Skip to content
NFFN - Standing Committee

National Finance


Proceedings of the Standing Senate Committee on
National Finance

Issue No. 65 - Evidence - May 1, 2018 (afternoon)

OTTAWA, Tuesday, May 1, 2018

The Standing Senate Committee on National Finance, to which was referred Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures, met this day at 1:35 p.m. to continue consideration of the subject matter of this bill.

Senator Percy Mockler (Chair) in the chair.


The Chair: Honourable senators, welcome to this meeting of the Standing Senate Committee on National Finance.


I wish to welcome all of those who are with us in the room, and viewers across the country who may be watching on television or online at

My name is Percy Mockler, senator from New Brunswick and chair of the committee. I would like the honourable senators, starting on my left, to introduce themselves.

Senator Andreychuk: Raynell Andreychuk from Saskatchewan.

Senator Marshall: Elizabeth Marshall from Newfoundland and Labrador.


Senator Massicotte: Senator Paul J. Massicotte from Quebec.

Senator Moncion: Senator Lucie Moncion from Ontario.

The Chair: I would also like to introduce the clerk of the committee, Ms. Gaëtane Lemay, and our two analysts, Mr. Sylvain Fleury and Mr. Alex Smith.


That teams up to have this committee on time and moving forward.

This afternoon we continue our consideration of the subject matter of Bill C-74, which we started this morning with officials from the Department of Finance Canada.

Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures is what we call the budget implementation act.

Let’s resume our study where we left off earlier today. For information, Bill C-74 has been divided with seven other committees of the Senate of Canada, which will report to the Finance Committee no later than May 31, so can proceed with a report to the Senate of Canada.

This afternoon we’re resuming with officials from the Department of Finance: Mr. Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch; Mr. Shane Baddeley, Policy Analyst, Sales Tax Division, Tax Policy Branch.


We also have before us Mr. Pierre Mercille, Director General (Legislation), Sales Tax Division, Tax Policy Branch, from the Department of Finance Canada.

We shall now proceed as follows.


This afternoon we will consider tab B, which represents clauses 47 to 67, which is Part 2, entitled “Amendments to the Excise Act, 2001 (tobacco taxation) and relation legislation.” Item No. 2 will be Part 3, tab C, clauses 68 to 119. Part 3 is entitled “Amendments to the Excise Act, 2001 (cannabis taxation) the Excise Tax Act and other related texts.”

For purposes of clarity, and to consider Parts 2 and 3 individually, I will ask Mr. Coulombe to make his presentation on Part 2. Questions will follow about the tobacco taxation.

We will then proceed to Part 3, which is the cannabis taxation.

Please, Mr. Coulombe, make your presentation on tobacco taxation, followed by questions from the senators; and then Part 3 on cannabis taxation, also to be followed by questions from the senators.

Gervais Coulombe, Director, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Thank you, Mr. Chair. The proposed measures on tobacco taxation can be found, for those of you who would like more details, on pages 39 and 40 of the budget supplementary information. It’s the little booklet attached and published with the budget. The draft legislation was also included. The proposed measures cover clauses 47 to 67 of the first BIA.


The Government of Canada applies an excise tax on all tobacco products sold on the Canadian market. Excise tax rates on tobacco are currently set to automatically increase every five years in line with inflation. As such, the tobacco excise duty will be adjusted on December 1, 2019.


Budget 2018 proposes to advance the existing inflationary adjustments for tobacco excise duty rates to occur on an annual basis rather than every five years. To ensure consistency in the excise framework, inflationary adjustments will take place on April 1 of every year, starting in 2019.

Effective February 28, 2018, the day after the budget, tobacco excise duty rates were adjusted to account for inflation. The last inflationary adjustment occurred in 2014. That inflationary adjustment amounted to $1.29 per carton of 200 cigarettes. The budget also proposes to increase the rate by an additional dollar per carton of 200 cigarettes, including corresponding increases to the excise duty rates on other tobacco products such as chewing tobacco and cigars.

Overall, as of February 28, 2018, the excise duty rate on a carton of 200 cigarettes increased by $2.29, from $21.56 to $23.85, which is equivalent to about 29 cents per pack of 25 cigarettes.


A tax on cigarette stocks also applies on inventories of over 30,000 cigarettes, which equates to 150 cartons of 200 cigarettes in the possession of manufacturers, importers, wholesalers, and retailers, at day’s end, February 27, 2018.


Finally, this measure generally applies as of February 28, 2018, and should generate about $1.5 billion in new revenue over the fiscal projection period.


Mr. Chair, that concludes my short presentation on Part 2. I should be pleased to respond now to senators’ questions.

The Chair: Thank you.


We will now go to questions on Part 2, as presented by Mr. Coulombe from the Department of Finance.

Senator Marshall: I was looking at the numbers as to the increased revenues the government is expecting. Has there been any sort of study done to show a correlation between the increase in taxes, contraband tobacco and advertisements to encourage people to quit smoking? I read somewhere a little while ago that, I think, 30 per cent of tobacco products are contraband. Has there been a study on that? I notice you’re looking at $1.5 billion in revenue, but is this going to push people toward contraband tobacco? Is there any study to that effect?

Mr. Coulombe: Definitely there have been many studies done by academics over the last 30 or 40 years that make the case for tobacco taxation as a health measure aimed at reducing the prevalence of tobacco consumption among Western populations. There are censuses and papers published on the Health Canada website.

In terms of a direct correlation and how it relates to the measure you are currently reviewing, most of those revenues presented here are due to the fact we will adjust existing tobacco rates to account for inflation. Those adjustments mean the real tax burden on tobacco products from a federal standpoint remains the same.

