5 March 2003 Excise Interpretation 43487 - Request Information with Regards to Tobacco

Dear XXXXX:

Thank you for your letter XXXXX concerning how tobacco taxes are levied, packaging of tobacco products, and the operating status of XXXXX[.]

XXXXX is not currently licensed to pack or manufacture tobacco products. Your letter indicates that you believe that XXXXX is still in business. Unfortunately, our attempts to contact you have reached an answering machine, so we have been unable to correct this information (We cannot leave information of this nature on an answering machine due to confidentiality considerations), or to clarify your questions about tobacco taxation.

Explanations of all the situations that your questions could potentially encompass would be too complex. The responses below are restricted to domestically produced tobacco products that are entered for consumption in Canada. They deal primarily with the issue of excise duty and excise tax on tobacco products; Goods and Services Tax/Harmonized Sales Tax (GST/HST) is only touched upon.

All tobacco packers and tobacco manufacturers must comply with the Excise Act and Excise Tax Act and their regulations - administered by the Canada Customs and Revenue Agency (CCRA) - as well as any other legislation enacted by Parliament. These Acts require stamping or marking of tobacco products. The particular stamping or marking required depends on whether the products are destined for the domestic or export market. In addition, some provinces and territories require specific marking on the tobacco products destined for sale there.

1. You asked: "How do you regulate the payment of taxes on completion of packaging? Is it based on honesty or the quantity of raw material the company buys or do you have an inspector on site during working hours while the packaging is being completed?"

Under paragraph 200(1)(a) of the Excise Act, excise duty becomes payable when tobacco products are completely manufactured. Excise duty on raw leaf tobacco, under paragraph 200(1)(b), becomes payable when the raw leaf is tied or otherwise packaged for consumption. The type of tobacco product and its destination determine the duty rate (see appendix).

The Tobacco Regulations (sections 6, 7) stipulate that excise duty imposed under the Act on tobacco that is packaged and entered for consumption during a period must be paid by noon on the last business day of the month in which the period ends.

The assessment of excise duty is based on self-assessment, as are most Canadian taxes. However, licensees are obligated by section 25 of the Excise Act to assist excise officers with inspections.

The Excise Act provides CCRA with verification and enforcement authorities that can be employed if necessary; including the authority to examine books and records (Section 33 of the Excise Act), to have a duty officer present during operations, to allow operations only when an excise officer is present (This procedure will not be authorized under Excise Act, 2001, which comes into force on July 1, 2003), and to question accounts and statements under oath (Section 40 of the Excise Act).

In general, there are two excise levies imposed on tobacco products; excise duty, (discussed above) and excise tax. Pursuant to subsection 23(2) of the Excise Tax Act, excise tax is payable at the time of delivery of the goods to the purchaser if the tobacco product is manufactured or produced and sold in Canada.

2. You asked: "Does the company pay the supplier tax on the raw materials (i.e., tubes, bags, and the tobacco) and then draw those monies back when it produces the finished product?"

As mentioned above, excise duty is imposed on tobacco products when they are completely manufactured, or in the case of raw leaf tobacco, entered for consumption. When tobacco is to be further processed, tobacco packers would typically transfer tobacco in-bond, as allowed under the Excise Departmental Warehousing Regulations, so that the excise duty payable is deferred. The shipper is released from the obligation to pay excise duty on the tobacco upon satisfactory evidence that the goods have been received into a bonding warehouse. Excise duty would be payable by the recipient of the in-bond tobacco when it is completely manufactured.

The company purchasing the tobacco would pay GST/HST to the supplier if the supplier is a GST/HST registrant under the Excise Tax Act. The company purchasing the raw materials may be able to claim an input tax credit for GST or HST they have paid. For information about the GST/HST, please contact your local Tax Services Office.

3. You asked: "Do they mark the product like the majors do with coloured bands and stickers?"

The Excise Act, and the Excise Tax Act, require tobacco products to be marked, stamped, and labelled in specific ways. The requirements are based on the product, and its destination: all tobacco manufacturers must comply with these requirements, regardless of size.

4. You asked: "What is the percentage or rate of excise tax (ex. 7% or 8%) on the tobacco product?"

As previously mentioned, rates of excise duty and excise tax depend on the tobacco product and their destination. I have attached a schedule of excise duty and excise tax rates for reference. These rates are as June 18, 2002, but are subject to change.

Should you require further information, or have any questions with respect to this letter, please do not hesitate to contact me at (613) 954-4208 or Richard Crompton at (613) 957-4156.

Preston Gallant, CGA
Manager
Excise Duties and Taxes Division
Excise and GST/HST Rulings Directorate

XXXXX

TOBACCO PRODUCTS - EXCISE TAX AND DUTY RATES

(Ways and Means Motion - effective June 18, 2002)

- Rate changes are indicated in bold - All Provinces and Territories - Regular Domestic Markets

CIGARETTES

CIGARS

(In reality, the excise tax is rarely $0.03947, as the 50% rate is normally the greater.)

TOBACCO STICKS

MANUFACTURED TOBACCO - other

CANADIAN RAW LEAF TOBACCO - sold for consumption

CIGARETTES, TOBACCO STICKS, OTHER MANUFACTURED TOBACCO - when delivered to duty-free shops, ships stores, and export markets

CANADIAN-MANUFACTURED CIGARETTES

CANADIAN-MANUFACTURED TOBACCO STICKS

CANADIAN-MANUFACTURED TOBACCO (other)

IMPORTED TOBACCO PRODUCTS (when delivered to duty free shops)

UNSTAMPED CANADIAN TOBACCO PRODUCTS AND FOREIGN TOBACCO PRODUCTS IMPORTED BY TRAVELLERS

(Customs Tariff - section 21)