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RITS-42806February 3, 2003
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Dear XXXXX
This letter is in response to your memorandum XXXXX, which you faxed to officials of the Canada Customs and Revenue Agency (CCRA) and Department of Finance. These questions were subsequently discussed in some detail at a meeting held at XXXXX, and pertain mostly to issues surrounding the implementation of the Excise Act, 2001 ("new Act").
At the XXXXX meeting, representatives of the CCRA and the Department of Finance discussed these questions with you and other officials of your company, as well as officials of XXXXX We have undertaken to answer the questions in your facsimile XXXXX that are within the preview of the CCRA. Please find our response attached to this letter as Appendix A. Other questions namely those numbered 1, 7, the first four bulleted items of 14, and the second and third bullets of question 20, will be addressed by the Department of Finance.
We hope that the answers we have provided will assist your company and the other XXXXX major tobacco manufacturers in preparing for the implementation of the Excise Act, 2001. If you have any questions about our responses, please contact me, at (613) 954-4208, or Steve Mosher, at (613) 941-1497.
Sincerely,
Preston Gallant, CGA
Manager
Excise Duty Operations
Excise Duties and Taxes Division
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XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Mark Hartigan
Preston Gallant
Patricia Malone (Department of Finance - Tax Policy Branch)
Ron Hagmann
Richard Crompton
XXXXX |
Appendix A
CCRA response to the XXXXX questions from XXXXX[.] Note: The numbered references correspond to the questions in the original facsimile.
(2) Excise duty payable before implementation date
In respect of finished tobacco products manufactured during the last two business days of the June 2003, the provisions of the current Excise Act ("current Act") and its regulations will apply. Therefore, payment of excise duties in respect of those goods, at the then prevailing rates, must be made by the manufacturer or producer by August 29, 2003.
If those products are in the tobacco manufacturer's inventory at the beginning of implementation date (July 1, 2003), that licensee will be eligible to apply for a refund of the duty under the provisions of subsection 316(2) of the Excise Act, 2001 (new Act), as soon as the liability for those products have been paid. In turn, excise duty under the new Act will then be liable in accordance with the transitional provisions of subparagraph 316(1)(a)(iii) of the new Act.
(3) Inventory taking procedures
We expect to have excise officers visit tobacco licensees on or about June 30, 2003 to witness the taking of the inventories of finished goods, partly manufactured goods, and goods in process. As well, our officers will be visiting licensees to perform licensing investigations under the Excise Act, 2001 and to carry out final audits of licensed tobacco manufacturers under the current Act and the Excise Tax Act (ETA).
The CCRA will, of course, rely to a great extent on companies' systems and controls, and particularly their production records and sales invoices. If a tobacco licensee is closed for business on June 30th, the CCRA will make alternative arrangements with that company for the witnessing of their inventory count. Our regional excise offices will work with licensees to plan these visits.
(4) Audits of payments and refunds
Our excise officers will try to carry out final audits of payments and refunds under the current Act and ETA as soon as possible following implementation date. The inventory counts carried out in the presence of CCRA auditors on or about June 30, 2003 will, in effect, be real time audits of the refund claims that will be submitted under the provisions of section 316 of the new Act, following implementation date.
(5) Market returns
When a duty paid tobacco product is destroyed or re-worked by its manufacturer, the rate of duty in effect at the time the tobacco product is duty paid (when it is packaged for consumption) will be used to determine the amount of refund. Under the new Act, in situations where the date of product is difficult or impossible to determine, the excise duty rate that may be used to determine the amount of refund payable under section 181 of the new Act will be the rate(s) in effect six months prior to the date of destruction. This time period has been determined on the basis of information obtained by ourselves and our regional excise offices from tobacco manufacturers and represents an industry average age of tobacco products returned to tobacco manufacturers.
The provisions of section 181 of the new Act make it clear that the goods must be destroyed or reworked before the refund claim can be approved. A credit issued to the client returning the goods is not sufficient to support such a claim. Once destroyed, a refund claim may be submitted on the form that will replace the current form N10.