That said, there is the additional dollar that I mentioned in my presentation, which is an additional burden compared to what the situation was shortly before the budget. When we look, for instance, at the numbers from Statistics Canada, the average retail price of a carton of 200 cigarettes in 2017 was about $106 in Canada. Would adding a dollar trigger further contraband measures? In fairness, the proposed increase is rather small and also has yet to be reviewed as part of other increases at the provincial level. Provinces have kept increasing tobacco excise duty rates.

I’m not judging these policies, but these are facts. When we look at the facts, we can conclude tobacco excise measures have been a key contributor to the reduction of smoking in Canada over the years. It’s always an issue of striking the right balance between contraband risks and maintaining the important revenues used to finance different programs.

Senator Marshall: Your data shows tobacco use declining, but it’s also possible people are moving to contraband, isn’t it?

Mr. Coulombe: A reduction in the prevalence of tobacco products in Canada is not necessarily based on excise or federal revenues. These are separate studies done by Statistics Canada and Health Canada that used to be called CTUMS, the Canadian Tobacco Use Monitoring Survey. These surveys indicate there is indeed a reduction.

Senator Marshall: When you look at the projected revenues for the government, why does it dip around 2020 and 2021? In the first year, it’s $30 million, but the next year 375, 350. But then it drops to 165. What happens there?

Mr. Coulombe: The numbers that are presented here have to account for the fact that tobacco excise duty rates were intended to increase in 2019 for inflation. You may have heard from my presentation that in Budget 2014, the government and Parliament at the time decided to adjust tobacco excise duty rates every five years going forward. That first adjustment was set to occur on December 1, 2019. As a result, in the fiscal framework, there were some revenues that had been included in the books. What you see here in terms of the fiscal profile is the net impact of those measures. Some revenues were already in the framework.

Senator Marshall: Is that similar for the following year, $240 million? It’s 375, 350, then it drops to 165 and then it goes up a little bit to 240 and then it’s back to 310. It swings up, does it?

Mr. Coulombe: It is because the December 1, 2019 adjustment is not the same as the April 1. Because of the 12 months, that affects three fiscal years, if you will.

Senator Marshall: Okay. Thank you.


Senator Massicotte: If I am not mistaken, the bill provides for an annual increase that would keep pace with inflation. Whereas under the existing system, the rate is adjusted for inflation every five years? Is that right?

Mr. Coulombe: That is correct.

Senator Massicotte: In today’s dollars, based on the bank rate, how much would that amount to? There is always going to be an advantage to speedier collection, but you do not see the full benefit immediately, it is spread over five years. Do we know in today’s dollars, using the annual inflationary adjustment method, what the total tax revenue would amount to, as opposed to what would be collected were we to wait another five years?

Mr. Coulombe: Do you mean how the regimes differ? The difference is that the duties will be collected every fiscal year on the date scheduled for each inflationary adjustment.

Senator Massicotte: The government will collect the same amount, but much more quickly because there will be no need to wait five years. The tax will be levied immediately, on an annual basis.

Mr. Coulombe: The amount collected will be higher because tobacco products are usually consumed at the time of purchase. A packet of cigarettes bought today will incur an increase of 29 cents, plus one dollar, so $1.29. This same packet of cigarettes purchased in 2018 cannot be purchased in 2019. The packet was bought now and it incurs — 

Senator Massicotte: Ordinarily, in 2022, there would have been a bigger increase.

Mr. Coulombe: If you look at the rates, the adjustment mechanism is essentially the same. It is calculated according to the annual rate of inflation as specified by Statistics Canada. Now, you have to factor in the date change, i.e. December 1, as opposed to April 1. The amount collected on April 1, last year, takes into account the inflationary adjustment, as determined by Statistics Canada, through September of the previous year, and the same instruments are used under the five-year system. The only difference is that going forward it would be calculated on an annual basis.

Senator Massicotte: From year one, you see an inflationary adjustment that, previously, you would have had to wait five years for. What you see in year two would have come four years later. In other words, how much more money, in today’s dollars, will the government collect in tax revenue under the new system as compared to the old one?

Mr. Coulombe: You are right as far as the tax rates are concerned. The rates going forward will not be different to what they would have been under the five-year system.

Senator Massicotte: Thank you for your answers, I think that we are saying the same thing.

I would like to follow up on my colleague’s question. Putting an inflationary adjustment instrument in a bill, or piece of legislation, is all well and good. Fifteen to 20 years ago, the cost of contraband tobacco was such that we had to reduce the price of tobacco to be able to compete as we were forfeiting a significant share of the market.

Even though the inflationary adjustment in the legislation will naturally result in higher prices, I presume the bill provides for a scenario wherein the Governor-in-Council would be at liberty to adjust or reduce the rate? Were we to realize, in two or three years, that contraband had gained a competitive edge, and we were once again losing market share, I presume provision has been made for the government to be able to decide, on an emergency basis, to cut the price of tobacco without having to introduce new legislation.

Mr. Coulombe: Flexibility is first and foremost a matter of politics. Officials regularly review the tax measures included in the budget. As a result, were a future government to find itself in a situation as dramatic as the events of the early 1990s, I imagine that the officials of the day would propose a number of remedies.

The draft legislation you have before you is unbending on this point, and does not give the government latitude when it comes to future hikes.

Senator Massicotte: Were we ever again faced with a situation akin to what occurred in the 1990s, where we suddenly lost control of the market, the government would have no choice but to table legislation in an attempt to regain the flexibility it forfeits under this bill.

