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Ottawa, December 4, 2001
2001-113

Government Tables Legislation to Implement Previously Announced Excise Measures

• Backgrounder.
• Excise Act, 2001 Explanatory Notes and Draft Regulations.
• Notice of Ways and Means Motion.

Secretary of State (International Financial Institutions) Jim Peterson today tabled in the House of Commons a detailed Notice of Ways and Means Motion to implement the Government’s Excise Act Review Proposals. At the same time, the Honourable Martin Cauchon, Minister of National Revenue and Secretary of State responsible for the Economic Development Agency of Canada for the Regions of Quebec, released draft regulations to accompany the proposed new legislation.

"The proposed legislation and draft regulations will reduce the compliance costs of affected businesses," Secretary of State Peterson said. "The new excise framework will allow the Canada Customs and Revenue Agency to serve its clients better, and gives authorities the tools they need to protect government revenues and deal more effectively with smuggling," Minister Cauchon added.

The new Excise Act incorporates the legislative proposals for a new excise framework that were released for consultation purposes in April 1999. The new Act modernizes the legislative provisions governing the taxation of spirits, wine and tobacco products and introduces an updated administrative and enforcement framework that reflects current industry practices.

Consumers will not be affected by the changes to the legislative framework.

Key features of the new legislation include the replacement of the excise levy on sales of wine with a production levy, updated provisions relating to remittances, assessments and appeals and a strengthened enforcement structure. Some adjustments to the original proposals have been made to take into account representations from industry associations, businesses, provincial liquor boards and ,other interested groups.

Secretary of State Peterson expressed his gratitude for the comments received during the consultations on the legislative proposals. In addition, he said "the new Act will give affected businesses more flexibility to organize their commercial affairs and respond more quickly to market changes."

Also included in the Motion are previously announced proposals relating to other excise tax measures, including changes to the ships’ stores provisions, which were announced on September 27, 2001, and measures to implement the tobacco tax increases announced by the Government on November 1, 2001.

The attached backgrounder provides details on the proposed new Excise Act and highlights the modifications that have been made to the 1999 legislative proposals relating to that Act. Additional information is provided in the related explanatory notes released today.

The Notice of Ways and Means Motion and explanatory notes can be viewed free of charge on the Department of Finance Web site at the address shown below. Printed copies of the Notice and explanatory notes are available for $25 and $22 respectively from the Department of Finance Distribution Centre at (613) 995-2855.

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For further information:

Backgrounder

Excise Act Review – Summary

The proposed Excise Act, 2001 is the culmination of a comprehensive review of the federal legislative and administrative framework for the taxation of alcohol and tobacco products. A joint project undertaken by the Department of Finance and the Canada Customs and Revenue Agency (CCRA), the Excise Act Review aims to replace the existing old and outdated administrative and enforcement structure governing alcohol and tobacco products with a modern regime reflecting current practices. It does not address tax rate and base matters, other than to ensure equitable treatment between domestic and imported products.

In 1997 the federal government released a discussion paper, which outlined a proposal for a revised taxation structure for alcohol and tobacco products. Legislative proposals and draft regulations were subsequently released in 1999, reflecting the key elements of the taxation structure outlined in the 1997 discussion paper. The legislative proposals dealt with the tax regime governing wine and products subject to excise duty under the Excise Act, with the exception of beer, which, for the time being, will continue to be subject to the existing Excise Act.

The legislative proposals served as the basis for further consultations with other federal departments, affected industries, provincial governments and liquor boards, and enforcement agencies. The proposed Excise Act, 2001 reflects refinements made to the Review proposals as a result of the consultation process.

The major elements of the proposed new Act, together with other measures contained in the legislation, are summarized below. The changes that have been made to the 1999 legislative proposals are also highlighted.

Licensing and Registration

Under the proposed new Act, producers of spirits, wine and tobacco products, users of industrial alcohol and persons warehousing non-duty-paid spirits and wine will be subject to more comprehensive licensing requirements than under the existing regime. In particular, all commercial vintners will be required to be licensed. New registration requirements will apply to persons who are not taxpayers under the proposed new Act but who carry on activities, such as transportation, in relation to spirits, wine or specially denatured alcohol.

Spirits and Wine

The proposed new Act retains the production levy on spirits but proposes the replacement of the existing excise levy on sales of wine with a production levy at an equivalent rate. The current tax exemption will be maintained for wine produced by a vintner whose sales of wine in the previous 12 months did not exceed $50,000.

