Excise Act Review: Annex I
- Table of Contents - Previous - Next -

Technical Annexes

Annex I
Excise Duty on Spirits

Introduction

The proposal for a revised excise framework will impose a production levy on spirits. The new system, however, will be significantly different in design and application from the current system, which relies on pervasive controls over the premises and equipment used to produce spirits.

The focus of the proposed tax structure will be the control of ownership and possession of bulk spirits, combined with a modern administrative system and an audit approach based on self-assessment and after-the-fact verification of books and records.

A. Licensees and Registrants

A.1. Excise Licensee

Under the proposed excise system, a distiller is defined as any person who produces, denatures or packages spirits or who owns spirits at the time they are produced, denatured or packaged. Any person who carries on the activities of a distiller in Canada will be required to obtain an excise licence and will be referred to as an excise licensee.

A non-resident who owns spirits at the time they are produced in Canada is a distiller and will be required to be licensed and post a guarantee bond. A non-resident owner who ships bulk spirits into Canada to an excise licensee for packaging or denaturing will not be required to be licensed, but may apply to be licensed, subject to posting a guarantee bond.

Excise licensees will be required to maintain books and records related to the production, processing, packaging and sale of spirits. An excise licensee must also maintain records related to bulk spirits that are owned by the licensee but are possessed by another excise licensee or an excise registrant.

A.2. Excise Registrant

An excise registrant is any person registered with Revenue Canada to possess or transport bulk spirits that are owned by an excise licensee, a licensed manufacturer, a province or, in the case of imported bulk spirits, an unlicensed non-resident.

The excise registrant does not assume liability for excise duty in respect of the bulk spirits -- the owner or importer remains accountable for bulk spirits that are possessed by an excise registrant.

While excise registrants will not be required to provide notification for each movement of bulk spirits, they will be required to maintain books and records that will enable Revenue Canada to verify movements of bulk spirits. Registrants will also be required to maintain information on the ownership of bulk spirits in their possession. In the case of imported bulk spirits owned by an unlicensed non-resident, excise registrants must maintain information identifying the excise licensee or licensed manufacturer who imported the bulk spirits.

A.3. Excise Warehouse Licensee

An excise warehouse licensee is any person authorized to acquire and store packaged spirits on a duty-deferred basis in premises specified under its licence as an excise warehouse.

Three classes of persons may apply for an excise warehouse licence -- excise licensees, provinces and persons who are not retailers. In general, any premises (except retail premises) used to supply packaged spirits to two or more retail stores or other excise warehouse licensees will be eligible to be an excise warehouse.

An excise warehouse licence will also be issued to a person in respect of a warehouse used to supply spirits to the export or duty-free markets, or to licensed manufacturers and registered users.

A.4. Licensed Manufacturer

A licensed manufacturer is a person licensed under the Excise Act to own and possess non-duty-paid bulk or packaged spirits for further manufacturing or processing of products in formulations approved by Revenue Canada, or for use in a manufacturing process in which the spirits are completely destroyed.

A.5. Registered User

A registered user is a person authorized by Revenue Canada to acquire and use packaged spirits duty free for scientific or medicinal purposes.

Further discussion concerning the treatment of spirits for non-beverage uses by licensed manufacturers and registered users can be found in the annex entitled, "Industrial or Non-Beverage Use of Spirits, Wine or Beer".

B. Basic Operation

B.1. Domestic Spirits

Under the proposal for a revised excise framework, excise duty will be imposed on the quantity of spirits produced in Canada. Liability for excise duty will rest with the owner of the bulk spirits and will transfer with any change of ownership.

Excise duty will become payable when the bulk spirits are bottled or otherwise packaged for consumption. When bulk spirits are taken for a taxable use by an excise licensee or a licensed manufacturer without being packaged, the excise duty will become payable at that time.

