12 July 2006 Excise Interpretation 79537 - Packaged Wine Destroyed or Damaged by Fire

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 letter XXXXX which we received on XXXXX concerning the application of excise duty to packaged alcohol destroyed or damaged by fire in a retail store and an excise warehouse. I apologize for the delay in providing you with this response.

It is understood from your telephone conversation with Steve Mosher on XXXXX that your request relates to hypothetical situations relative to your insurance coverage. Therefore, this letter will provide you with an interpretation of those provisions of the Excise Act, 2001 (Act) and its regulations that deal with the destruction of packaged spirits and packaged wine, and the extent of relief from excise duty that might apply in such circumstances.

Subsequently Mr. Mosher discussed the Budget provisions from May 2, 2006 and the Finance Minister's June 28, 2006 announcement of proposed changes to the Excise Act, 2001. These changes will provide for an exemption of excise duty for all wine that is packaged on or after July 1, 2006 and is made wholly from Canadian-grown agricultural products. Accordingly, any loss of wine that qualifies for this exemption would not result in any excise duty liability.

Statement of Facts

Our understandings of the facts from your letter, and from Steve Mosher's telephone conversations with you XXXXX are as follows:

1. XXXXX is licensed under the Act as a producer of wine. XXXXX is also an excise warehouse licensee under the Act and holds accounts for XXXXX warehouse locations.

2. XXXXX is currently a small producer of wine, as defined under the Act, and thus all the wine that it has produced or packaged has been exempt of excise duty.

3. XXXXX has produced all of its wines from grapes grown on its estate, and does not import bulk wine for blending purposes or operate in contract with other growers.

Interpretation Requested

Your letter asked us to explain the excise duty status of packaged alcohol that is destroyed or damaged as a result of a fire in an alcohol licensee's retail store or excise warehouse.

Interpretation Given

In respect of packaged alcohol (wine or spirits) that has been duty paid and is subsequently lost due through breakage or other damage, there is no provision to refund the duty on these products. Therefore, any alcohol in a retail store that is lost through breakage or damage would not qualify for an excise duty refund.

If packaged alcohol 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 will not be payable. The excise warehouse licensee must maintain proper books and records to account for the packaged alcohol in their excise warehouse and to provide appropriate support for any losses that are a result of 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, if packaged alcohol that is subject to excise duty has been placed in an excise warehouse and is subsequently damaged in the course of a fire or other event, but is not lost because of breakage, there is no automatic entitlement to relief from paying the excise duty. In order to receive relief from the excise duty in this 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 (Minister).

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.

Explanation

There are no provisions in the Act that provide for the recovery of duty that has been paid on wine or spirits destroyed or damaged while in a retail store.

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". 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.

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 excise warehouse licensees to maintain adequate records to substantiate any losses of packaged alcohol resulting from breakage is contained in section 206 of the Act.

It is understood that all the wine the company produces or will package on or after July 1, 2006, will be made wholly from agricultural produce (grapes) grown on the company's estate. Such wine may not be placed in an excise warehouse, as it would be exempt of the excise duty. Therefore, there will not be any refund for excise duty for any losses, through breakage or otherwise. The exemption is contingent on the enactment of the proposed changes to the Excise Act, 2001 concerning wines made from wholly Canadian-grown agricultural products.

However, if in the future your company should package or produce wine that is not made wholly from Canadian-grown agricultural products, the exemption would not apply. The resulting wine would be subject to excise duty. Therefore, the above-described rules pertaining to the handling of losses of packaged alcohol would be fully applicable in such circumstances.

We are enclosing with this letter, for your information, copies of the Losses of Bulk Spirits and Packaged Alcohol Regulations and ED Memorandum 4.4.1. When the policy on alcohol destruction is ultimately approved, it will be published on the CRA website under http://www.cra-arc.gc.ca/tax/technical/act2001-e.html.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the Excise Act, 2001, its regulations, or our interpretative policy could affect this interpretation.

If you have any questions with respect to 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

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