Excise Act Review: 4
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Part IV
Proposal for a Revised Excise Framework Imposition and Control Structures

Overview

Under the proposal for a revised excise framework, control and protection of revenue will no longer be achieved by regulating the apparatus and place of production, but rather by licensing and registering persons who own or possess bulk goods and by imposing penalties on unauthorized ownership or possession.

Excise duty will be imposed during the production process, but there will be fewer constraints on how and where a manufacturer may produce, store or transport goods, providing greater flexibility for producers and recognizing both public and private distribution needs.

The overall approach to imposition and control structures is one of balance -- greater flexibility for industry to manage production practices in a competitive manner will be balanced by the government's ability to determine liability for excise based on the production and flow of bulk and packaged goods.

The sections that follow outline the key concepts of the revised excise framework as they apply to beverage alcohol, alcohol used for non-beverage purposes and tobacco products. More detailed information on an industry-specific basis is available in the attached technical annexes.

Alcohol

The proposal for a revised excise framework for alcohol introduces a broad range of new measures designed to provide distillers, brewers and vintners with a fair, modern and efficient taxation structure. The core elements of the new system are set out below. 

Production Levy

Spirits, beer and wine will all be subject to an excise duty that is imposed and becomes payable during the production process.

For spirits, excise duty will be imposed at the still and payable at the time of packaging.

For beer and wine, excise duty will be both imposed and payable at the time of packaging.

Point of imposition refers to the point at which goods are charged with excise duty. For spirits, excise duty will be imposed at the still. For beer and wine, excise duty will be imposed at the time of packaging. Earlier imposition for spirits reflects the fact that spirits are potable when they come off the still.

At the time excise duty becomes payable, the quantity of goods and amount of excise duty are determined, and responsibility to pay the excise duty is assigned to a particular person. For spirits, beer and wine excise duty will be payable by the owner of the goods at the time the goods are bottled or otherwise packaged for consumption.

Bulk Goods

• Prior to packaging, excise duty is not payable on bulk alcohol.
• There will, however, be strict controls over ownership, possession and disposition of bulk alcohol, with penalties imposed for illegal ownership, possession and disposition.
• Mandatory licensing of the producers and owners of bulk alcohol, and registration of persons who will possess these goods, are key concepts.
• Only an excise licensee may own bulk alcohol and only an excise licensee or excise registrant may possess bulk alcohol -- an excise licensee remains accountable for goods in the possession of an excise registrant.

Excise duty will be imposed during the production process, but licensing of manufacturing premises and control of production equipment will no longer exist. Instead, there will be controls on the ownership and possession of bulk alcohol -- goods which have not been bottled or packaged for consumption.

Regulating the ownership and possession of bulk alcohol is essential to maintaining the integrity of the excise system. The features outlined below form the basis for liability on diversion of bulk alcohol, imposition of penalties, and seizure of bulk alcohol found in possession of unauthorized persons.

An excise licence will be required by any person who produces or packages spirits, beer or wine (or who owns spirits, beer or wine produced or packaged on his or her behalf). This requirement also applies to provinces, except where a province takes ownership of alcohol only to comply with federal or provincial laws.

To provide excise licensees with increased flexibility to store and transport bulk alcohol, an excise registrant will be introduced. An excise registrant may possess and transport bulk alcohol it does not own, but does not assume liability for excise duty. The excise licensee who owns the bulk alcohol remains accountable for any losses that occur while the goods are in the possession of the excise registrant.

Alcohol produced domestically may be sold in bulk form by the excise licensee who owns the alcohol to another excise licensee. The purchasing excise licensee must further process or package the bulk alcohol, however, and cannot simply resell the goods as received. This restriction is designed to prevent "jobbing" of bulk alcohol and maintain the integrity of the flow of bulk goods.

Bulk alcohol may be imported by an excise licensee or a province. All imported bulk alcohol is subject to regular customs duty and Goods and Services Tax (GST) at the time of importation. Bulk spirits are also subject to customs duty equivalent imposed at the time of importation, which becomes payable at packaging. For bulk beer and bulk wine, regular excise duty is imposed and payable at the time of packaging.