Customs Memorandum D18-2-1 allows certain in-bond returns of Canadian manufactured tobacco products that were originally exported in bond (e.g. prescribed brand exports, as well as exports under the 1.5 per cent quantity limits). With respect to returns to Canada of duty-paid tobacco products, we spoke with Customs Branch officials about this issue over one year ago. It is our understanding that they intend to revise Memorandum D10-14-11 to specifically allow for returns of duty paid tobacco products. In the meantime, we also understand that Customs will allow returns of duty paid Canadian tobacco products without additional payment of the additional duty under subsection 21(4) of the Customs Tariff or the excise taxes. For further information on this matter, please contact Ms. Huguette Côté-Vitkus, of the Trade Policy and Interpretation Directorate, Customs Branch, at (613) 954-6909.
(6) Plant recalls and tobacco recuperation
We do not anticipate any changes to current practices affecting plant recalls or the recuperation / rework of tobacco products. The tobacco licensee is responsible for notifying the regional manager(s) directly concerned of any plant recalls they undertake. We also recommend that tobacco licensees contact directly the appropriate provincial tobacco tax officials to notify them of any plant recalls.
(8) Export tax provisions and removals from excise warehouses
Under paragraph 56(2)(a) of the new Act, the special duty on tobacco product exports within the maximum quantity limits (1.5 per cent of previous year's production per category of tobacco product manufactured by them) is payable at the time a tobacco product is exported by the licensee who manufactured them, at the rates set out in section 3 of Schedule 3 to the new Act.
Subsection 50(5) of the new Act actually sets out the maximum quantity of tobacco product by category that may be removed from a tobacco licensee's excise warehouse. The "total quantity manufactured" by the tobacco licensee in the preceding calendar year is not affected by the quantities of tobacco products that have been reworked or destroyed by the licensee during that year. Subsection 50(6) of the new Act provides that the "total quantity manufactured" by a licensee shall not include any quantities of a tobacco category that were exported by the licensee for delivery to a foreign duty free shop or as foreign ships stores. This provision is very similar to subsection 58.1(5) of the current Act.
XXXXX XXXXX
(10) New monthly return and refund claim forms
The current "Monthly Return - Excise Duty - Tobacco["] (Form K50T - revenue portion) will be replaced by the "Excise Duty Return - Tobacco Licensee" form. However, the form has not yet been numbered. The new form will replace the current forms K50T and B96, as well as form B245. Draft copies of the new form were released at the XXXXX meeting to all tobacco company representatives in attendance. We welcome any concerns or comments that have been submitted to us.
Drafts of the new refund claim form are not yet available.
(11) New Excise Duty Memoranda Series
Chapter 2, "Memoranda Relating to Licences and Registrations" will be mailed out with Information Bulletins and Licensing Kits by mid to late January 2003. These memoranda will address the following matters:
• Licence types
• Obtaining and renewing a licence
• Security requirements and guarantee bonds
• Approved financial institutions and bonding companies
• Branches and divisions
• Cancellations and suspensions
• Amalgamations and mergers
• Bankruptcies and corporate reorganizations
• Information for non residents
Other memoranda will be available closer to the implementation date of the new Act.
(12) New regulations
The proposed regulations under the new Act were released for public comment in December 2001, including all those of direct interest to the tobacco industry. Revised drafts of the regulations were released at the XXXXX meeting. At this late time, it is unlikely that any significant changes can now be made unless we are advised to do so by the Department of Justice - Regulations Section.
It is not certain whether or for what period the new regulations will have to be pre-published in Part I of the Canada Gazette prior to their final approval. Any decision on this matter will be made by the Special Committee of Council, which will ultimately be asked to approve the regulations just before implementation date.
(13) Changes to licensing and bonding requirements under the new Act
Details of the new licensing and bonding requirements for tobacco and excise warehouse licensees are set out in the proposed Regulations Respecting Excise Licences and Registrations. Details of these changes were also provided in the documents distributed at the XXXXX meeting.
