Tax Letters: 2018 Federal Budget – Sales Tax and Excise Tax Measures

February, 2018

GST/HST and Investment Limited Partnerships

The Budget confirms the Federal Government’s intention to proceed with the legislative and regulatory proposals released on September 8, 2017, relating to the application of GST/HST to investment limited partnerships with the following modifications:

  • GST/HST only applies to management and administrative services rendered by the general partner on or after September 8, 2017, and not before this date unless the general partner has charged the GST/HST in respect of such services before that date
  • GST/HST will generally be payable on the fair market value of the management and administrative services in the period in which they are provided
  • An investment limited partnership will have the ability to make an election to advance the application of these rules as of January 1, 2018.

Consultation on the GST/HST Holding Corporation Rules

The government intends to consult on the application of the “holding corporation rule” that allows a parent corporation to claim input tax credits to recover GST/HST paid on expenses that can reasonably be regarded as relating to the ownership of shares or indebtedness of a related commercial operating corporation.

The consultations will address the limitation of the rule to corporations and not other entities and the degree of relationship between the parent corporation and the commercial operating corporation.

The government intends on clarifying the expenses of the parent corporation that are in respect of shares or indebtedness of a related commercial operating corporation that qualify for input tax credits under this rule.

Tobacco Taxation

The Budget proposes to increase the excise duty on tobacco products on an annual basis rather than to automatically increase it every five years to account for inflation. These inflationary increases will take effect on April 1 of every year, starting in 2019. Effective February 28, 2018, tobacco excise duty rates will be adjusted to account for the inflation since the last adjustment in 2014.

The excise duty rate is proposed to increase by an additional $1 per carton of 200 cigarettes with corresponding increases to the excise duty rates on other tobacco products.

Cigarette inventories held by manufacturers, importers, wholesalers and retailers at the end of Budget Day will be subject to an inventory tax of $0.011468 per cigarette subject to certain exemptions. Taxpayers will have until April 30, 2018, to file returns and pay the cigarette inventory tax.

Cannabis Taxation

The Budget proposes a new excise duty framework for cannabis products to be introduced as part of the Excise Act, 2001. The duty will generally apply to all products available for legal purchase including fresh and dried cannabis, cannabis oils and seeds and seedlings for home cultivation. Cannabis cultivators and manufacturers (cannabis licensees) will be required to obtain a cannabis licence from the CRA and remit the applicable excise duty.

Excise duties will apply at the higher of a flat rate on the quantity of cannabis contained in the final product and a percentage of the dutiable amount as sold by the producer. Generally, the dutiable amount is the portion of the producer’s selling price that does not include cannabis duties.

The proposed excise duty will be applied as follows:

  • A flat rate duty will be imposed on a dollar-per-gram basis at the time of packaging for final retail sale. For seed and seedlings, the duty rate will be applied on a dollar-per-seed/seedling basis.
  • At the time of delivery by a cannabis licensee that packaged the cannabis product to a purchaser (i.e., a provincially authorized distributor), an ad valorem rate will also be imposed on the dutiable amount.
  • Cannabis licensees will be liable to pay duty at the higher of the flat rate or the ad valorem rate at the time of delivery to a purchaser.

The framework requires all cannabis products to have an excise stamp before they can be removed from the premises of a cannabis licensee and enter the Canadian market for a retail sale. Cannabis licensees who packaged the cannabis product will have the responsibility to determine and apply the appropriate excise stamp based on the provincial or territorial market in which the product is intended to be sold.

The new excise duty would not apply to packaged products that contain concentrations of no more than 0.3 per cent Tetrahydrocannabinol (THC) and pharmaceutical products that can only be acquired through a prescription.

The GST/HST rules for basic groceries will be amended to ensure that any sales of cannabis products will not meet the zero-rating provisions and will be subject to GST/HST in the same way as sales of other cannabis products. In addition, the relieving rules for agriculture products will be changed to ensure that sales of cannabis products including seeds or seedlings will also be subject to GST/HST.

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