Support of a Federal Excise Tax Review for Distilled Spirits

Year: 
2016

Opening Statement

The Federal Excise Duty on alcohol is applied in an unbalanced manner that puts small distilleries at a distinct disadvantage both amongst wineries and breweries in Canada, which pay none or very little excise duty on the alcohol they produce, and amongst foreign distilleries that operate in lower cost/tax environments.

Background

In Canada, bulk alcohol production is monitored and taxed by the Canada Revenue Agency (CRA) via the Excise Duty Program and the Excise Act is the legislation. There is a Federal Excise Duty applied to all alcohol products both domestic and import. However domestically, depending on the type of alcohol product, the application of Excise is widely varied and unevenly applied.

For example, a 750ml bottle of wine produced by a Canadian vineyard using Canadian grown grapes pays no Federal Excise. In fact, a Canadian wine producer can use any Canadian grown agricultural product to produce a wine and their product will still qualify as excise exempt. Breweries have Excise Duty applied using a tiered system based on each brewery’s annual production and no requirement to use Canadian grown agricultural products. For a brewery that is similar in size to most of the craft distilleries in Canada, the rate is $6.244 per hectolitre (100 litres) or the equivalent of $0.05 for a 750ml bottle. Whereas for a distillery in Canada, regardless of distillery size and where in most cases the distillery is using 100% Canadian grown agricultural products, the Excise Duty is applied at $11.696 per litre of absolute alcohol (LAA), which is the equivalent of $3.51 per 750ml bottle of spirit at 40% alcohol by volume (ABV).  Even when corrected for the difference in alcohol strength between beer and spirits, the rate applied to spirits is 9.4 times more than for beer.

       Table 1.0 – Excise Duty Rate Comparison

 

Raw Material Origin

Size Requirement

Duty Rate

Beer

Anywhere

Tiered

$0.06 per litre

Wine

Canada Only

No Limit

$0.00

Spirits

Mostly from Canada

N/A

$11.696 per litre

In the United States, the Federal Alcohol Excise tax is currently at $7.10 per LAA which is about $2.13 per 750ml bottle of spirit at 40% ABV. This is almost half the Canadian rate and, furthermore, there is a U.S. Federal Bill on the table that would reduce the rate to $1.42 per LAA ($0.43/750ml bottle at 40% ABV) for distilleries producing less than 190,000 LAA. While most Canadian micro/small Distilleries do not compete directly with their U.S. counterparts, the lower level of taxation on spirits allows for a much quicker growth to profitability for U.S. distillers. This is evident in the rapid growth of the industry in the U.S. There are now more than 1000 small distilleries in the U.S.A, compared to approximately 60 to 65 in Canada.  The U.S.A. small distilleries also tend to be much larger than Canadian small distilleries. Higher Excise Duty tax has contributed to the Canadian small distillery industry seriously lagging behind the U.S. growth.

The federal government has already extended support to both the wine and brewing industries to support growth of these industries by changing policy to help make the producer more competitive, and having more capital to invest in growth and labour. More specifically, for Canadian wineries the government eliminated Excise Duty completely, as long as Canadian agriculture products are used. For breweries, the government introduced a tiered system that recognized small producers need more help early on; as they grow, they can afford to pay more.  At present, no consideration has been extended to craft distilleries.  In an attempt to stimulate local economies, compete with U.S.A. distilleries and grow the industry, eliminating (or reducing) imposed Excise Duties would be a natural extension of what has already been granted to Canadian wine and brewing companies.

Extending Excise exemptions similar to the wineries, would be a fair and appropriate way to apply Excise Duty to small craft distilleries.  At present, Canadian distilleries have their raw material inputs audited by both the federal excise officers and provincial authorities on a monthly/annual basis.  As such, it would be an easy task to provide evidence that a distillery was using 100% Canadian agricultural products for their raw materials.

Average production size for most small Canadian distilleries is less than 50,000 LAA per year.  Eliminating Excise Duty for distilleries producing less than 50,000 LAA per year would likely cost the federal government as little as $5 million in lost Excise revenue. The start-up costs for most craft distilleries however, is typically in excess of $1 million generating substantial economic spinoffs in a growing industry that would quickly recapture lost revenue through other revenue streams.

Fundamental to the future success of operating distilleries is to have more available working capital to support growth through equipment acquisition, additional labour, building/storage expansion, and developing distribution/sales channels. Expansion activities undertaken by each craft distillery would certainly lead to greater employment opportunities in both the spirits industry and related ancillary manufacturing areas, greater usage of Canadian agricultural products, increased investment in land due to increased demand for raw materials, and export growth potential. Furthermore, a June 2013 House of Commons report by the Standing Committee on Agriculture and Agri-Food strongly recommended a review of Excise Duty on Canadian made spirits (Page 48).

