Excise Act Review: 1
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Part I
Introduction

Preface

This paper presents a comprehensive proposal for a revised federal commodity taxation system in respect of alcohol and tobacco products. The revised system encompasses both a new legislative framework and a modern administrative function for the application of federal excise levies.

The proposal for a revised excise framework is the result of a co-operative effort between the Department of Finance and Revenue Canada, with input from industry associations and provincial liquor jurisdictions. The focus of the revised excise framework is to replace archaic legislation and complex administration with an integrated modern structure that recognizes and accommodates the needs of government and industry.

Background

Historically, commodity taxes on specific goods have been a significant element of the federal tax system, accounting for as much as 25 per cent of federal revenues in the first half of this century. While their relative importance has declined over recent years, these levies continue to represent an important source of revenue to the federal government.

Among the most significant federal excise levies are the charges imposed on alcohol and tobacco products which contributed approximately $3.1 billion in fiscal year 1995-96. Of this total, $1.94 billion was attributable to tobacco, $560 million to beer, $480 million to spirits and $110 million to wine.

The legislative framework governing the application of excise levies across alcohol and tobacco products is provided for in three separate statutes:

• The Excise Act imposes excise duties at various unit rates on domestically produced spirits, beer and tobacco products;
• The Excise Tax Act imposes excise taxes on both imported and domestic goods at a unit rate for wine and tobacco products and at an ad valorem rate for cigars; and
• The Customs Tariff imposes customs duties equivalent to the excise duties that are applicable to domestically produced goods, on imported spirits, beer and tobacco products.

The Department of Finance and Revenue Canada share responsibility for the federal commodity tax system. The Department of Finance is responsible for legislation and policy, while Revenue Canada administers the commodity taxation system, including interpretation, collection and enforcement.

The Excise Act

The Excise Act is the foundation of the federal commodity taxation system for alcohol and tobacco products. It imposes excise duties on spirits, beer and tobacco products manufactured in Canada and includes extensive control provisions relating to the production and distribution of these commodities.

The Excise Act is also one of the oldest taxing statutes in Canada, existing in previous configurations before Confederation and with parts of the present act flowing from the consolidated Inland Revenue Act enacted in the 1870s. This time frame for development and historically high rates of duty account for the positioning of excise duties as production charges, and also for the wide-ranging control provisions to ensure that excise duty is collected at a specific point in the production process.

For the most part, the imposition of excise duties and concurrent supervision of the alcohol and tobacco industries have functioned without undue difficulty over the course of this century. While the administrative framework is comprehensive, the number of taxpayers is limited and participants have a body of specialized knowledge concerning application of the excise framework. Periodic amendments have dealt with specific issues, but the Excise Act has never been the subject of in-depth review and revision.

Impetus for Review

Recently, however, the need for a substantive review of the excise framework has become increasingly evident. Industry participants have undertaken significant development with respect to automated production processes, application of information technology systems, scheduling considerations, product marketing and distribution initiatives, and increased foreign competition.

Against this backdrop, industry associations representing distillers, brewers and tobacco manufacturers have expressed a number of recurring concerns with the Excise Act. Their fundamental position is that the archaic excise framework impairs their ability to achieve competitive commercial structures. Industry is seeking a revised framework that provides greater latitude to manage production and distribution processes in accordance with commercial pressures, and incorporates modern assessment and audit tools.

The Department of Finance and Revenue Canada recognize that changes are needed to update the structure of the Excise Act. In recent years, a limited number of changes have been introduced to both legislation and administration. For the most part, however, the government has been reluctant to make changes on an ad hoc basis, preferring to develop a comprehensive, integrated proposal that undertakes the type of fundamental change desired by government and industry.

There is also a need to consider the legislative and administrative structure governing the federal taxation of wine. Wine is taxed under the Excise Tax Act, which imposes a sales levy on the manufacturer without the type of close supervision contained in the Excise Act. While the structure is less intrusive, there are concerns that this structure has not been effective in protecting government revenues and securing the integrity of the domestic market.

Thus, there is a strong desire on the part of government and industry to establish a new legislative structure and modern administrative approach that responds to the concerns and issues identified by the affected parties. The proposal for a revised excise framework will generate stable and secure revenues for the Crown and address recent contraband pressures, without imposing unrealistic administrative burdens on industry, or onerous controls on the manufacture of goods that fall under the legislation's jurisdiction.

In this way, the revised excise framework will foster the competitiveness of Canadian industries; minimize the role of government in the day-to-day affairs of business; provide Revenue Canada with increased opportunities to deliver a modern administrative function; and ensure that all applicable excise levies are accounted for in a fair and efficient manner.

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