As per the restriction on sale of domestically produced alcohol, the excise licensee who imports bulk alcohol cannot simply resell the goods as received but must further process or package the bulk alcohol, again to preserve the integrity of the flow of bulk goods. In addition, bulk beer brought into a province by an excise licensee will continue to be subject to the blending provisions of the Importation of Intoxicating Liquors Act (IILA).

Bulk alcohol that is to be exported free of duty must be exported by the excise licensee who owns the alcohol and must leave from the premises of the excise licensee who produced or further processed the goods.

Packaged Goods

• Excise duty becomes payable when bulk goods are bottled or otherwise packaged for consumption.
• Packaged spirits and packaged wine may, however, be stored on a duty-deferred basis in an excise warehouse, with excise duty payable upon removal from the excise warehouse.
• There is no duty deferral in respect of beer intended for the domestic market.

Excise duty will be payable when bulk alcohol is bottled or otherwise packaged for consumption. Packaged spirits and packaged wine may be entered for storage on a duty-deferred basis in an excise warehouse. This deferral reflects the storage and ageing period for wine and spirits, as distinct from beer, and helps to provide a level playing field among the alcohol industries.

An excise warehouse will be defined as specified premises, other than retail premises, where packaged spirits and packaged wine can be stored on a duty-deferred basis. A licence for an excise warehouse may be granted to excise licensees and provinces. To facilitate privatization initiatives undertaken by some provinces, an excise warehouse licence will be available to any person who is not a retailer. This broad availability can be moderated by provincial restrictions on who may warehouse alcohol.

Once packaged spirits or packaged wine are placed in an excise warehouse, liability for excise duty will transfer from the owner of the goods to the excise warehouse licensee. Excise duty will be payable by the excise warehouse licensee when the goods are removed from the excise warehouse.

Removal of packaged spirits and packaged wine from an excise warehouse on a duty-free basis will be permitted only for delivery to duty-free stores, accredited representatives or for use as ships' stores. Where packaged spirits or packaged wine are to be exported on a duty-free basis, they must be removed directly from an excise warehouse of which the packaging distiller or vintner is the licensee.

In the case of beer, duty-deferral will not apply to product intended for the domestic market. Packaged beer may, however, be placed in an excise warehouse for delivery to duty-free stores, accredited representatives or for use as ships' stores. Where packaged beer is to be exported on a duty-free basis, it must be removed directly from an excise warehouse of which the packaging brewer is the licensee.

Imported packaged goods will no longer be allowed to enter a customs bonded warehouse. They will be subject to regular customs duty and GST, payable by the importer of record at the time of importation. The customs duty equivalent in respect of packaged beer is also payable at the time of importation.

For wine and spirits, payment of the customs duty equivalent may be deferred if the importer is an excise warehouse licensee and the wine or spirits are delivered to the excise warehouse by a customs bonded carrier. The customs duty equivalent is then administered in the same manner as the excise duty on domestic packaged spirits or wine.

Production for Personal Consumption --
U-Brews and U-Vins

• In order to possess the bulk beer and bulk wine which is produced on their premises by individuals and owned by the individuals for personal consumption, u-brew and u-vin operators will be required to register as excise registrants.
• To qualify for the personal use exemption, individuals must ferment and package the beer or wine that they own.
• U-brew or u-vin operators who ferment or package wine or beer will be required to secure an excise licence and will be liable for excise duty.

Liability for excise duty rests with the owner of beer or wine at the time the goods are packaged. The only exception to this rule is where the owner of the beer or wine is an individual and the beer or wine was made for the individual's personal use and not for commercial use. (Spirits may be produced only by a licensed distiller.)

As a corollary to the controls on bulk alcohol outlined earlier, u-brew and u-vin operators will be required to register as excise registrants to possess the bulk wine or bulk beer which is produced on their premises by an individual solely for the individual's personal use.

To qualify for the personal use exemption, individual customers will continue to be required to ferment and package the beer or wine that they own. They will not be required to perform intermediate steps such as filtering, carbonation or racking which may be performed by the u-brew or u-vin operator.