As members will be aware, the excise duty on Canadian wine was eliminated in its entirety in 2006, this despite the fact that these drinks, whether they’re spirits, beer, or wine, all contain exactly the same amount of alcohol…. The impact of these changes is that, despite representing less than 30% of the beverage alcohol market, spirits’ share of excise payments has gone from 38% in 2006 to nearly 45% over the last six years.… Our excise duties are $11.69 per proof litre—so that’s a litre of actual alcohol. That went up by sixty cents in 2006. What we're asking the government to do is reduce that by a dollar.… That would take that twenty cents of excise down to about eighteen and a half cents. So a pretty modest reduction.” (Page 49, June 2013)

Extending the same Excise Exemption already in place for Canadian wineries would support an evolving industry struggling to grow without a net loss. The government could then introduce Excise Duty in tiers to better align ‘cash flow’ and assist craft distilleries to slowly pay more Excise Duty as their scale of operation grows, and the burden of higher Excise Duty rates would have a much lower impact on the financial sustainability of the distillery.

Producing hand crafted spirits using Canadian agriculture (raw materials) is costly. Economies of scale are not in place for small producers. The cost of packaging, labour, and establishing effective distribution channels is prohibitive, resulting in craft spirits that are noticeably more expensive than large spirit producers. The elimination of Excise Duty would support small business growth and stimulate regional economies. Surplus dollars resulting from saved ‘Excise Duty’ could then be re-invested into future business growth strategies through improved working capital and equipment acquisition plans.

THE CHAMBER RECOMMENDS:

That the Federal Government:

  1. Makes working with small distilleries and/or their association across Canada a priority to develop a fair Excise policy for all beverage alcohol as recommended in the 2013 House of Commons Report of the Standing Committee on Agriculture and Agri-Food; and

  2. Make this change to help grow the Industry to a point where exports become a viable option.

Appendix A: References

  1. CRA Excise Duty Memorandum 4.1.1 (Website: http://www.cra-arc.gc.ca/E/pub/em/edm4-1-1/edm4-1-1-e.html#sc8)

Excise duty exemption for 100% Canadian wine

37. Pursuant to paragraph 135(2)(a), wine that is produced in Canada and composed wholly from Canadian-grown agricultural or plant products and that is packaged on or after July 1, 2006, qualifies for an excise duty exemption.

38. This means that to qualify for this excise duty exemption:
all of the primary raw materials that are fermented (including grapes, berries, other fruits, honey and dandelions) must have been grown in Canada;
if the wine is produced from juice, the raw material used to make that juice (e.g., grapes, berries) must have been grown in Canada;
all juices, juice concentrates, fruits or plant products, added in the winemaking process must be made wholly from Canadian-grown agricultural or plant product; and
any wine, beer or spirits added, including brandy or fruit spirits, must have been made in Canada wholly from grains, fruits and other agricultural product that have been grown in Canada.

39. Incidental agricultural or plant product-based ingredients that are added in the winemaking process, such as sugar and yeast will not be required to be made wholly from Canadian-grown agricultural or plant product. Such food ingredients and food additives are considered incidental ingredients in the wine and the origin of these ingredients will not otherwise disqualify the wine from the excise duty exemption.

40. Sections B.02.100 to B.02.123 of Division 2 of the Food and Drug Regulations set out the identity standard for wine and list the various food ingredients and food additives that can be used in the production of wine. The Food and Drug Regulations are available on the Department of Justice website at http://laws-lois.justice.gc.ca/eng/regulations/C.R.C.,_c._870/index.html  .

41. Where a wine licensee blends wine, the final blended wine that is packaged must be composed wholly from Canadian-grown agricultural or plant products in order to qualify for the excise duty exemption.

Example:

A wine licensee produces or purchases two wines made wholly from grapes or other fruit grown in Canada (wine no. 1 and wine no. 2). That wine licensee also produces or purchases a wine made from grapes or other fruit grown outside Canada (wine no. 3). In this example, wine no. 1 and wine no. 2 qualify for the exemption, but wine no. 3 does not. If the licensee blends wine no. 1 with wine no. 2, the resultant blend qualifies for the exemption. If the wine licensee blends wine no. 1 or wine no. 2 with wine no. 3, the resultant blended wine does not qualify for the exemption.

  1. From: EDBN8 - Excise Duty Rate Changes for Beer - July 1, 2006 (Website: www.cra-arc.gc.ca/E/pub/em/edbn8/edbn8-e.html)

Beer or Malt Liquor Brewed by Domestic Brewers

More than 2.5% of absolute ethyl alcohol

Annual production volume increments (hectolitres [100L])         Rate of excise duty per hectolitre

From 0 to 2,000

$3.122

From 2,001 to 5,000

$6.244

From 5,001 to 15,000

$12.488

From 15,001 to 50,000

$21.854

From 50,001 to 75,000

$26.537

Greater than 75,000

$31.22

  1. The Effects of Price on Alcohol Consumption and Alcohol-Related Problems (Website: http://pubs.niaaa.nih.gov/publications/arh26-1/22-34.htm)

  2. US Market:
    http://www.americancraftspirits.org/government/fet/
    http://mibiz.com/item/22887-distillery-excise-tax-reform-to-benefit-small-west-michigan-distillers

TOWARD A COMMON GOAL: CANADA'S FOOD SUPPLY CHAIN — PART 1, Report of the Standing Committee on Agriculture and Agri-Food, Merv Tweed – Chair, JUNE 2013, 41st PARLIAMENT, FIRST SESSION (Website: http://www.parl.gc.ca/HousePublications/Publication.aspx?DocId=6226525&Language=E&Mode=1&Parl=41&Ses=1&File=174#49 ) Pages: 48-50

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