(14) Various policy issues
With respect to the last item of query that dealt with tobacco seizures by provincial authorities, we have advised provincial tobacco tax officials of the specific concerns raised by XXXXX XXXXX. We must advise that the CCRA has no jurisdiction in respect of how the provincial tobacco tax authorities dispose of their tobacco product seizures.
(15) Payments and refunds of excise duty payable on "black stock" tobacco products intended for sale in Canadian duty free shops or for use as ships' stores
If a tobacco licensee can determine at the time of production which cases of cigarettes, tobacco sticks, and other manufactured tobacco products are destined for delivery to duty free shops, customs bonded warehouses, and ships' stores, they would be in a position to determine the amounts payable at the reduced excise duty rates, under paragraphs 1(a), 2(a), and 3(a) of section 1 of Schedule I of the new Act. Otherwise, they should calculate excise duty liability at the regular rates under paragraphs 1(b), 2(b), and 3(b) of Schedule 1, and apply, under section 176 of the new Act, for a refund of the difference in excise duty rate(s).
XXXXX
(17) Audit Program under the new Act
As a result of the implementation of the new Act, which will combine the current excise taxes (ETA) with the current excise duty licensees, we will have one audit instead of the current two currently required for both excise levies. Each current licensee will require a final audit under both the current Act and the ETA up to period ending June 30, 2003.
Initially there should be very little change in the audit procedures undertaken by excise officers. Audit cycles should normalize in about one year after implementation of the new Act. CCRA will review its audit procedures in light of the new Act and will seek some consultations with our client base.
(18) Use of "Canada Duty Not Paid" tear-tape
The Tobacco Regulations do not require the "duty not paid" tear-tape on in-bond exports: that is, those within the 1.5 per cent quantity limit per category and per manufacturer. The use of such tear tape is optional for greater clarification by the tobacco manufacturer.
The Tobacco Regulations were, however, amended on May 30, 2002, to deal, in part, with the matter of Canadian manufactured tobacco products intended for delivery to accredited representatives in Canada. Therefore the "Not for Sale in Canada" marking for tobacco products destined for sale to accredited representatives in Canada is now law. The proposed Regulations Respecting the Stamping and Marking of Tobacco Products under the new Act are expected to continue this requirement.
(19) Imported Tobacco Products for Testing Purposes
Small quantities of imported tobacco products, even for testing purposes, must be duty paid and properly stamped on the packages, cartons, and shipping cases. These stamps may be applied in a customs sufferance warehouse by the licensee or its agent (e.g. a customs broker). The package stamps can take the form of either tear-tape or other package stamps that seal the packages and cartons. There is no provision in either the current legislation or the new Act that relieves this requirement. However, testing that effectively destroys such tobacco products without having them smoked by an individual could be treated as destruction for the purposes of section 181 of the new Act (see our answer to question #16).
It is recommended that you contact the appropriate provincial tobacco tax authorities directly concerned XXXXX so as to ascertain your privileges and responsibilities under their respective legislation and regulations.
(20) Tobacco products destroyed in a licensee's distribution centers.
Tobacco products that are destroyed or damaged while under the control of the tobacco licensee, in circumstances such as floods or fires, may be eligible for refund under the provisions of section 181 of the new Act. To be considered, the quantities and circumstances will need to be verified by the excise duty regional manager for the area. However, thefts of tobacco products are not covered by any refund provision of the new Act.
Disposal of tobacco seizures by CCRA XXXXX At this time, the policy of the CCRA XXXXX is not to sell tobacco products that have been seized under the Customs or Excise Acts. Although section 266 of the new Act allows for regulations to be made to govern the sale of seized products, it is the intention of this office at this time not to request such regulations. It is now and will continue to be our policy not to sell seized tobacco products, because of product liability and health policy issues.
(21) Regulations under new Act
Please refer to the responses to questions #12 and #18 above. XXXXX. The Canada duty paid carton and shipping case stamps will not be required where there is a provincial or territorial carton or case stamping/marking requirement. The revisions will also address the marking requirements for cigars for the duty free shops and for imported tobacco products otherwise that are destined for Canadian duty free shops or ships' stores.
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