Cannabis Excise Bond Program for Licensed Producers
Updated: Nov 16, 2021
Upon release of the 2018 Federal Budget, the Government of Canada has confirmed that they will implement a cannabis excise duty regime similar to the framework proposed back in November of last year.
What Does This Mean For Licensed Producers?
Legislation will require all Health Canada-licensed cultivators and manufacturers to obtain a cannabis license from the CRA. Further to this requirement, all licensed cultivators and manufactures will be required to provide security covering the applicable duties owed in one full reporting period, with a minimum of $5,000, up to a maximum of $5,000,000.
What Are “Acceptable” Forms of Security?
Similar to the tobacco and alcohol industry, the CRA will require that licensees post security to ensure they will be able to recover all duties owed in the event of insolvency on behalf of the manufacturer. Traditionally, this security has been in the form of an irrevocable letter of credit, although it can be supplemented with an excise bond.
What Is An Excise Bond?
An excise bond is a type of surety bond that was created by the insurance industry due to its many advantages over a letter of credit; most notably it’s non-impact on cash flows.
Another advantage of an excise bond is its relatively low premium. As outlined in the cannabis excise duty framework, licensees will be required to post security with a minimum of $5,000 up to a maximum of $5,000,000. Although many large Licensed Producers will hit the cap – excise bonds are cheap in comparison to the alternative of fronting the cash with an LC.
Calculating Excise Duties Owed
Under this framework; federal, provincial and territorial governments will impose duties on the sale of cannabis and cannabis products at the greater of $1 per gram or 10% of the final price/gram. It’s important to note that the last federal licensee in the supply chain who packaged the cannabis product for final retail sale will be liable to pay the applicable excise duty.
As such, Health Canada Licensees will be subject to accounting for and providing any duties owed on a monthly basis to the CRA. Although there is an exception for cannabis products sold with less than 0.3% THC and those used in prescription drugs with a drug identification number – nearly all cannabis products will be subject to an excise duty. The following duties apply:
$1 or 10% of the sale price per gram of flower
$1 or 10% of the sale price per gram equivalent of cannabis oil
$1 or 10% of the sale price per seed or seedling for home cultivation
Excise Duties: An Example
Example: A federal licensee sells a 60mg bottle of cannabis oil direct to the final consumer at a price of $130. The dried cannabis equivalent used to produce the oil totals 10 grams.
Flat rate ($1/g) = $10
Ad Valorem Duty (10%) = $13
Therefore, the licensee would be required to provide $13 at the end of the month to the CRA.
Ready To Get Started?
Some provisions of the Act, such as licensing and stamping requirements, are proposed to come into force earlier to facilitate a smooth transition in the period leading up to legalization.
Due to the application process required to obtain a cannabis license with the CRA, we recommend that LPs begin gathering information and preparing their submissions now. Because security must be provided along with your submission, we recommend those applying arrange for their excise bonds well in advanced.
As one of Canada’s only insurance brokerages dedicated to the cannabis industry, we have the experience and expertise to provide cannabis excise bonds at preferred market rates. Our team is available and eager to answer any questions you may have, so please give us a call!