Mr. Coulombe: This would enable the government to change the rates. In the 1990s, if my memory serves me correctly, the Prime Minister of the day went public with new rates. The government then turned to Parliament to endorse these decisions.

Senator Massicotte: Simply put, this legislation stipulates an automatic nondiscretionary increase. Still, you are saying that officials or the government can, at its discretion, change the rate at any time.

Mr. Coulombe: With the consent of Parliament, of course.

Senator Massicotte: By enacting new legislation, in other words.

Mr. Coulombe: Invariably, yes.


Senator Andreychuk: I have just a few information points. You’re saying there will be $1.5 billion in new revenue. Is that correct? That’s what the government is anticipating as a revenue item? And we talked about the smuggling issue. The increases are there. One of the reasons the government has given for increases is the higher the rate, perhaps people will think twice and not smoke. It’s a disincentive to smoke if you hit a certain point, and that’s how the increases got going in the first place.

The government is saying that, through Health Canada, their advertising and their focus on education has reduced the number of smokers. Is this measure a revenue item or is this a measure of health at this time?

Mr. Coulombe: Thank you for the question, senator. In respect of the $1.470 billion, you are right in saying these are new revenues and they are presented on page 6 of the booklet, the tax measures supplementary information I referred to earlier. These are new revenues for the fiscal framework that have been assessed based on an array of factors by the department.

The budget also contained a parallel measure with respect to the Federal Tobacco Control Strategy. Details of that measure are on page 176 of the English version of the budget plan. Basically, that measure announced enhanced funding for the Federal Tobacco Control Strategy, which is from Health Canada and aimed at reducing tobacco consumption among Canadians.

The increase in excise duty framework for tobacco products, yes, is a revenue-generating measure. It’s an excise duty. It’s a tax; there’s no doubt. At the same time, it tries to balance having a reasonable, prudent increase to ensure fiscal pressures continue to be effective in terms of reducing tobacco consumption, but at the same time the budget provides for funding in terms of tobacco control activities.

Senator Andreychuk: Since you’re the numbers people, I’m going to ask you. You don’t want to trust mine. Is the increase expected in revenue equivalent to the increase in the education and health component? The same percentage increase?

Mr. Coulombe: I’m not a specialist in the overall funding envelope for health.

At first glance, the new revenues generated by the increase in excise duty rates are higher but these revenues are going directly into the Consolidated Revenue Fund, where they are used to finance an array of measures like public health spending for provinces and so on. There is no direct correlation between what is being collected under the Excise Act 2001 and spending measures.


Senator Moncion: I have three questions. First, what impact will these new measures have on the provinces?

Mr. Coulombe: I am not sure what you are getting at.

Senator Moncion: The tobacco tax constitutes a revenue stream for the federal government, as it does for its provincial counterparts. Has the impact of this been gauged?

Mr. Coulombe: It may have a very modest impact, especially given the one dollar hike, which could potentially lead to a slight reduction of the overall rate of tobacco use. Barring such exceptional circumstances, the two orders of government levy taxes on tobacco products independently. Some provinces have continued to increase their duties over recent years: including some of the biggest provinces. In all cases, these rates are higher than the federal excise tax rate. The provinces therefore are already going after higher duties, and announcements to that effect were made in February’s budget. I do not recall any telephone calls, or colleagues being criticised by their provincial counterparts over this measure, which I would call prudent, reasonable, and modest given what is in the offering, and the overall pricing of tobacco products.

Senator Moncion: My second question has to do with vaping products: do you intend to tax these products in the same manner in which you currently tax tobacco products?

Mr. Coulombe: You may be aware that vaping products are to be regulated by Health Canada. The Senate introduced a bill; from memory, I believe it is Bill S-5 — 

Senator Moncion: You have a good memory.

Mr. Coulombe: — which is currently being considered in the House of Commons. Vaping products are not legal in Canada at this time. We need this regulatory framework in order to legalize their use, in spite of the fact that the sale of vaping products is already fairly widespread. However, the official position of Health Canada, and of the government, is that these products are still unregulated. I am not in a position to tell you this afternoon what the Canadian government’s intentions are in terms of taxing these products once they are officially legal — subject, of course, to royal assent of Bill S-5.

Senator Moncion: My third question has to do with the importing of acetate foam filters. When we met with police officers, who spoke to the issue of cigarette contraband, one of their recommendations was to ban the sale of acetate filters in Canada. Could you tell us where you stand on this matter?

Mr. Coulombe: We hold meetings and conference calls with officials from different orders of government regarding taxation on tobacco. The regulation of acetates, from memory, was put in place by Ontario. Our colleagues from Ontario undertook a lot of studies, and the government is continuing to study these issues carefully.

Excise duties are levied on the manufacturing of products. In order to legally produce tobacco products in Canada, you have to get an excise tax license from the Canada Revenue Agency. Licensees have to meet a number of obligations, and report back to the agency. Under the current system, they alone can legally take possession of what is coined “ungraded tobacco,” the substance required for manufacturing. Therefore, the primary substance in the manufacturing of tobacco products, crude tobacco, is already subject to an excise tax regime, and there are rules governing this. Whether or not other substances should be added is reviewed on a case-by-case basis. There is always a balance to be struck between the government wanting to regulate a product, in this particular case, tobacco products, and the freedom of economic players. Not to mention, the real impact that future regulations would have in a context where the primary substance, tobacco, is already subject to regulation under the excise tax act. This is all highly technical, I confess; but truth be told, we are venturing beyond the measures being proposed in the bill.

Senator Moncion: I understand, but we are talking about federal government revenue. We know that, whenever there is a tax hike on tobacco products, the illegal tobacco market also grows. There is a point at which the scales tip; and unlawful tobacco outpaces the controlled legal sale of tobacco.