Prior to packaging, duty will not be payable on bulk alcohol. As a result, there will be tight controls over possession, distribution and use of bulk alcohol. Duty will become payable when spirits or wine is packaged for consumption or when packaged spirits or wine is imported. The introduction of excise warehouses will allow for the deferral of the payment of duty on domestic and imported packaged spirits and wine to the time of sale to a retailer.

The proposed new Act explicitly recognizes existing exemptions from the requirements to be licensed and to pay duty for wine produced by individuals for their personal use. An individual will be permitted to produce wine for personal use at a residence or a ferment-on-premises facility (commonly known as a u-vin), if the operator of the facility is a ferment-on-premises registrant.

Alcohol for Non-Beverage Use

The ability to acquire and use spirits on a non-duty-paid basis will continue to be determined in accordance with two categories of authorized users, namely licensed users, who will be able to use non-duty-paid spirits in approved non-beverage uses, and registered users, who will be able to use non-duty-paid spirits for medicinal or research purposes, if they are qualifying health, educational or research establishments. Licensed users will also be able to use wine in approved non-beverage uses, which they cannot currently do.

Licensed users will no longer have to meet the existing requirement to hold separate licences for different classes of products, nor will they be required to hold separate inventories for each product category. The nominal rates of duty that currently apply to spirits for non-beverage use will be eliminated. However, imported spirits acquired by a licensed user will continue to be subject to the special duty of $0.12 per litre.

As under the current excise regime, there will be no restrictions on the distribution or use of denatured alcohol. However, there will be tight controls over the possession and use of specially denatured alcohol. Only SDA registrants may use specially denatured alcohol.

Tobacco Products

The current excise duty and excise tax on tobacco products other than cigars will be merged into a single production levy on tobacco products payable at the time of packaging. In the case of cigars, a production levy will be payable at the time of packaging and an additional duty identical to the current excise tax will be payable at the time of delivery to a purchaser by the tobacco licensee who manufactured the cigars. In the case of imported tobacco products, the duty will be payable at the time of importation. To ensure equitable treatment with Canadian raw leaf tobacco, duty will also be payable on raw leaf tobacco imported by a person other than a tobacco licensee.

The proposed new Act also incorporates the tax measures introduced in April 2001 as part of the Government’s comprehensive strategy to reduce tobacco consumption. Those measures included the introduction of a new excise tax on imported manufactured tobacco sold in duty-free shops, a new customs duty on manufactured tobacco imported by returning residents under the terms of the traveller’s allowance and a revised excise tax and duty structure for exported domestic manufactured tobacco. The proposed legislation transfers these levies to the new Excise Act.

The current stamping and marking requirements for tobacco products will continue to apply and play a key role in the enforcement of the proposed statute’s tobacco provisions. Controls, similar to current controls, will apply to the possession and disposition of raw leaf tobacco and partially manufactured tobacco.

Administration and Enforcement

The revised excise framework for spirits, wine and tobacco products will include substantive changes to key administrative provisions.

Consistent with the CCRA’s integrated accounting initiative, the proposed new duty remittance and return structure will be harmonized with other taxes and with commercial accounting periods. The new assessment and appeal provisions are similar to those under the goods and services tax/harmonized sales tax legislation.

The proposed new Act will also encompass a range of modern enforcement mechanisms, such as certificates of default, garnishment, seizure and sale of goods and chattels and directors’ liability. While the posting of guarantee bonds will generally be eliminated under the new Act, spirits licensees and tobacco licensees will be required to provide security to complement the proposed collection tools.

With respect to other enforcement measures, the proposed new Act incorporates the current offence provisions relating to the illegal production, possession or sale of contraband tobacco. The new comprehensive controls on the possession, use and disposition of non-duty-paid spirits and wine will significantly improve the alcohol offence structure, and the fines for alcohol-related offences will be substantially increased. As well, the proceeds of crime provisions under the proposed new Act will cover serious alcohol offences.

In addition to strengthened offence provisions, the proposed new Act will provide for a range of administrative penalties that will be imposed on licensees, registrants and other persons dealing with excisable goods who fail to comply with particular requirements under the Act.

Coming-Into-Force

In order to give both affected industries and the CCRA time to prepare for the implementation of the new excise framework, there will be a delay between the time the proposed new Act is assented to and its coming-into-force. It will take effect on a date to be fixed by order of the Governor in Council.

Key Changes Made to the Excise Act Review Proposals

The major changes to the 1999 legislative proposals that are reflected in the proposed new Excise Act are summarized below.

Licensing/Registration

The generic alcohol licence for the production or packaging of spirits and wine will be replaced with two separate licences:

• a spirits licence, authorizing the licence holder to produce or package spirits; and
• a wine licence, authorizing the licence holder to produce or package wine.

