With the passing of the Cannabis Act, Canada became the first G8 country to fully legalize recreational marijuana. If you’re an entrepreneur, or an accountant for an entrepreneur, this creates new business opportunities. Are your clients thinking of joining the industry? It’s important to know how the government’s marijuana taxes could affect their business.
Understanding the Canada Marijuana Tax
If your clients decide to sell or distribute cannabis, they can expect taxes from both the federal government and your province. All sales are subject to goods and services taxes (GST) or harmonized sales taxes (HST). As with other goods, the rate depends on your client’s province or territory.
- 5% GST: Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Quebec, Saskatchewan, and Yukon
- 13% HST: Ontario
- 15% HST: New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island
Some of your cannabis-selling clients might also need to pay excise duty. This is a tax on specific products, such as fuel-inefficient vehicles, automobile air conditioners, and petroleum products — and now, cannabis. The federal government collects the tax. Then, it keeps a percentage and gives the rest to the province. Your clients only need to pay the excise duty if they’re packaging cannabis, or if they’re importing it into Canada.
If your clients have to pay the cannabis excise tax, you can help guide them through the process these simple steps:
- Calculate a flat-rate duty when the client packages the cannabis.
- When they deliver the packaged products to a customer or distributor, calculate the ad valorem duty. This is a tax based on the value of the cannabis.
- Compare the flat-rate and ad valorem amounts, and pay whichever one is higher.
The Canada Revenue Agency (CRA) expects you to do this for every sale. You can then report each sale and the higher duty amount on the client’s monthly cannabis return.
The ad valorem duty is 2.5% of the value of the flowering and non-flowering material in your cannabis, as of 2018. The flat rate depends on the part of the plant:
- Flowering material: $0.25 per gram
- Non-flowering material: $0.075 per gram
- Viable seed/seedling: $0.25 per seed/seedling
It’s also important to note that you apply the excise tax before you pay GST/HST. That means that buyers are effectively paying tax on other taxes.
For example, imagine your client sells a gram of cannabis for $10. It’s made up of half flowering material and half non-flowering material. The ad valorem duty would be 2.5% of $10, or $0.25. To figure out the flat-rate duty, you’d calculate:
- Flowering material: $0.25 x .5 gram = $0.125
- Non-flowering material: $0.075 x .5 gram = $0.0375
- Total flat rate tax: $0.125 + $0.0375 = $0.1625
The ad valorem tax is greater, so you add $0.25 to the sale for a total of $10.25. If the client is selling in Alberta, you add 5% GST, for a total price of $10.76.
Marijuana Taxation in Your Province or Territory
Your province or territory may also charge taxes on top of the GST/HST and excise tax. The tax rates vary by province and territory. Most locations use the same ad valorem/flat rate comparison scheme, but each one sets their own rates. In Nunavut, for example, the ad valorem rate is 7.5% of the value plus 19.3% of the dutiable amount of cannabis, for a total rate of 26.8%. In Quebec, the ad valorem rate is just 7.5%.
Implications of Cannabis Tax for Accountants
As legal cannabis businesses sprout up around Canada, regulators are on the lookout for people who aren’t following the rules. If you’re providing accounting support to cannabis packagers, this means you have a big responsibility. It’s important to stay up to date on the latest changes to cannabis regulations or tax rates — that way, you can help your clients navigate the tax rules.
The excise tax is a great place to start. This type of tax is rare in Canada, so many of your clients may be completely unfamiliar with it. You might consider having a special sit-down session with your marijuana clients to explain how the tax works. It’s also a good idea to train your clients’ in-house bookkeepers to handle the taxes in accordance with the law. Are sellers handling their own bookkeeping? You might advise them to use an accounting program like QuickBooks Online. That way, they can make the tax calculations and record sales in real time.
Legal cannabis creates exciting opportunities for your clients and new financial reporting challenges for you. By becoming familiar with the law and taxation rules, you can help your clients stay compliant. Need help managing your cannabis and non-cannabis tax clients? Accelerate your year-end adjustment process and start saving time on corporate returns with QuickBooks Online Accountant. Sign up for free.