful certainty,” particularly in regards to medical cannabis, as users of medical cannabis can claim a Medical Expense Tax Credit that was previously in question after recreational use was legalized in October 2018.
“It’s just a legal clarification,” says Desroches.
“The takeaway is a person who is otherwise entitled to the medical tax credit can claim an expense for medical cannabis whether it was purchased before or after Oct. 17.”
Desroches says the changes in the budget should be of interest to “any lawyer advising a business involved in either production or distribution of cannabis products or helping with complying with regulatory and tax environments and, to a lesser extent, any lawyer helping patients with claiming the medical tax credit.”