28 September 2006 Excise Interpretation 82479 - Clarification on the Excise Duty Liability on the Loss of Bulk Alcohol

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your XXXXX, which you sent to XXXXX A/Assistant Director, Excise Duty, for the XXXXX Region. A copy of that correspondence was forwarded to me XXXXX for direct response.

XXXXX you requested clarification on the excise duty liability on the loss of bulk alcohol, following questions raised by the transport companies that ship your products. More specifically, you requested confirmation of your understandings in respect of the relief of excise duty liability in cases of losses of bulk alcohol because of destruction and theft, and asked if such liability is relieved for the transport companies and XXXXX. Furthermore, you asked about excise duty liability in relation to losses of packaged alcohol. You noted that these questions are tied to insurance-related issues.

XXXXX we summarized the general legislative and regulatory provisions concerning the losses of bulk spirits and packaged alcohol. However, as requested, we are also providing this letter to set out the provisions in further detail.

Statement of Facts

Our understandings of the facts of your company's situation XXXXX are as follows:

1. XXXXX is licensed under the Excise Act, 2001 ("Act") as a producer of spirits. XXXXX.

2. Your letter does not refer to any specific incident or event, but to general issues associated with the transportation of (alcohol) According to your subsequent XXXXX, the question of excise duty liability on bulk spirits lost because of theft was raised by one of the transport companies that carry bulk spirits for XXXXX.

Interpretation Requested

You have requested clarification of the liability of your transport companies and XXXXX for excise duty in the event of losses of bulk alcohol due to destruction or theft. XXXXX also holds these concerns with respect to the liability for excise duty on packaged alcohol lost in the same circumstances.

Interpretation Given

Liability for the excise duty on bulk spirits rests with the person (a spirits licensee or licensed user, as the case may be) who is responsible for those spirits in accordance with the provisions of section 104 of the Excise Act, 2001 ("Act"). The excise duty is payable by the person who is responsible for bulk spirits on any portion of those spirits that cannot be accounted for by that person as being in the possession of a spirits licensee, a licensed user, or an alcohol registrant.

However, the excise duty payable on the bulk spirits will be relieved where those spirits are lost in the following circumstances and if the person responsible for them at the time of the loss keeps adequate records to document the event:

(a) a fire;

(b) shrinkage by evaporation;

(c) processes relating to manufacturing, including aging, blending, racking, re-distilling, reducing and vatting;

(d) processes relating to handling, including stock operations and packaging; and

(e) the physical transfer of the spirits between licensees or between a licensee and an alcohol registrant.

Liability for the excise duty on bulk wine rests with the person who is responsible for the wine in accordance with section 113 of the Act.

Although a transport company must be an alcohol registrant under the Act in order to be allowed to haul or store bulk spirits, such a company is not responsible under the Act for any excise duty liability arising from the loss of the spirits, regardless of the reasons for that loss. Moreover, any theft of bulk spirits that are in the possession of an alcohol registrant would still make the responsible spirits licensee or licensed user liable for any excise duty that is payable on the spirits, because there is no provision under the Act or regulations to allow for such relief.

If packaged alcohol (wine or spirits) that is subject to excise duty has been placed in an excise warehouse and has been lost through breakage while in its original unopened container, or through breakage that occurs during the physical transfer of the packaged alcohol between excise warehouses, the excise duty for that alcohol will not be payable. The excise warehouse licensee must, of course, maintain proper books and records to account for the packaged alcohol in their excise warehouse and to provide appropriate support for any losses that result from breakage. Any breakage of packaged alcohol that results from a fire that takes place in an excise warehouse may also be considered an "accountable loss".

However, in cases where packaged alcohol that has been placed in an excise warehouse and is subsequently damaged in the course of a fire or other event, but not lost because of breakage, there is no automatic entitlement to relief from the excise duty. In order to receive the excise duty relief in such a case, the non-duty paid packaged alcohol must be destroyed by the excise warehouse licensee in a manner approved by the Minister of National Revenue.

If an excise warehouse licensee wishes to destroy packaged alcohol, the licensee must apply in writing, in advance, to the Regional Manager or Assistant Director of Excise Duty for their region. The following information must be provided:

(a) The reason for the destruction.

(b) The expected frequency of destruction.

(c) The volume and absolute ethyl alcohol content.

(d) The proposed method of destruction.

(e) If an off-site waste disposal company is used, details such as the method of transporting the alcohol to the disposal company's facility, that company's method of destruction, the controls in place to prevent the diversion of the alcohol, assurances of the licensee's responsibility for the alcohol, and assurances of access to the disposal company's facilities by excise duty officers.

(f) A detailed description of the applicant's internal controls and records relating to the proposed destruction process.

Any losses of alcohol that your company incurs should be reported to the XXXXX Regional Excise Office or other regional Excise Office as soon as possible. Any such losses must also be sufficiently documented in XXXXX books and records.

Explanation

Section 2 of the Losses of Bulk Spirits and Packaged Alcohol Regulations sets out all of the prescribed circumstances under which bulk spirits are considered to be lost and for which the excise duty liability is relieved for the purposes of paragraph 109(f) of the Act. The theft of bulk alcohol is not regarded as a "prescribed circumstance" under the said Regulations.

Under the provisions of paragraphs 129(1)(c) and 138(1)(c) of the Act and section 3 of the Losses of Bulk Spirits and Packaged Alcohol Regulations, non-duty paid packaged alcohol in an excise warehouse that is lost through breakage may be treated as an "accountable loss", because they are lost under "prescribed circumstances". Therefore, the packaged alcohol that is lost in this manner will not be subject to excise duty. As well, we consider the breakage of packaged alcohol that results from a fire in the excise warehouse to be covered by the provisions of section 3 of the Regulations. However, theft of packaged spirits from an excise warehouse is not considered to be a "prescribed circumstance", so there would be no relief of excise duty on those goods

Non-duty paid packaged alcohol in an excise warehouse that has been merely damaged during the course of a fire, but not lost through breakage, is subject to excise duty upon removal from the warehouse, unless it is destroyed in a manner approved by the Minister, as provided in paragraph 145(2)(b) of the Act.

The requirement for all licensees and registrants to maintain adequate records to substantiate any losses of packaged alcohol resulting from breakage is covered by the general record-keeping provisions of section 206 of the Act.

Links to the electronic copies of the Losses of Bulk Spirits and Packaged Alcohol Regulations and EDM 3.4.1 - Losses of Spirits were previously sent to you XXXXX.

If you have any questions with respect to the matters discussed in this letter, please feel free to contact me at (613) 952-0178 or Steve Mosher at (613) 941-1497.

Sincerely,

Preston Gallant, CGA
Manager
Excise Duty Operations - Alcohol
Excise Duties and Taxes Division
Excise and GST/HST Rulings

2006/07/12 — RITS 79537 — Packaged Wine Destroyed or Damaged by Fire