Mr. Coulombe: On that particular point, if I may, Senator Moncion, the department, and the House of Commons committee, received requests and applications over recent years from various stakeholders appealing to the federal government to refrain from instituting increases in one fell swoop. One of the fears regarding an increase once every five years was precisely that the price hike would send shockwaves through the market. In that sense, opting for annual adjustments might help to stabilise prices in a way that a five-year regime would not, for example.

Senator Moncion: Thank you.


Senator Eaton: Is it because Canadians will put up with tobacco taxes going up on a regular basis and would not put up with the same taxation policies on alcohol? It’s interesting because we have been doing this study on Bill C-45 and Bill C-46 which talks about people killed because of alcohol. Thirty-seven per cent of people in road accidents die because of impairment due to alcohol.

We have seem to have gone after cigarettes and tobacco and I’m wondering whether if it’s just because it can be done. Whereas if we started going after wine or alcohol in the same way, would there be a taxpayer revolt? What do you think?

We have ostracized smokers, fine, because of all kinds of reasons, like second-hand smoke. We don’t ostracize drinkers. I like a cocktail — I say that right out loud — and I used to love every cigarette I ever smoked. Why do we go after tobacco and not alcohol? It’s just an interesting question. Is it because it’s an easy tax for government?

Senator Moncion: None of the —

Senator Eaton: The sin tax, I just want to know.

Mr. Coulombe: I’m afraid the only thing I can say is these are matters of policy for the elected government of the day to decide on.

Senator Eaton: What are your personal thoughts?

Some Hon. Senators: Oh, oh.

The Chair: Thank you.

Senator Marshall: I know you talked about the revenues coming in on a more steady basis because the increases will now be annual as opposed to every five years; how much extra will the government collect as a result of annual increases as opposed to the five-year increases? Because the increases are going to be coming sooner rather than later. Will the increases be on top of one another? And it will be compounded, so how much extra does the government collect because of the compounding?

Mr. Coulombe: This information has not been made public as part of the budget. We will see if we can come back with that information.

Senator Marshall: I would be interested in that. Thank you very much.

Senator Massicotte: There was an obvious compounding. I presume even your five-year test was an annual compounding?

Mr. Coulombe: The inflationary adjustment rules refer to the CPI, the consumer price index, and the reference to the CPI is the same if you look on an annual basis or every five years. You are still referring to the same CPI.

Senator Massicotte: When you do the five-year test the way it would have been structured, it’s a tax and then you do your compounding, then you do a percentage, an increase plus a percentage of the last year’s increase. There is a compounding impact. I don’t think you understand what the term means. Do you know what I mean?

Mr. Coulombe: I know what you mean. I don’t think there is one.

Senator Massicotte: If there is none, then she is right.

Senator Marshall: That’s why he said there is data and can we have it?

Pierre Mercille, Director General (Legislation), Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Just to be clear, the way it was before your compounding was every five years. It was just adjusted every five years. Now it’s adjusted every year. There is more revenue generated. I just want to add that, I don’t have the number, but the additional amount we are going to generate is essentially the amounts that are produced in the budget minus the dollar increase that applies on the day after the budget.

Senator Massicotte: That’s complicated. Let me ask a simple question. Five years from now, is the amount bigger, greater when you add compounding, or is it the same amount five years it would have been under the old method?

Mr. Coulombe: I would say the rate in five years is the same.

Senator Massicotte: So there is compounding annually.

Mr. Coulombe: With the big caveat that the dates are not the same. We used to have an adjustment happening every December 1, every five years. Now it is at the beginning of the fiscal year, and as a result, it’s difficult to compare the rates exactly, but philosophically, they are based on the same adjustment rates.

Senator Massicotte: Not to doubt it, but I bet you you’re wrong. I think you’re wrong.

Senator Marshall: To add to that, does that factor in — and it probably wouldn’t be material — but it impacts the government’s borrowing also, ever so slightly, because you’re getting revenues faster. They don’t need to borrow as much. Do you factor in interest?

Mr. Coulombe: No. Well, this might be compounded in other accounts, that make up the bottom line of the government. They are not shown as part of the duty, the revenues being shown here.

Senator Marshall: I’ll wait until I get the information and look at it.

The Chair: Honourable senators, we have completed Part 2.

We will now move to Part 3, clauses 68 to 119 in Bill C-74, which is also related to tab C. This is the amendments to Excise Act, 2001 (cannabis taxation), the Excise Tax Act and other related acts.

Mr. Coulombe will make a short presentation.

Mr. Coulombe: Thank you, Mr. Chair.

Part 3 covers clause 68 to 119 implements a new federal excise duty framework for cannabis products, a measure proposed in the February 27 budget and detailed in the supplementary information on tax measures on page 40.

The proposal builds upon the framework that was released for consultation by the Government of Canada in November 2017, and reflects the revenue-sharing agreement that was agreed to in principle at the finance ministers’ meeting in December 2017, with most provinces and territories.

The duty, which will be introduced as part of the Excise Act, 2001, will generally apply to all products available for legal purchase, which at the outset of legalization will include fresh and dried cannabis, cannabis oils, and seeds and seedlings for home cultivation. Cannabis cultivators and manufacturers will be required to obtain a cannabis licence from the Canada Revenue Agency, and remit the excise duty where applicable.


Excise duties will be levied on a federally licensed producer hereafter referred to as “cannabis licensee.” The excise duty will be highest between a uniform rate applied on the quantity of cannabis contained in a final product and a percentage of the amount subject to duty of the product sold by the producer. The amount subject to duty is generally equivalent to the share of the producer’s sale price, which does not include duties on cannabis under the Excise Act of 2001.