U-brew and u-vin operators who ferment or package beer or wine for a customer will be required to secure an excise licence, and will be liable for excise duties on any beer or wine that they ferment or package for an unlicensed owner.

Comparison of Revised and Existing Frameworks

The proposal for a revised excise framework shifts the focus from rigid control over plant, apparatus and production processes, to the identification and movement of bulk alcohol among designated parties with liability for excise duty based on ownership.

For spirits and beer, currently subject to the expansive provisions of the Excise Act, the proposal for a revised excise framework will remove many of the intrusive forms of government involvement, providing distillers and brewers with greater flexibility to manage production and distribution in a modern manner. In addition, the new imposition and control structures will help to deter and detect contraband activity and facilitate the prosecution of contraband operators.

Wine is currently subject to a post-production levy, which has reduced the federal presence at the manufacturing level and impaired the potential for an effective enforcement function. The new taxation structure for wine will be more comprehensive, helping to address a significant illegal wine market and providing equitable treatment among the alcoholic beverage industries.

The proposal for a revised excise framework will continue to allow individuals to undertake the production of beer and wine for personal consumption, and u-brew and u-vin establishments to provide facilities and services to these individuals. New provisions regulating the storage of bulk goods and codifying the existing guidelines for production for personal consumption will help to preserve the integrity of the domestic market and ensure that all participants are on a level playing field.

Alcohol for Non-Beverage Purposes

The proposal for a revised excise framework will also apply to alcohol intended for non-beverage purposes. It is important to understand that there is no difference in the alcohol produced for beverage use and that produced for non-beverage use -- several producers make alcohol for both beverage and non-beverage use and all producers must be licensed.

Alcohol used for non-beverage purposes is generally spirits, although there are non-beverage applications for both beer and wine. Spirits intended for non-beverage use take one of three general forms:

• undenatured spirits which are potable;
• denatured spirits which are not potable; and
• specially denatured spirits which are not potable but can, through certain recovery processes, be made potable.

Current Framework

Under the current Excise Act, where denatured or specially denatured spirits are supplied for non-beverage use, the control function is carried out through the approval of end uses and denaturing standards.

Where undenatured spirits, beer or wine are supplied for non-beverage use, the risk of diversion is addressed by defining and regulating two categories of authorized participants, licensed manufacturers and registered users, and by approval of product formulas or specification of use.

These controls minimize the risk of diversion of alcohol for beverage use and address public health concerns. Without undertaking any fundamental changes to the control structures currently in place, a number of changes are proposed to rationalize and simplify the excise framework.

Producers of Alcohol for Non-Beverage Purposes

For producers of denatured and specially denatured spirits, the key proposal for a revised excise framework is a review of the denaturing standards.

Distillers will be able to produce more grades of denatured and specially denatured spirits to correspond more closely with grades approved in the United States, and will also be allowed to produce grades for export to foreign specifications. In fact, this process has already begun, with the recent release by Revenue Canada of new regulations for denaturing standards.

Both denatured and specially denatured spirits will continue to be duty free. Denatured spirits will not be subject to further restrictions concerning sale or export, while specially denatured spirits may only be exported or sold to a holder of a permit issued by Revenue Canada for that particular grade.

Users of Alcohol for Non-Beverage Purposes

The ability to acquire and use duty-free spirits, beer or wine will continue to be determined in accordance with two categories of authorized users:

• Licensed manufacturers will be able to purchase spirits, beer or wine on a non-duty-paid basis in bulk or packaged form from a distiller, brewer or vintner or excise warehouse licensee, for use in a formulation or for a purpose approved by Revenue Canada; and
• Registered users will be able to purchase spirits on a duty-free basis, in packaged form only, from an excise warehouse licensee where the registered user is a qualifying health or educational institution or other person using spirits for scientific purposes.

Within the context of licensed manufacturers, Revenue Canada will be reviewing the process for formula approval to include new risk-assessment factors that extend beyond potability. This undertaking responds to concerns that the existing process is too rigid and will help to facilitate the introduction of new products and boost competitiveness of Canadian manufacturers.

In addition, administration and compliance will be addressed. Licensed manufacturers will no longer be required to hold separate licences for different classes of products, nor will they be required to hold separate inventories of alcohol for each product category.

