After much anticipation, the 2019 Canadian Federal Budget was released on Tuesday. Notably for the Canadian cannabis industry, the Budget introduced changes to the taxation rules for new classes of cannabis-related products that are set to be available this year. The development of the legislation is trucking along and the government is hopefully on pace to meet its target. The Canadian taxation proposal in the Budget is to base taxation on the quantity of THC in the new cannabis-related products. What follows are some highlights from the proposal and other cannabis-related issues stemming from the new Budget:
Adjusting the Rules for Cannabis Taxation
The "new classes" of cannabis contained in the new legislation include edibles, extracts, and topicals. The Government proposed not only a change to excise duties for these products, but also to cannabis oils which are already available for sale in the adult-use cannabis market in Canada. This ties to the government's proposed change to include cannabis oil in the "extract" definition, once introduced.
The proposal is that duties be determined based on the level of THC contained in a final product when it is packaged. If adopted, the new rates will come into effect on May 1, 2019 (prior to the "new classes" roll out).
Under the current tax system, products are subject to excise tax in the amount of $1 per gram or 10% of the sale price of a product. The new proposed rate would be $0.01 per mg of total THC when packaged and these changes will not alter the application of additional provincial taxes.
Current excise duties and rates will not change for fresh and dried cannabis or seeds and seedlings. Applicable exemptions under the excise duty framework will also remain the same for fresh and dried cannabis and cannabis oils that contain no more than 0.3 per cent THC, as well as for pharmaceutical cannabis products that have a Drug Identification Number that can only be acquired through a medical prescription.
Note that the government has also proposed a change in how they describe the cannabis classes and will be applying the term "cannabis extracts" to also include cannabis oils.
Medical Expense Tax Credit
On the medical side, some Canadians are entitled to claim eligible medical expenses under the "Medical Expense Tax Credit".
The medical expense tax credit is
a 15-per-cent non-refundable tax credit that recognizes the effect
of above-average medical or disability-related expenses on an
individual's ability to pay tax. For 2019, the medical expense
tax credit is available for qualifying medical expenses in excess
of the lesser of $2,352 and three per cent of the individual's
net income.
Eligible Canadians for the Medical Expense Tax Credit will be able to claim expenses for cannabis products for new classes of cannabis not previously covered, which may include certain edibles, extracts, and topicals, once they become legally available for sale under the Cannabis Act.
Unsurprisingly, the tax credit will only be applicable to cannabis medical expenses incurred on or after October 17, 2018.
The Budget further proposes to amend the Income Tax Act to reflect the current regulations for accessing cannabis for medical purposes.
For cannabis businesses, the changes to the excise tax for the new classes should be a relief, making it easier to determine and plan total unit pricing for the incoming wave of new and exciting cannabis products.
Previously published on Canada Cannabis Legal at https://www.canadacannabislegal.com/taxing-%E2%80%9Cnew-classes%E2%80%9D-of-cannabis-addressed-in-the-2019-federal-budget/
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