The payment of the excise duty may be deferred if, immediately after packaging, the spirits are placed in an excise warehouse. Liability for payment of excise duty will transfer from the owner of the spirits to the excise warehouse licensee who has possession of the packaged spirits. Excise duty will be payable when the spirits are removed from the excise warehouse unless they are exported, sold to a licensed manufacturer, a registered user or the duty-free market, or transferred to another excise warehouse.

The excise duty will be remittable by the last day of the month following the month in which it became payable.

B.2. Imported Spirits

Excise duty will not apply to bulk or packaged spirits that are imported. Instead, a customs duty equivalent to the excise duty will be imposed under the Customs Tariff at the time of importation, with liability resting with the importer.

For imported bulk spirits, the customs duty equivalent will be administered in the same manner as the excise duty on domestic spirits -- the customs duty equivalent will be payable when imported bulk spirits are packaged, unless the packaged spirits are placed in an excise warehouse. Alternatively, duty will be payable when bulk spirits are taken for use. Where imported bulk spirits are packaged and then placed in an excise warehouse immediately after being packaged, duty will be payable when the spirits are removed from an excise warehouse.

In the case of imported packaged spirits, the customs duty equivalent will be payable at the time of importation according to customs rules, unless the importer is an excise warehouse licensee and the packaged spirits are delivered by a customs bonded carrier directly to an excise warehouse. For imported packaged spirits entered into an excise warehouse, customs duty equivalent will be administered in the same manner as the excise duty on domestic product -- duty will be payable when the packaged spirits are removed from an excise warehouse.

Under the proposed excise system, imported bulk and packaged spirits will no longer be allowed to enter a customs bonded warehouse. The regular customs duty and GST will be payable at the time of importation under normal customs rules and procedures.

C. Treatment of Bulk and Packaged Spirits

C.1. Bulk Spirits

Bulk spirits will always be non duty-paid. A key feature of the new structure will be the rules regarding the ownership, possession, disposition and importation of bulk spirits.

Ownership of Bulk Spirits

Bulk spirits may only be owned by an excise licensee, a licensed manufacturer, a province or, in the case of imported bulk spirits, an unlicensed non-resident owner.

Ownership of bulk spirits may be transferred from one excise licensee to another, or to a licensed manufacturer. Where bulk spirits are transferred between excise licensees, the transfer must be for further processing or packaging, not simply resale of the bulk spirits as received.

Where a province acquires ownership of bulk spirits for commercial purposes (i.e. if a province produces or packages spirits, or if it has ownership of spirits that are produced or packaged on its behalf), it will fall within the definition of a distiller and will be required to be licensed as an excise licensee.

Possession of Bulk Spirits

Under the proposed excise system, bulk spirits may be possessed only by an excise licensee, a licensed manufacturer, a province or an excise registrant. Persons in possession of bulk spirits will be required to have evidence that the spirits are owned by an excise licensee, a licensed manufacturer, a province or, in the case of imported goods, an unlicensed non-resident. Where imported spirits are owned by an unlicensed non-resident, the person in possession must also be able to identify the excise licensee or the licensed manufacturer who imported the spirits and is liable for the customs duty equivalent.

Disposition of Bulk Spirits

Bulk spirits that are produced by an excise licensee may only be exported; sold to another excise licensee, a licensed manufacturer or a province; taken for use; denatured; or packaged.

Bulk spirits may not be resold (including exported) in an unaltered condition. Where an excise licensee imports bulk spirits or acquires ownership of bulk spirits from another excise licensee, the spirits must be redistilled, blended, denatured, or packaged. The only exception to this rule will be for bulk spirits that are returned in an unaltered condition to the excise licensee who originally sold the spirits.

The owner of bulk spirits will be liable for unaccountable losses of spirits that the owner produced, purchased or imported. The owner will not be liable for duty on the theft of bulk spirits.

Importation of Bulk Spirits

Bulk spirits may only be imported by an excise licensee, a licensed manufacturer, or a province. Imported bulk spirits acquired by an excise licensee must be redistilled, blended, denatured or packaged.

Where imported bulk spirits are owned by an unlicensed non-resident, the importer will be liable for duties in place of the owner. In all other cases, imported bulk spirits must be owned by the importer at the time of importation.

C.2. Packaged Spirits

Packaged spirits will be defined as spirits that have been bottled or otherwise packaged for consumption (this will include spirits packaged for non-beverage purposes).

The excise duty or the customs duty equivalent on packaged spirits will be payable at the time of packaging or importation, unless the packaged spirits are placed in an excise warehouse immediately after being packaged or imported. Subject to the exceptions outlined below, duty is payable when the packaged spirits are removed from an excise warehouse.

Packaged spirits may be removed from an excise warehouse without payment of duty if they are delivered to another excise warehouse. Packaged spirits may also be removed from an excise warehouse without payment of duty if they are sold and delivered to a licensed manufacturer, registered user, duty-free shop, accredited representative or for use as ships' stores. Finally, packaged spirits may be removed without payment of duty if they are exported from an excise warehouse of the excise licensee who packaged the spirits.

Packaged spirits that are returned unopened to the excise warehouse that sold the product may re-enter the duty-deferred inventory of the warehouse. If excise duty was paid on the returned packaged spirits, a credit may be claimed by the excise warehouse licensee.

Excise warehouse licensees will be liable for duty and penalties on any unaccountable losses of packaged spirits entered into an excise warehouse. The excise warehouse licensee will also be liable for duty on packaged spirits that are stolen.

D. Exports

Bulk spirits may only be exported by the excise licensee who owns the spirits and must be shipped from the premises of the licensee who produced or processed the spirits. Where bulk spirits are sold or delivered to another excise licensee, the spirits must be blended or further processed before being exported in bulk form.

Packaged spirits may only be exported from an excise warehouse of the excise licensee who packaged the spirits, and the excise licensee who packaged the spirits must be the exporter.

Neither bulk spirits nor packaged spirits may enter a customs bonded warehouse prior to export.

E. Duty-Free Sales

Domestic and imported packaged spirits may be supplied by an excise warehouse licensee without payment of duty to duty-free shops, as ships' stores or to accredited representatives. Packaged spirits may also be imported directly by accredited representatives on a duty-free basis.

Under the proposed system, packaged spirits destined for the duty-free market may no longer enter a customs bonded warehouse. Packaged spirits that are supplied to the duty-free market may not enter the domestic duty-paid market.

F. Penalties

Penalty and control provisions under the new excise system will focus on unauthorized ownership, possession and disposition of bulk spirits. For packaged spirits, penalties and controls will relate to the storage, disposition and possession of non-duty-paid spirits.

Penalties will be imposed on excise licensees, excise registrants and excise warehouse licensees for offences relating to the requirement to keep books and records on the operations of their businesses with respect to the production, processing, packaging, storage, transportation or sale of spirits.

Penalties will also be imposed on persons involved in diversion activities or who have unlawful ownership or possession of spirits. Penalties will include seizure and forfeiture of the spirits, the equipment and facilities related to their production and storage, and the vehicles used to transport the spirits.

G. Transition

Under the proposed new excise system, imported spirits may no longer enter or be stored in a customs bonded warehouse. On the date of implementation of the new Excise Act, the customs duty equivalent, regular customs duty and GST on imported packaged spirits held in a customs bonded warehouse will become payable under normal customs rules and procedures. Payment of the customs duty equivalent may be deferred if, on the implementation date of the new excise system, imported packaged spirits are placed in an excise warehouse. Payment of the customs duty equivalent will then follow the rules of the new Excise Act.

Similarly, for imported bulk spirits that are stored in a customs bonded warehouse, the regular customs duty and GST will become payable according to normal customs rules on the implementation date of the new Excise Act. The customs duty equivalent, however, will not be payable until the bulk spirits are packaged or taken for a taxable use.

- Table of Contents - Previous - Next -