EDN25 Sale of unstamped partially manufactured tobacco and activities of a tobacco licensee

September 2010

The purpose of this Notice is to clarify the activities of tobacco licensees that are permitted under the Excise Act, 2001 with respect to unstamped partially manufactured tobacco.

Canada Revenue Agency (CRA) officials are aware that there are a number of tobacco licensees with business activities that include sales of unstamped partially manufactured tobacco^{Footnote 1} (PMT) in Canada. In some cases, business activities include purchasing raw leaf tobacco,^{Footnote 1} further manufacturing the raw leaf tobacco (for example, stemming), and selling the resulting PMT to another tobacco licensee for use as an input into a final, packaged^{Footnote 1} and stamped^{Footnote 1} tobacco product.^{Footnote 1} In other cases, business activities include purchasing PMT and reselling it to another tobacco licensee.

Please be advised that the Act does not permit a tobacco licensee to sell unstamped PMT to another tobacco licensee for delivery in Canada.

Activities of a tobacco licensee

The following information explains how the Act would apply in various situations. If you would like information on how the Act would apply in a situation not described below, you can contact your CRA regional excise office.

A tobacco licence authorizes a person to manufacture tobacco products. The following situations and explanations refer specifically to raw leaf tobacco that is unpackaged and unstamped and to PMT that is unpackaged and unstamped, unless otherwise stated.

Scenario 1

A tobacco grower in Canada sells raw leaf tobacco to a tobacco licensee. The tobacco licensee processes (manufactures) the raw leaf tobacco into PMT and:

• further manufactures the PMT into a final, packaged and stamped tobacco product to be offered for sale in the duty paid market; or
• exports the PMT.

Explanation

• The tobacco licensee purchases the raw leaf tobacco from a tobacco grower pursuant to paragraph 30(2)(a) of the Act. The tobacco licensee is licensed to manufacture tobacco products pursuant to paragraph 14(1)(d), which includes manufacturing raw leaf tobacco into PMT. The tobacco licensee may further manufacture the PMT into a final, packaged and stamped tobacco product in accordance with the Act. Subject to the requirements of the Act, the tobacco licensee may enter the packaged and stamped tobacco product into the duty-paid market.
  or
• The tobacco licensee may export the PMT in accordance with paragraphs 28(2)(b) and 32(3)(a).

Scenario 2

A tobacco grower sells raw leaf tobacco to Tobacco Licensee 1. Tobacco Licensee 1 does not alter the raw leaf tobacco and:

• sells the raw leaf tobacco to Tobacco Licensee 2; or
• exports the raw leaf tobacco.

Explanation

Tobacco Licensee 1 purchases the raw leaf tobacco from a tobacco grower pursuant to paragraph 30(2)(a).

• Tobacco Licensee 1 may sell the raw leaf tobacco to Tobacco Licensee 2 pursuant to paragraph 30(2)(a). Tobacco Licensee 1 may remove the raw leaf tobacco from its premises for delivery to Tobacco Licensee 2 pursuant to subparagraph 28(2)(a)(ii). Please note there could be concerns with the licence of Tobacco Licensee 1 if its only activity is the sale of raw leaf tobacco. If the only activity is the sale of raw leaf tobacco, a tobacco dealer licence would be appropriate.
  or
• Tobacco Licensee 1 may export the raw leaf tobacco pursuant to subparagraph 28(2)(a)(iii).

Scenario 3

A tobacco grower in Canada sells raw leaf tobacco to Tobacco Licensee 1. Tobacco Licensee 1 is licensed to manufacture tobacco products which include manufacturing raw leaf tobacco into PMT.

Tobacco Licensee 1 does not alter the raw leaf tobacco but sells the raw leaf tobacco to Tobacco Licensee 2. However, Tobacco Licensee 1 maintains possession of the raw leaf tobacco. 

Tobacco Licensee 2 now owns the raw leaf tobacco and contracts with Tobacco Licensee 1 to have the raw leaf tobacco processed (manufactured) into PMT.

Explanation

Tobacco Licensee 1 may purchase the raw leaf tobacco from a tobacco grower pursuant to paragraph 30(2)(a).

Tobacco Licensee 1 may sell the raw leaf tobacco to Tobacco Licensee 2 pursuant to paragraph 30(2)(a).

Tobacco Licensee 1 may maintain possession of the raw leaf tobacco pursuant to paragraph 30(2)(a).

Tobacco Licensee 1 may manufacture the raw leaf tobacco into PMT.

Tobacco Licensee 1 may deliver the resulting PMT to Tobacco Licensee 2 pursuant to paragraph 28(2)(b). 

Scenario 4

Tobacco Licensee 1 is in possession of raw leaf tobacco that it owns.

Tobacco Licensee 1 contracts with Tobacco Licensee 2 to have the raw leaf tobacco processed (manufactured) into PMT by Tobacco Licensee 2.

Tobacco Licensee 2 is licensed to manufacture tobacco products pursuant to paragraph 14(1)(d), which includes manufacturing raw leaf tobacco into PMT.

Explanation

Tobacco Licensee 1 may possess the raw leaf tobacco pursuant to paragraph 30(2)(a).

Tobacco Licensee 1 may deliver the raw leaf tobacco to Tobacco Licensee 2 pursuant to paragraph 28(2)(a).

Tobacco Licensee 2 may possess the raw leaf tobacco under paragraph 30(2)(a).

Tobacco Licensee 2 may manufacture the raw leaf tobacco into PMT.

Tobacco Licensee 2 may deliver the resulting PMT to Tobacco Licensee 1 pursuant to paragraph 28(2)(b).

Please note that there may also be provincial and territorial tobacco control and taxation legislation that applies to the above mentioned situations.

The foregoing comments represent our general views with respect to the situations described. These comments are not rulings and do not bind the CRA with respect to a particular situation. Future changes to the Excise Act, 2001, regulations, or our interpretative policy could affect this interpretation.

Further information