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Engagement on a Fuel, Alcohol, Cannabis and Tobacco Sales Tax Framework

Consultation Paper

1. Introduction

The Government of Canada views tax agreements and arrangements with interested Indigenous governments as an important part of renewed nation-to-nation fiscal relationships. Over the last two decades, Indigenous governments have entered into over 60 tax agreements with the Government of Canada. These arrangements take the form of First Nations Sales Taxes (FNST), First Nations Goods and Services Taxes (FNGST), and First Nation Personal Incomes Taxes. These partnerships enable Indigenous governments to generate revenues within their lands to support community priorities.

In Budget 2022, the Government of Canada announced its plans to engage with interested Indigenous governments and organizations on a fuel, alcohol, tobacco, and cannabis (FACT) sales tax framework that would support interested Indigenous governments to implement a FACT sales tax within their reserves or settlement lands. The development of a FACT sales tax framework is envisioned as providing a ‘stepping-stone’ for interested Indigenous governments to generate supplementary revenues through the exercise of tax jurisdiction on sales of FACT products within their reserve or settlement lands, rather than on the entire Goods and Services Tax (GST) base, as is the case with FNGST arrangements. (Background on these agreements)

We Want Your Input

The Department of Finance is interested in your thoughts, perspectives and comments. Please provide your feedback on this Discussion Paper to the Tax Policy Branch-Indigenous Tax Policy Section by participating in the virtual engagement sessions that will be organized by the Department of Finance in your region or by contacting the FACT Engagement Team at: FACT-CACT@fin.gc.ca.

2. Discussion Paper – Key Elements of a Fact Framework

This Discussion Paper has been developed to solicit feedback, and to generate views and comments from Indigenous governments and organizations. This Discussion Paper is not intended to restrict the input received, but rather it aims to contextualize the typical elements of tax frameworks and gauge interest and perspectives to inform the development of a FACT sales tax framework, including vaping products.

Overview

Taxation is a characteristic feature of governments and the exercise of tax powers enhances self-government, and can ultimately support self-determination and the social and economic wellbeing of Indigenous communities. With the proposed FACT framework, interested self-governing Indigenous groups and First Nations operating pursuant to the Indian Act could levy a sales tax with respect to the sale of fuelFootnote 1, alcoholic beveragesFootnote 2, cannabisFootnote 3 and/or tobaccoFootnote 4 (FACT) products, including vaping products, occurring within their reserve or settlement lands.

A FACT sales tax would be levied under an Indigenous government’s law rather than federal or provincial law, and would only apply if an Indigenous government chooses to implement it.

It is envisioned that a FACT sales tax would apply to all persons, including those registered pursuant to the Indian Act, who purchase the select products within a taxing Indigenous government’s reserve or settlement lands. It would be limited to these lands and not affect the application of the Indian Act tax exemption for other federal or provincial taxes.

It is anticipated that a FACT sales tax would be fully harmonized and coordinated with the federal GST, including the same rate (currently 5%), on the applicable products and replace the federal GST, when it would otherwise apply. A FACT sales tax could be collected and administered by the Canada Revenue Agency (CRA), on behalf of the taxing Indigenous government, under the terms of a tax administration agreement negotiated with the Government of Canada.

The remainder of this Discussion Paper will expand on the concepts introduced in the Overview section.

Application of a FACT Tax

Similar to FNST and FNGST frameworks, it is anticipated that participating Indigenous governments would apply a FACT sales tax through their own tax law and a negotiated tax administration agreement with the Government of Canada. This approach would respect an Indigenous government’s autonomy in choosing whether or not to levy a FACT sales tax and allow for the coordination of taxes between governments under a negotiated tax administration agreement.

It is envisioned that a FACT sales tax would be levied at point of sale by retailers on FACT products on reserve or settlement lands and Canada would vacate its GST room in order for Indigenous government to levy their tax. It is also envisioned that the framework could provide flexibility with respect to the FACT products an Indigenous government would choose to tax. For example, interested Indigenous governments could choose to levy a FACT tax on only one product (e.g., tobacco) or a subset of the FACT products.

Similar to current FNST and FNGST agreements, it is envisioned that the CRA would be responsible for the collection, administration and enforcement of FACT taxes free of charge on behalf of Indigenous governments under the terms of a negotiated tax administration agreement. This would allow for FACT sales taxes to be administered in a similar manner as the current federal GST on these lands and would also avoid costs and management burden for Indigenous governments while maintaining compliance ease for taxpayers and businesses.

Further discussions to be held with interested Indigenous groups on the overall design and administration of a FACT sales tax.

