24 June 2003 GST/HST Interpretation 45252 - GST on Domestic Packaged Beer and Wine

Dear XXXXX:

Thank you for your letter XXXXX and subsequent telephone conversations concerning the application of the Goods and Services Tax (GST) to supplies of domestic packaged wine and domestic packaged beer that are acquired and made by XXXXX[.]

Statement of Facts

We understand the facts are as follows:

1. XXXXX currently purchases domestic packaged beer (All future references to beer are references to domestic packaged beer.). This beer is purchased on an excise duty-paid basis pursuant to the Excise Act (EA). XXXXX pays GST on these supplies based on a value of consideration that includes the excise duty.

2. XXXXX currently purchases certain domestic packaged wines (All future references to wines are references to domestic packaged wine.). These wines are purchased on an excise tax-paid basis pursuant to Part IV of the Excise Tax Act (the ETA). XXXXX pays GST on these supplies based on a value of consideration that includes the excise tax.

3. On July 1, 2003, the Excise Act, 2001 (EA, 2001) will apply to the manufacture and handling of wine and spirits (among other goods), and the excise tax imposed on wine pursuant to Part IV of the ETA will be repealed. The EA will continue to apply to the manufacture and handling of beer, malt liquor and products manufactured in accordance with subsection 169(2) of the EA.

4. After June 30, 2003, XXXXX will continue to purchase domestic packaged beer on an excise duty-paid basis.

5. After June 30, 2003, XXXXX will purchase certain domestic packaged wines from licensed wine producers who will transfer such wines on a duty-deferred basis to XXXXX (with delivery from the producers' excise warehouses to XXXXX excise warehouses).

6. After June 30, 2003, XXXXX will purchase certain other domestic packaged wines from licensed wine producers that are small producers for purposes of the EA, 2001, with delivery to XXXXX excise warehouses.

Interpretation Requested

In your submission, you indicated that you received our XXXXX information letter addressed to the XXXXX in which we confirmed the application of GST to supplies of dutiable spirits, and in which we described cases of inclusion and exclusion of the excise duty from the value of consideration for supplies of dutiable spirits. You are seeking written confirmation on whether the tax treatment outlined in this letter is applicable to supplies of domestic wines as of July 1, 2003.

During our telephone conversations, you indicated your understanding that there are no changes in the GST treatment of supplies of domestic packaged beer further to the July 1, 2003 implementation of the new EA, 2001. For more certainty, you are requesting a written confirmation that your understanding is correct.

Interpretation Given

Based on the information provided in your letter and telephone conversations, our interpretation is as follows:

Domestic Packaged Beer

We hereby confirm that there will be no change to the GST treatment of domestic packaged beer on July 1, 2003 as there are no changes to the manner in which beer is treated under the EA. Pursuant to the EA, domestic packaged beer will continue to be purchased by XXXXX on a duty-paid basis. Given the preceding, GST will continue to apply to XXXXX purchases of domestic packaged beer based on the value of the consideration paid or payable for the supply of the beer, including the duty.

Domestic Packaged Wine:

Excise Duty

On July 1, 2003, in accordance with EA, 2001, excise duty will replace excise tax on wine, although the same rates will apply. The Excise Duties and Taxes Division has previously provided liquor boards (including XXXXX) and the wine industry various publications on this matter, such as the "Highlights for Wine Producers and Packagers (Excise Act, 2001)" and the Memorandum To All Clients dated March 26, 2003, from P. McLester, Director, Excise Duties and Taxes Division. For further information related to the excise duty treatment of wine, please contact Mr. Preston Gallant, Manager, Excise Duty Operations Unit, Excise Duties and Taxes Division, at (613) 954-4208, XXXXX GST

Subject to Part IX of the ETA, subsection 165(1) of the ETA provides that every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply (i.e. GST), calculated at the rate of 7 per cent on the value of the consideration for the supply. As defined in subsection 123(1) of the ETA, consideration "includes any amount that is payable for a supply by operation of law". In addition, paragraph 154(2)(a) provides that consideration for a supply of property or a service includes any tax, duty or fee imposed under an Act of Parliament that is payable by the recipient, or payable or collectible by the supplier, in respect of that supply or in respect of the production, importation, consumption or use of the property or service, other than tax under this Part that is payable by the recipient.