The legislative and regulatory framework for licensing and registration has been significantly strengthened and includes, among other things, a requirement to post guarantee bonds by spirits licensees or tobacco licensees. In addition, the denaturing of spirits will no longer qualify a person for a spirits licence.

The proposed licensing framework will dovetail with provincial legislation for the warehousing of packaged alcohol. Provincial approval will be required before a person can operate an excise warehouse for the storage of non-duty-paid packaged alcohol in a province. This requirement will not apply, however, to a spirits licensee or a wine licensee who produces or packages spirits or wine in the province.

Spirits and Wine

The definitions of "spirits" and "wine" have been modified to provide greater certainty as to the types of products that fall within the definitions and to ensure there is no overlap between the definitions. As well, new rules clarify the requirements relating to the blending of spirits and wine.

The current tax exemption for wine produced and packaged by small vintners with annual sales up to $50,000 will be maintained. Unlike the existing excise framework, however, vintners of all sizes will be required to be licensed. The licensing requirement is consistent with the strict new controls on the possession of bulk wine and it will assist enforcement efforts against contraband wine.

The definitions of "packaged" and "special container" have been modified to recognize the types of containers currently in use in Canada. Under the proposed legislation, "packaged" alcohol means alcohol packaged in a container not larger than 100 litres that is ordinarily sold to consumers without the alcohol being repackaged. It also means packaged in a marked special container. A special container of wine is a container of a capacity greater than 100 litres. A special container of spirits is a container of a capacity greater than 100 litres but not more than 1,500 litres. Marked special containers of spirits will now also be able to be delivered to bottle-your-own spirits operations.

The requirement to label wine at the time of packaging has been changed to allow wine that is immediately placed in an excise warehouse after packaging to be labelled when the product is removed from the excise warehouse.

Industrial Alcohol

New measures have been incorporated in the proposed legislation to restrict the sale of specially denatured alcohol to certain licensees or registrants and to require imported denatured and specially denatured alcohol to be sampled and tested to ensure these imported products meet the denaturing standards under the new Excise Act. The Minister of National Revenue may waive the testing requirement on a risk-managed basis, taking into account such factors as the importer’s compliance record and volume of shipments.

During consultations on the 1999 draft legislation and regulations, a number of concerns were expressed about the proposed grades of denatured and specially denatured alcohol. In response, the CCRA intends to establish an industry working group composed of industrial alcohol producers and users to make recommendations regarding changes to existing grades of denatured and specially denatured alcohol that will be incorporated in the denaturing regulations made under the proposed new Excise Act. As a result, draft regulations relating to denatured alcohol and specially denatured alcohol are not being released at this time.

Tobacco

Modifications have been made to incorporate the tax measures introduced in April 2001 as part of the Government’s anti-tobacco strategy, including the two-tiered excise tax on exports of tobacco products.

In addition, to assist enforcement efforts against contraband tobacco, new measures have been introduced to require tobacco growers to maintain books and records relating to their production and disposition of raw leaf tobacco and to obtain approval to export Canadian raw leaf tobacco.

Administration and Enforcement

Under the proposed new Act, collection action will no longer be taken until certain time limits for objection or appeal have expired or certain decisions have been made.

Transitional Provisions and Consequential Amendments

The proposed new Act contains transitional provisions that will apply to spirits, wine and tobacco products, manufactured or imported prior to the coming into force of the Act, but in respect of which duty will not have become payable when it takes effect. In certain circumstances, refunds may be provided in respect of duty- or tax-paid product that becomes subject to the provisions of the new Act.

The proposed new Act also includes consequential amendments to other federal statutes. These amendments have been expanded and incorporate a number of technical changes from the 1999 draft proposals. In particular, the consequential amendments to the Importation of Intoxicating Liquors Act have been modified to maintain the existing import restrictions and trade-related exemptions on bulk spirits.

Other Measures

The proposed new Act also implements the changes to the ships’ stores provisions under the customs and excise legislation announced by the Government on September 27, 2001. These changes broaden the enabling legislation for ships’ stores regulations and implement a temporary fuel tax rebate program for certain ships that, as a result of amendments to the Ships’ Stores Regulations effective June 1, 2002, will no longer qualify for ships’ stores relief.

In addition, the proposed new Act will implement the increases in the federal excise taxes on tobacco products that were announced by the Government on November 1, 2001. These increases are part of the federal government’s comprehensive strategy to improve the health of Canadians by discouraging tobacco consumption.