The proposed excise duty framework will be applied as follows: A flat rate duty will be imposed at the time of packaging for final retail sale on the quantity of cannabis flowering and non-flowering material, generally referred to as flowers and trim respectively, as well as on cannabis seeds and seedlings; for instance, in the case of home cultivation. The flat rate duty will be imposed on a dollar per gram, dollar per seed or a dollar per seedling basis in the case of seasoned seedlings. That’s the dollar per gram. A lower rate per gram will be applied to trim, as compared to flower, to reflect the fact that trim has less THC content than flowers. A product will generally be considered to be packaged by a cannabis licensee when it is put in a container intended for sale to the final consumer at a retail sale.

At the time of delivery of cannabis products by a cannabis licensee that packages it to a purchaser, e.g. a provincially authorized distributor, that volume rate — 10 per cent — will also be imposed on the dutiable amount of the transaction.

Cannabis licensees selling to purchasers will be liable to pay duty at the higher of the flat rate, or the at volume rate on the product. The applicable duty will only become payable at the time of delivery to a purchaser. The cannabis licensee who packaged the cannabis product for final retail sale will be liable to pay the applicable excise duty.

In layman’s terms, if you have a product of 1 gram sold by the producer, not the final retail sale — the wholesale producer level, if it is being sold at a price less than $10, the duty to be remitted is $1. If the same product is sold at a price higher than $10, that’s thead valorem, the 10 are per cent that needs to be applied.


Any cannabis products leaving the premises of a cannabis licensee bound for the Canadian market for retail sale must bear an excise stamp. Excise stamps will be colour-coded indicating the provincial or territorial market where the product shall be sold. The cannabis licensee having packaged the cannabis product shall determine and affix the appropriate excise stamp prior to the arrival of the product on the duty paid Canadian market.


The excise duty framework will generally apply to cannabis products containing THC, the primary psychoactive compound of cannabis. However, packaged products that contain no more than 0.3 per cent of THC and, consequently, have little to no associated psychoactive effects will generally not be subject to the excise duty under the proposed framework.

Pharmaceutical products approved by Health Canada with a drug identification number, DIN, from cannabis and acquired only through a prescription will also not be subject to the excise duty.

The federal government has reached an agreement with provincial and territorial governments on a coordinated cannabis taxation framework for the initial two years after legalization. In practice, the coordinated framework provides for the application of a federal excise duty, as well as an additional excise duty in respect of provinces and territories. The additional excise duty in respect of a province or territory will apply in provinces and territories that agree to participate in the coordinated framework and will apply on the same tax base as, and in fixed proportion to, the federal rate.

This part also amends the goods and services harmonized sales tax’s basic groceries rules of the Excise Tax Act to ensure any sales of cannabis products that would otherwise be considered basic groceries are subject to the GST/HST in the same way as sales of other types of cannabis products. In addition, relieving rules for various agricultural products will be changed to ensure that sales of cannabis products, includes seeds and seedlings, will not be relieved under these rules.

Under the agreement with provinces and territories, in principle, 75 per cent of the revenues will go to provincial and territorial governments, 25 per cent of revenues will go to the federal government and the rates included in the bill in front of you are the federal rates reflecting that 25 per cent split in revenues. Provincial rates will be introduced through regulations at a later time. This is because we are finalizing the agreements with provinces and territories.

This measure generally comes into effect when cannabis for non-medical purposes becomes available for legal retail sales, so this is subject to Bill C-45, the proposed cannabis act being passed by the Senate and ultimately to receive Royal Assent.

At maturity, the federal excise duty revenues on cannabis, based on that 25 per cent share of revenues, would amount to about $220 million in 2022-2023. These numbers are also included as part of the tax measures supplementary information.

That completes my presentation of Part 3.

The Chair: Thank you. We will go to questions.

Senator Marshall: This is a rather complex arrangement. Have the producers, retailers and distributors all been advised as to what the new rules will be? What is the process for making sure the system kicks in when the legislation is passed and marijuana is legalized? What ground work have you done to make sure everything operates like it’s supposed to?

Mr. Coulombe: Thank you for the question. First of all, we did consult the Canadian public, including industries involved currently with cannabis. There were about two months of consultation. We consulted in the fall of 2017 on a draft framework that is essentially the same one before you. There were some tweaks following those consultations, but it was very important to have to have consultations with Canadians.

Also, Finance Canada has been working very closely with colleagues at Health Canada, the Department of Justice, Public Safety Canada, and with colleagues from our provincial and territorial partners to ensure legalization takes place in a smooth manner. These consultations are ongoing.

Other consultations are happening, of course, with the Canada Revenue Agency, which will be the federal body in charge of issuing licences and working with Health Canada to ensure people issued licences under the taxation framework are also issued licences under the cannabis framework.

There are ongoing discussions between the various agencies involved, and the CRA, in the near future, will announce through guidelines, forums and so on how this is going to be administered.

You mentioned the complexity. We have to remember this is a duty imposed at the production level. The number of taxpayers of excise duty remitters is not as high as a regime like the GST or HST where retailers are also subject to. These rules are, yes, very specialized, but will be complied with by a relatively contained number of excise duty remitters. These excise duty remitters would be able to access CRA officials to make sure in the early months that they properly comply with the new regime.

Senator Marshall: The government must have some idea right now who the remitters are going to be, so how advanced would the discussions be? It’s May 1. We’re looking, optimistically, at July, which is only another couple months. How advanced is that work? Have all the remitters been identified? Have they all been given information as to what the law is going to be? How advanced are those discussions?