On July 1, 2003, the correct application of GST on domestic packaged wine as it moves in stages from producer to XXXXX to consumers is generally the same as is the case of dutiable spirits as described in the CCRA's XXXXX information letter to XXXXX. An exception exists with respect to wine sold by small producers (i.e. producers with less than $50,000 gross annual sales), where excise duty is not imposed pursuant to subsection 135(2) of the EA, 2001.

The GST application with respect to domestic packaged wine sold by producers that are NOT small producers will be as follows:

Example 1:

Fact: A licensed wine producer supplies domestic packaged wine to XXXXX from its excise warehouse to an XXXXX excise warehouse.

Tax Application:

(i) Duty will not become payable on the wine until the goods are removed from XXXXX excise warehouse "for entry into the duty-paid market", pursuant to section 136 of the EA, 2001.

(ii) GST is applicable, calculated on the value of consideration for the taxable supply, pursuant to subsection 165(1) of the ETA.

(iii) The consideration for the supply does not include the excise duty as: (a) the duty is not an amount payable for the supply by operation of law and (b) it is not "any tax, duty or fee (...) that is payable by the recipient, or payable or collectible by the supplier, in respect of that supply or in respect of the production, (...) consumption or use of the property (...)". At this point, the duty is not payable by the supplier (wine producer) XXXXX as the goods are moving between two excise warehouses. Similarly, at the time of production, the duty was not payable or collectible by the supplier (wine producer) as the goods went into an excise warehouse of the producer.

(iv) XXXXX may claim an input tax credit in respect of the GST paid or payable on the supply of wine, to the extent the wine was acquired for consumption, use or supply in the course of XXXXX commercial activities, and assuming that all the requirements of section 169 are met (e.g. documentary evidence).

Example 2

Fact: XXXXX transfers domestic packaged wine from an XXXXX excise warehouse to its retail outlet:

Tax Application:

(i) Excise duty becomes payable by the XXXXX pursuant to section 136 of the EA, 2001.

(ii) No GST is payable or collectible by the XXXXX, as it has not made a supply for GST purposes. The XXXXX keeps ownership of the goods when it moves its own wine to its own retail stores for sale to the public. The fact that duty becomes payable under the EA, 2001 upon this transfer has no immediate effect on the application of GST under the ETA.

Example 3

Fact: XXXXX outlet supplies domestic packaged wine to consumers. Duty has been previously paid or became payable by XXXXX (per example 2).

Tax Application:

(i) GST is applicable, calculated on the value of consideration (including the duty) for the taxable supply, pursuant to subsection 165(1) of the ETA.

(ii) The consideration for the supply is the excise duty-included amount payable to XXXXX by the consumer for the supply (i.e. the duty is included in the price charged by XXXXX as it was paid by XXXXX and it is being passed on to the consumer). In addition, paragraph 154(2)(a) of the ETA provides that the consideration for the supply of wine includes any "(...) duty (...) imposed under an Act of Parliament (...) that is (...) payable or collectible by the supplier, in respect of that supply or in respect of the production, importation, consumption or use of the property (...)".

Small producers

Producers of domestic packaged wine whose annual sales during the preceding 12 fiscal months do not exceed $50,000 will require a wine licence under the EA, 2001. However, these persons will not be liable for the payment of excise duty unless that threshold is exceeded. XXXXX should purchase wine from small producers without payment of excise duty, as these goods are not subject to duty. Given that excise duty is not imposed in respect of these supplies, there will be no duty to defer upon XXXXX purchase of such wine. Further, XXXXX will not pay excise duty at the time that it transfers this wine from an XXXXX excise warehouse to its retail outlets. When a XXXXX outlet supplies such domestic wine to consumers, GST is applicable on the supply, calculated on the value of consideration for the supply, pursuant to subsection 165(1) of the ETA. The consideration for the supply includes any amount payable for the supply by operation of law. XXXXX must charge and remit GST based on the "consideration" paid or payable by its client for the supply of the wine. Since no excise duty was paid in respect of the wine, the tax base for GST purposes will be calculated without reference to the duty.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-1433.

Yours truly,

Bao Tran
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate