With the passing of the Cannabis Act, Canada becomes the first G7 country to fully legalize recreational marijuana. Decriminalizing the psychoactive plant places its manufacture and sale under the purview of the federal government, complete with hefty taxes and stringent regulations. Marijuana industry researchers project the legal sale of cannabis to inject as much as $4.5 billion per year into the Canadian economy by 2021. With businesses small and large — as well as many layers of government — all scrambling to get their share, here is what you should know about legalized marijuana and its taxation.
Federal Taxation of Marijuana
The Cannabis Act lays out the tax laws for legalized marijuana. The drug is subject to two levels of taxation at the federal level: the goods and services tax, the same levy placed on nearly all products sold in the country; and a federal excise tax, a duty generally reserved for highly specific products such as fuel-inefficient vehicles, automobile air conditioners, and petroleum products. The federal government splits the excise tax on marijuana fifty-fifty with the province where the sale occurs.
The GST is a flat 5 percent, while the excise tax on marijuana is $1 per gram sold or 10 percent of the final sales price, whichever is higher. Also, the excise tax is applied before the GST is applied, meaning buyers effectively get taxed on tax. So, if a gram of marijuana sells for $10, first the $1 excise tax is applied, then the new sales price of $11 is subjected to the 5 percent GST, or 55 cents.
Provincial Taxation of Marijuana
In every part of the country but Alberta and the three territories, marijuana buyers must also pay a provincial sales tax, charged in addition to the GST and federal excise tax. (Ontario, New Brunswick, Nova Scotia, and Newfoundland/Labrador automatically combine the GST and PST into something called a harmonized sales tax.) Provincial sales tax rates run as low as 5 percent (Saskatchewan) and as high as 10 percent (Nova Scotia).
So, if that $10 marijuana gram transaction occurred in Saskatchewan, it would be subjected to 55 cents of PST, which is also applied after the excise tax. If the sale took place in Nova Scotia, the provincial tax (again, automatically rolled into the harmonizing tax) would be $1.10.
For accountants with clients planning to sell marijuana online or in retail stores, some challenges await you in 2018. With the new law still shrouded in controversy, it is a safe bet that government regulators plan on making examples of any business that steps out of compliance. It is incumbent upon the professionals who advise these businesses — namely, accountants and lawyers — to ensure all i’s remain dotted and t’s remained crossed.
The biggest thing to stay aware of at all times is the allocation of taxes. Excise taxes are rare in Canada, and many businesses have never been subjected to one up to this point. Marijuana changes that. You might consider having a special sit-down session with your marijuana clients, training their in-house bookkeepers on the tax laws as well as the importance of staying in compliance. The buck stops with you, of course, with making sure they get it right, but it is easier to ensure that happens when everyone is on the same page from day one.
The new marijuana laws create a huge economic opportunity in Canada. As an accountant, you can help your clients capitalize on this occasion by keeping them up to date with the tax laws.