Mr. Coulombe: From an administrative standpoint, because this is basically a question of how it’s going to be administered on the ground, my understanding is the Canada Revenue Agency is working closely with Health Canada to ensure that both regimes can be introduced —

Senator Marshall: They will be ready to roll and the revenues can start to roll in as soon as the legislation is passed?

Mr. Coulombe: Yes. I think it has been made public that there needs to be a certain period of time between the passing of the Bill C-45 and the legalization date. I’m not in a position to further elaborate on what the delay might be. Is it two months, six weeks or five weeks? These are questions for other officials. I’m not here to brief you on Bill C-45. But the rules being proposed, in particular the excise duty remittance rules, will kick in only upon legalization date.

The Canada Revenue Agency, at that point, would have probably issued some form of prelicensing to ensure participants in the regimes can comply.

Senator Marshall: And actually participate.

There’s a reference to the excise stamps. Who controls those?

Mr. Coulombe: These stamps will be issued by the Canada Revenue Agency. I don’t know if you are familiar with tobacco excise stamps.

Senator Marshall: They are the same process.

Mr. Coulombe: They are the same process. They will be controlled and provided to cannabis licensees only under the Excise Act.

Senator Marshall: There’s also a reference to cannabis that cannot be accounted for. What does that refer to?

Mr. Coulombe: That’s the general term referring to the amount of excisable goods lost through the production process.

Senator Marshall: That’s very interesting.

Mr. Coulombe: Again, to ensure that the excise duty raised is properly protected and safeguarded, these amounts of lost tobacco, alcohol or cannabis are subject to a proper pricing system so that licencees are not cheating the government.

Senator Marshall: Who oversees the cannabis that cannot be accounted for?

Mr. Coulombe: All these rules will be administered, overseen and checked by the CRA. It’s the Canada Revenue Agency. We touched on that in my earlier mention on tobacco. There is a special nature of being a licensee under the excise regime. You have a right to produce and create excisable goods and at the same time, you have stricter obligations than other taxpayers.

Senator Marshall: The CRA is looking after most of it, but you’re looking after the money once it comes in?

Mr. Coulombe: As Finance officials, the responsibility of the Minister of Finance primarily is the policy. The policy is basically the design of all these rules. They have been, of course, carefully looked at with colleagues in the CRA. The role of the CRA after that is to administer the excise duty.

In terms of the revenues, they would be remitted to the Receiver General of Canada, as any of us filing our taxes. The CRA is in charge of all the ledgers,the accounting and assessment process. That money is being reported to the Department of Finance so that, under federal-provincial agreements, we can provide back to provincial entities the amount they should receive under these agreements.

Senator Marshall: My last question: The amount in the supplementaries is just the federal government’s portion?

Mr. Coulombe: That’s correct.

Senator Andreychuk: It may be that I am misunderstanding what you said. I want to be sure that we’re talking about all cannabis grown in Canada. Are you talking about importing at all, in your understanding? Because in another committee we were told there will be no import or export of any cannabis, in any form, from a foreign country except under the existing rules for medicinal purposes and scientific research. This act does not extend beyond Canada’s borders, is that correct for the changes you’re talking about?

Mr. Coulombe: My understanding of what can be imported and exported is exactly the same as yours. So that’s great. We have been briefed equally by colleagues to ensure those rules are properly designed under Bill C-45. There are currently very few imports of cannabis products. These are very specific products in the medical world.

Shane Baddeley, Policy Analyst, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: Cannabis oil, specifically. These are specific strains you cannot find in Canada but can get an exemption on, or for research purposes.

Senator Andreychuk: Or scientific purposes? Because we were told just for scientific purposes and —

Mr. Baddeley: I think it’s considered the same, research, scientific process. Scientific research.

Senator Andreychuk: What you’re talking about is internal in Canada only?

Mr. Coulombe: These products, if they fit within the definition of cannabis products and are imported under those rules, would be subject to taxation at the borders.

Senator Andreychuk: As opposed to now?

Mr. Coulombe: Currently there is no excise duty on cannabis products.

Senator Andreychuk: Medicinal will now be taxed?

Mr. Coulombe: That’s correct, if, of course, they fall into the category of products subject to taxation, which might not always be the case.


Senator Massicotte: I would like to turn back to your summary. You have opted for the 10 per cent rate, the highest rate of 10 per cent, or $1 per gram. These are examples. The legislation does not contain these figures, does it?

Mr. Coulombe: The legislation does not regulate prices. However, it does list rates in Schedule 1.

Mr. Mercille: On page 541.

I would like to clarify something that was said in support of the information. The rates presently listed in the bill pertain to the federal component of the excise duties on cannabis. When agreements are reached with the provinces, the legislation will effectively give the Governor-in-Council the regulatory authority to set the provincial component, in other words the excise duty rate for each province.

Senator Massicotte: Federally, it is highest at 10 per cent, or one dollar per gram, and the provincial portion will be added later. Now, for arguments sake, were the provincial rate also 10 per cent, there would be a combined excise duty of two dollars per gram, which is 20 per cent. Is that right?

Mr. Coulombe: No. Right now, the rate is 2.5 per cent ad valorem for the federal portion, and with the agreed upon 2.5 per cent, plus the 7.5 per cent in additional duties, the total tax burden would be 10 per cent, or one dollar per gram. Currently, if you look at the fixed rates, it is 25 cents per gram. You would then tack on 75 cents per gram to that.

Senator Massicotte: The agreement with the provinces has already been reached. Every province has agreed that its portion will be 75 per cent of $1.

Mr. Coulombe: This split was agreed to in principle at meetings of the Departments of Finance; and officials are hammering out the final agreement with their ministers.

Senator Massicotte: Does the 25 per cent also fall under this agreement?

Mr. Coulombe: It is the major component of the agreement.

Senator Massicotte: Last night, or the night before, on Radio- Canada, they showed a graph indicating the price of marijuana across Canada, which was between $6 and $7. Everybody is afraid of having to compete with the black market, which is very competitive and highly effective. It could make major inroads and attempt to undercut your product.

Is there any flexibility when it comes to these duties, were the producer to make the following argument, “I cannot compete because of the tax burden and my administrative costs, and my price is $10. I am sorry, but at $10, your market is quite simply not viable. We will persevere with the black market in its current iteration.” What do you say and do in response to that? Day in day out, on every street corner, your competitors would be lurking.

Mr. Coulombe: The 10 per cent rate did not come out of the blue. Analyses were conducted last year. People looked at the tax burden in a number of U.S. states. We tried to settle on an amount that would enable us to meet the objectives of the legislation, in other words, to stop the profiteering by criminals and protect our youth at the same time.

The idea behind the agreement with the provinces is also, at least for the first two years, to be able to meet regularly, and work hand-in-hand with them, to ensure that the rules and regulations set out in the legislation, including those on taxation, support these objectives.

I would not feel comfortable venturing further with any analysis of the data the media has been reporting lately. The data collected was in the form of online surveys of Canadians. What exactly will be the relationship between the lawful and illicit marketplaces in the first few years? We will know the answer to that question soon enough. Multiple factors will, over time, drive growth in the legal cannabis market.


Shane, do you have anything to add on that point?

Mr. Baddeley: I would add that over the past several months we’ve been looking at the different tax rates in the U.S. and the prices there, and what we’re proposing here, including the excise tax and the GST, closely aligns or is below what you see in many other U.S. jurisdictions.

For instance, in Washington you have a rate of 37 per cent tax, and I think they’re in year four of legalization and they’re still managing to capture 75 per cent of the total market. We don’t think we’re too far off base with the level of taxation we have proposed here, but as Gervais mentioned, we will be working closely with the provinces to ensure that.


Senator Massicotte: Based on what we have observed south of the border, there are highly effective and organized growers. I assume that, in time, they will become major producers and even more competitive, which will drive down prices — and that is a good thing, in some ways. Cannabis might therefore end up cheaper than anticipated, which will increase demand. That would fly in the face of the government’s stated objective, but that is supply and demand for you. Were the price to drop to $4 or $5, the rate of consumption might very well climb, because the price would be even lower — but that would be contrary to the main objective of the legislation. So, what is to be done?

Your tax of 10 per cent is what bothers me. The legislation, were any attempt made to amend it down the track, would itself require the tabling of a new bill. Yet, the actual market fluctuates on a daily basis and is highly competitive. It adjusts very quickly. We would need new legislation in order to react proactively to a highly competitive market, and that could take several months.


Mr. Baddeley: With respect to your comments on prices dropping over time, the tax has been designed to be as flexible as possible. That $1 tax really serves as a floor. If prices drop too much, you still have that tax as somewhat of a disincentive for increased consumption. At the same time, as you know, edibles will likely be legalized within a year, and that’s going to increase value. That’s why you have that built in 10 per cent for anything over $10 a gram.

The tax system has been designed with considerable flexibility to try to account for whatever eventualities you will see in prices, to as much as we can predict, because there is a great deal of uncertainty going forward.

Senator Massicotte: I agree. It’s very hard to predict and don’t forget you’re competing against a very efficient and highly motivated competition out there.


Mr. Coulombe: If I may, Senator Massicotte, the black market for alcohol in Canada, despite the very high price tag on wine, spirits, and other alcoholic beverages, is very negligible. Why is that? Because consumers are looking for a guarantee of quality, and the system being currently implemented by our colleagues at Health Canada will ensure quality control, including a final product free of mould and fungi.

Undoubtedly, many consumers feel more comfortable buying legal products, as opposed to illegal ones that offer no guarantee as to their exact contents. There have been tests done on contraband tobacco, among other substances, and it turns out that it contains all manner of ingredients, and the same is true in the case of adulterated alcohol. What we can expect is standardized products that will encourage consumers, I dare hope a great many consumers, to favour the legal marketplace.

Senator Moncion: I have a follow-up to Senator Massicotte’s question. Comparisons are being drawn with the 37 per cent in the United States. In the United States, at 37 per cent, the tax revenue is not shared between the federal and state governments, whereas in our case, it is $1 or 10 per cent, and the revenue will be shared between the federal government and the provinces. The federal government collects 25 per cent, and the provinces, 75 per cent, whereas in the United States, it is 37 per cent.

Senator Massicotte: Plus HST and QST.

Mr. Coulombe: The analysis referred to included all forms of taxation. The comparison is based on the total tax burden in Canada and the provinces, in contrast with a number of U.S. states that have gone down the same path.

Senator Moncion: The task force that undertook the analysis of the ins and outs of the legalization of cannabis favoured a lower price. I seem to recollect that price being under $8.50. And yet, you set the bar at $10, which is higher than what was recommended.

Mr. Coulombe: The rate of $10, Senator Moncion, is not the recommended price. Basically, we had to arrive at an amount whereby a given product would be subject to the ad valorem rate, for cultivation, as opposed to a fixed rate. Especially in the case of oils and concentrated products manufactured using several by-products.

There is not necessarily any direct correlation between this threshold, at which point the ad valorem rate kicks in, and the average cost of production, or the average sales price. A threshold had to be set, and it was set at $10. For the time being, that will be the price going forward.