Finally, the nominal rates of excise duty that apply to alcohol for non-beverage use will be eliminated. These charges bring in less than $2 million per year and do so in a manner that is inconsistent and onerous across the authorized participants. Accordingly, there will no longer be excise duty charged on alcohol used for non-beverage purposes.

Comparison of Revised and Existing Frameworks

The proposal for a revised excise framework for alcohol for non-beverage purposes will reduce complexity and promote fairness, while maintaining adequate controls to ensure that untaxed potable and potentially potable alcohol is not diverted to beverage use.

Production of alcohol for non-beverage use will be undertaken in accordance with the same rules that govern the production of alcohol for beverage use -- excise licensees, excise registrants and excise warehouses.

Producers will benefit from specific changes designed to respond to technical and competitiveness concerns -- they will be able to produce additional grades that correspond more closely with grades approved in the United States, and they will be allowed to denature spirits for export to foreign specifications.

Users of alcohol for non-beverage purposes will benefit from changes to the administrative structure surrounding their operations, with emphasis on formula approval and reduced compliance burden. In addition, the elimination of the nominal rates of duty will end the complex and inconsistent application of variable rates of duty across manufacturing uses.

Tobacco Products

The focus of the review for tobacco products is to establish a single excise levy. It is critical, however, that the revised excise framework provide a level of control and protection for federal revenue that is commensurate with high rates of specific taxation.

Current Framework

Tobacco products are the only goods subject to both a production levy and a sales levy, as set out in the Excise Act, the Excise Tax Act and the Customs Tariff.

A production levy is imposed on domestically produced tobacco products at the time of packaging and on imported tobacco products at the time of importation. Excise duty must be remitted at the end of the month excise duty is imposed.

A sales levy is imposed on domestically produced tobacco products at the time the manufacturer delivers the goods to a purchaser, and on imported tobacco products at the time of importation. Excise tax must be remitted at the end of the month following the month excise tax is imposed. Large manufacturers are required to remit excise tax at the end of the month the tax is imposed and on the 15th day of the following month.

The application of separate rules for imposition and remittance under three statutes results in excessive compliance and administration costs.

Control and Protection of Revenue

Control and protection of revenue is the most important consideration shaping the proposal for a revised excise framework for tobacco products. The large scale contraband trade during the early 1990s plainly illustrated the vulnerability of tobacco tax revenues.

Under the existing excise framework, control and protection of revenue is safeguarded by the provisions of the Excise Act. The stamping and marking requirements that accompany imposition of excise duty play an essential role in protecting tobacco tax revenues. The risk of non-duty- and tax-paid product being diverted into the domestic market is minimized because excise duty is imposed, and the stamping and marking requirements must be complied with, at the time tobacco products are packaged or imported.

Enforcement measures against contraband tobacco rely heavily on the stamping and marking requirements for tobacco products. The Excise Act stipulates that the absence of tobacco stamps on a tobacco package is evidence that excise duty and tax have not been paid, facilitating prosecution of persons who are found in possession of unstamped tobacco products.

New Excise Duty

The federal proposal for creating a single levy on tobacco products is to roll both excise tax and customs duty equivalent into excise duty.

The new excise duty will be imposed on domestically produced tobacco products at the time of packaging, and on imported tobacco products at the time of importation. There will be only one set of rules for imposition and excise duty will be remitted at the end of the fiscal month following the fiscal month excise duty was imposed.

Deferral of duty will continue to be available for domestic and imported tobacco intended for duty-free sale. The system will be streamlined by consolidating the current functions performed by excise bonding and customs bonded warehouses into an excise warehouse. This new system for duty deferral will result in equal treatment for domestic and imported tobacco products.

The critical advantage of the new excise duty is the continued application of stamping and marking requirements for tobacco products. Domestic and imported tobacco products will be stamped at the time of packaging to ensure that duty has been paid at the rates applicable in the province where the tobacco is to be sold for consumption. Domestic and imported tobacco products entering an excise warehouse will be marked to reflect the fact that they are intended for duty-free sale.

In addition, modern administration and compliance structures will provide a more fair and efficient taxation structure for industry and government.

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