Examples

  1. A gas station is located on the reserve of an Indigenous government levying a FACT sales tax on fuel and tobacco products. John, a First Nations individual registered pursuant to the Indian Act, purchases $70 of gas and $30 of tobacco products. While he is normally exempt from federal and provincial/territorial taxes on reserve because of the Indian Act tax exemption, the 5% FACT tax applies on these sales. The retailer would be required to charge and collect the FACT sales tax, in this case $5, and remit it to the CRA in the normal course of filing their Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return. Remittances would then be transferred to the Indigenous government in accordance with the negotiated tax administration agreement with Canada.
  2. A cannabis retailer is located on the settlement lands of an Indigenous government levying a FACT sales tax on cannabis products. Marie, a non-citizen/non-member of the Indigenous government, purchases $30 of cannabis products. Instead of paying the federal GST, the 5% FACT sales tax applies, in this case $1.50, and the retailer remits the FACT tax collected to the CRA in the normal course of filing their GST/HST Return. Remittances would then be transferred to the Indigenous government in accordance with the negotiated tax administration agreement with Canada.

Tax Administration Agreements

It is envisioned that negotiated government-to-government tax administration agreements would set out the details of how a FACT sales tax would be collected and administered, including the option for a party to terminate the agreement with appropriate notice and the determination of remittances to Indigenous governments. It is envisioned that these agreements would consider the amount of GST revenue that Canada would agree to forego as part of a revenue sharing mechanism.

Similar to FNST and FNGST frameworks, it is anticipated that the remittances to Indigenous governments under these agreements would be based on final sales that take place on the reserve or settlement lands of a taxing Indigenous government. That is, as GST/HST registrants remain eligible to recover the FNST/FNGST/GST/HST paid or payable on purchases and expenses related to commercial activities by claiming input tax credits (ITCs), a final sales approach would account for sales of the FACT products that are not to final consumers, particularly in the case of fuel products (e.g., business fuel costs).

For instance, final sales factors could be as follows:

Example

A gas station located on the reserve of an Indigenous government levying a FACT sales tax charged and remitted the following to the CRA:

  • $30,000 in FACT sales tax on tobacco products;
  • $200,000 in FACT sales tax on gasoline; and
  • $40,000 in FACT sales tax on diesel.

= Gross total of $270,000 of FACT sales tax remitted to CRA

In recognition that only FACT sales tax collected on final consumers is net governmental revenue (i.e., sales to businesses may be claimed as ITCs), the following final sales factors, for example, would be factored into the calculation of net FACT sales tax for purposes of remitting to a taxing Indigenous government:

  • 100% * $30,000 for tobacco products;
  • 50% * $200,000 for gasoline; and
  • 25% * $40,000 for diesel.

= Net total of $140,000 of FACT sales tax remitted to the Indigenous government

Further discussions to be held with Indigenous governments with respect to the calculation of a final sales approach.

Design of the Revenue-Sharing Mechanism

The Department of Finance wants to discuss the design of a revenue-sharing mechanism that would apply in certain circumstances, such as where the bulk of the FACT sales tax is generated from sales to persons other than the members of the Indigenous government who would normally otherwise be liable to pay the federal GST.

Further discussions to be held to seek feedback from Indigenous governments on the overall design of the revenue-sharing mechanism.

Nature of Tax Revenues

It is envisioned that FACT sales tax revenues remitted to Indigenous governments would be based on the negotiated tax administration agreements with each respective Indigenous government. Such remittances would not be considered grants, contributions or ‘Indian moneys’ as defined under the Indian Act, and therefore, would not have conventional Government of Canada terms and conditions. The Indigenous government would be free to allocate FACT sales tax revenues to their own community priorities.

Further discussions to be held with Indigenous governments on details of remittances (such as timing, re-estimation, final estimates).

3. How to Participate

The Department of Finance is planning to engage with Indigenous governments and organizations on the initial design elements of the proposed framework over a seven month period, beginning August 2022. Interested Indigenous governments and organizations will have additional opportunities to share their views as the framework is developed and implemented.

There are multiple ways to participate in the engagement process:

Input received throughout the engagement process will be used to gauge interest and inform the initial development of a FACT sales tax framework. The Department of Finance is seeking views and comments on the design elements of a proposed framework, including how the framework can be aligned with the interests of Indigenous governments. This Discussion Paper is not intended to restrict the input received during the engagement process.

To ensure that input is received in time to inform the early design of the framework, the Department of Finance encourages interested Indigenous governments and organizations to share their input  and written submissions by June 16, 2023.

4. Contact Us

Indigenous Tax Policy Section
Tax Policy Branch
Department of Finance
Government of Canada
90 Elgin Street
Ottawa, ON.  K1A 0G5
Email: FACT-CACT@fin.gc.ca

FACT Engagement Team:
Roch Vézina
Bruce Stirrett-Wood
Evren DeSousa
Austin Lemieux

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