Senator Andreychuk: Just listening to the debate, we really don’t know what’s going to happen in Canada. We’re reaching to questions like, “Is it like tobacco? Is it like alcohol? Is it like Colorado?” None of those may fit Canada. Colorado is a state. Everything there is close. There are no distances there in the way that we have here.

I think Saskatchewan did it right when it said they didn’t put the revenue into their budget and they didn’t put the expenditures in. They simply don’t know. It seems that should be the approach we should all take: we really don’t know what it could be. Wouldn’t it be better to say you’re just pegging it and hoping it works, but we’re all going to have to revisit this if it’s going to work in the future?

What I want to know is — there’s no empirical evidence as to what will and will not work. I don’t know where the $8 or the $10 came from. I’ve got hints of comparisons, but I don’t find them to be valuable comparisons. They’re instructive in some ways, but I don’t think they’re Canada. I’m trying not to go into feelings here.

Mr. Baddeley: In response to your question, I think there’s considerable uncertainty in terms of the price, but we have a fairly good understanding of the demand. I think where the uncertainty will lie is in what proportion of the total demand we can capture by the legal market. That correlates with the price. In our estimates, based on what we’ve seen in other jurisdictions who have been in similar situations, we’ve built in certain assumptions that we’re not capturing the whole market at the beginning. We’re slowly capturing more and more over time. We’ve been very prudent with our estimates in terms of how much market we can realistically capture at the beginning versus a few years out.

Mr. Coulombe: By “we,” this includes colleagues at Health Canada who are in charge of assessing what the legal market and legal demand will be. We have numbers included in the budget which are based on assumptions agreed to and carefully reviewed by both departments. This is quite an interesting challenge. Are the numbers as presented, the assumptions that are presented or everything else that has been presented perfect? I hope so — no, I’m kidding.

The point is we have done our best. The proposals that were endorsed by cabinet, and that were included and presented by the Minister of Finance, are some of the most comprehensive regimes you will see among jurisdictions that have legalized cannabis over the last number of years.

Senator Andreychuk: It’s your best estimate at this time?

Mr. Coulombe: Best guess.

Senator Andreychuk: My concern is, like with alcohol, you can prohibit the sale and then you can say you can sell it, but so much is dependent on what hour you can get it, in what quality and quantity, and where you are. The variables are all there. I’m concerned not only whether you have the revenue correct, but are you apportioning sufficiently for justice, not just health? Because you’re saying those who are using it will probably move from the black market to get it pure. Well, we’re not sure whether we’re going to get increased consumption and new customers, and whether their health problems will be the same as they are today. The variables for me are not just on the revenue side; they’re the ones like, how are we going to deal with all of the unintended consequences as well as the known consequences of driving, and children’s behaviour and access? We’re embarking along with you, if we pass the budget and pass the bill, in a venture into the unknown.

I’m trying to get you off the hook. You’ve been given a task and you’re doing the best you can, but really it’s an unknown.

Mr. Coulombe: Your comments are a little bit outside the scope of Part 3, but if you look at page 177 of the budget plan, under the heading cannabis taxation, regulation and public protection, there is a short summary of the announcements and the funding that has been put aside to prepare the world for post-legalization. Also, to ensure proper funding is in place to address what may become issues and try to mitigate them in the post-legalization world. In that respect, I think the approach chosen by the government is comprehensive and also tries to include funding for pressures that could arise.

Senator Andreychuk: It’s just a concern that I want to put on the table. The revenue is one thing, but my concern is that there be sufficient revenues allocated to what I believe will be the problem issues. That will be the generations to come who have to deal with another crisis in health, justice, protection and security. I just want it on the record.

The Chair: I have one question, please, for the officials. Please give me a dry run of what happens. From the producer, to the distributor, to the consumer, where will the taxes be applied?

Mr. Coulombe: The proposed framework in front of you for review would apply at the production level.

The Chair: Give me a dry run. Let’s say I’m a producer and I’m selling at $8. Where do I go with that, and where do I pay the taxes? It goes to the consumer. The consumer is sitting in his living room and he’s having his marijuana. Tell us exactly, with an example, who pays what when it comes to taxes.

Mr. Coulombe: Assuming you have two joints, each within 0.5 grams, being sold at the production level of $8. The proposed rules, including the additional component for a province or territory, would mean $1 of excise duty would have to be remitted on those two joints. As a result, the price passed on to the next level in the distribution chain would be $9, assuming that the full cost of the excise duty is being passed on.

What will happen after that, with all due respect, is outside our area of expertise. This is where products will be distributed and put out for retail at the provincial level — plus PST and GST, of course.

The Chair: And the consumer will pay taxes on taxes?

Mr. Coulombe: The important point is excise duties are generally embedded in the price of products. It’s like gasoline, the 10 cents being paid at the production level is likely to be passed on to final consumers at the pump. Legally speaking, those duties, those rates, are paid by the producers. That ensures a price now and ensures you restrict the amount of tax remitters to those involved in production. You have fewer people remitting duties.

The Chair: Honourable senators, before we close, tomorrow afternoon at 1:30 p.m., in room 160-S, Centre Block, we will go over the divisions of Part 6 that were referred to our committee.

For your information and clarification, seven other committees are studying portions of Bill C-74. I would like to put on the record the names of those committees as per the order of reference from the Senate of Canada. The other committees are: the Arctic Committee, the Banking Committee, the Foreign Affairs and International Trade Committee, the Legal and Constitutional Affairs Committee, the National Security and Defence Committee, the Energy, Environment and Natural Resources Committee, and Agriculture and Forestry Committee.

(The committee adjourned.)

Back to top