EDM2.2.2 Security Requirements for Certain Licensees and for Prescribed Persons Importing Tobacco Products
This version replaces the one dated March 2003, which was entitled Security Requirements for Licensees.
This memorandum explains the requirements for certain licensees and for prescribed persons importing tobacco products to provide and maintain security with the Canada Revenue Agency (CRA) under the provisions of the Excise Act, 2001. It explains the types of security acceptable to the CRA and the amount of security that is required to be posted.
The information in this memorandum does not replace the law found in the Excise Act, 2001 and its regulations. It is provided for your reference. As it may not completely address your situation, you may wish to refer to the Act or its regulations, or contact any Canada Revenue Agency regional excise duty office for additional information. These offices are listed in Excise Duty Memorandum EDM1.1.2, Regional Excise Duty Offices.
Table of Contents
Persons required to provide security
1. Under the ActFootnote 1, the following persons are required to provide security in a form satisfactory to the CRA and in an amount determined in accordance with the Regulations Respecting Excise Licences and Registrations and the Stamping and Marking of Tobacco Products Regulations:
- pursuant to paragraph 23(3)(b), persons applying for or renewing a spirits licence or tobacco licence and
- pursuant to subsection 25.1(3), a prescribed person who is importing a tobacco product and applying for excise stamps.
2. A person who is applying for or renewing a registration or a licence that is not a spirits licence or a tobacco licence is exempt from the security provisions of the Act and is not required to post security.
3. Security is a condition of licensing and must be posted before a spirits or tobacco licence is issued or renewed.
4. Security must be posted in a form and amount acceptable to the CRA as a condition before excise stamps may be issued.
Amount of security required
5. Pursuant to paragraph 5(1)(a) of the Regulations Respecting Excise Licences and Registrations, security provided with an application for, or the renewal of, a spirits licence must be in an amount of at least $5,000 and must be sufficient to ensure payment of all amounts for which the licensee is or will be responsible under sections 104 to 112 of the Act, up to a maximum of $2 million.
6. The determination of the amount of security is based on the quantity of bulk spirits for which a spirits licensee is or will be responsible, and not the quantity in their possession. A spirits licensee may be responsible for bulk spirits that are not in their possession or, conversely, they may not be responsible for bulk spirits that are in their physical possession.
7. Generally, the amount for which a spirits licensee is or will be responsible is based on the quantity of bulk spirits that the licensee owns at any given time.
8. To calculate the security amount, the licensee must first determine the quantity of bulk spirits for which they are responsible at any time. The licensee must then determine the potential liability on this quantity of bulk spirits by applying the appropriate excise duty rate imposed for each strength of spirit. The rates of excise duty applicable on spirits are included in Excise Duty Memorandum EDM1.5.1, Rates of Excise Duty.
9. The licensee must then submit security that is equal to or in excess of the potential liability calculated (subject to the minimum amount of $5,000, up to a maximum of $2 million).
10. Information on the imposition, responsibility and liability for excise duty on bulk spirits is available in Excise Duty Memorandum EDM3.1.1, Producers and Packagers of Spirits.
11. Pursuant to paragraph 5(1)(b) of the Regulations Respecting Excise Licences and Registrations, security provided with an application for, or the renewal of, a tobacco licence must be in an amount of at least $5,000 and must be sufficient to ensure payment of the amount of duty payable on the tobacco licensee’s excise duty return for any fiscal month, up to a maximum of $2 million.
12. The amount of duty payable refers to duty payable on the excise duty return. This amount is net of deductions and refunds that are claimed on the return.
13. Additional information on determining the amount of duty payable and for completing and filing Form B267, Excise Duty Return – Tobacco Licensee, is available in Excise Duty Memorandum EDM10.1.8, Completing an Excise Duty Return – Tobacco Licensee.
Excise stamps – tobacco licensees and prescribed persons
14. The amount of security to be posted for excise stamps is determined in subsection 4.1(1) of the Stamping and Marking of Tobacco Products Regulations. That amount is calculated as the greater of:
- one half of the amount of duty that would be imposed under section 42 on the tobacco products if they were stamped with
- the unaffixed excise stamps that have been issued to the person, and
- the excise stamps to be issued to the person; and
If the amount referred to in (a) above exceeds $2 million, the maximum security to be posted will be $2 million.
15. If the person to whom the excise stamps are to be issued is also a tobacco licensee and the amount of security posted for their tobacco licence exceeds that required for the excise stamps, then additional security is not required.
Maintenance of security
16. Licences issued under the Act remain in effect for a period not exceeding two years, subject to it being suspended or cancelled prior to expiration. Since the provision of adequate security is a condition of licensing, the licensee must ensure that the level of security provided remains sufficient for the term of the licence. The licensee must exercise care when determining the level of security to be provided, to account for anticipated or possible increased duty liabilities during the term of the licence.
17. Failure to maintain a sufficient level of security may lead to the suspension or cancellation of the licence or its renewal being denied by the CRA.
18. With respect to excise stamps, failure to maintain sufficient security will result in the denial by the CRA of requests for the issuance of additional stamps until sufficient security is posted.
Increase in security required
19. If, during the period in which a licence is in effect, the licensee determines that the level of security has, or may, become inadequate, the licensee should immediately contact their regional excise duty office to discuss the situation.
20. If the CRA has reviewed the security requirements and advises the licensee or prescribed person that increased security is required, the additional security amount must be posted without delay and before additional stamps will be issued.
21. A licensee or prescribed person may obtain assistance in determining the correct amount of security to be provided to the CRA by contacting their regional excise duty office. A listing of these offices is available in Excise Duty Memorandum EDM1.1.2, Regional Excise Duty Offices.
Increase in security not required
22. Adjustments may not be required for minimal changes to the amount of security. If the CRA has reviewed the security requirements, the licensee or prescribed person may not be required to increase the amount of security if
- the amount of security required is $100,000 or less and the additional amount of security is less than 10% of that amount, or
- the amount of security required exceeds $100,000 and the additional amount of security required does not exceed $10,000.
Decrease in amount of security
23. If at any time a decrease in the total amount of security is warranted, the licensee or prescribed person may request in writing that the excess amount of security be returned. The excess amount of security will not be returned unless the excess amount exceeds the thresholds noted in paragraph 22 of this memorandum.
Acceptable forms of security
24. Pursuant to paragraph 23(3)(b) and subsection 25.1(3), security provided must be in a form satisfactory to the CRA.
25. Subsection 5(2) of the Regulations Respecting Excise Licences and Registrations provides that security in Canadian funds may be in the form of cash, certified cheque, transferable bonds issued by the Government of Canada or surety bonds issued by an approved entity.
26. Additional information on acceptable forms of security and on approved entities that issue them is available in the following Excise Duty Memoranda: EDM2.2.3, Government of Canada Bonds and Surety Bonds, and EDM2.2.4, Approved Financial Institutions and Acceptable Bonding Companies
27. At the time of submission, the face value of government bonds posted as security must be sufficient to cover the security required.
28. The following documents, properly completed, must be submitted to the CRA for non-certificate Government of Canada bonds: a safekeeping agreement and Form Y76, Transfer of Registered Bonds. For an example of a safekeeping agreement, see Appendix C of Excise Duty Memorandum EDM2.2.3, Government of Canada Bonds and Surety Bonds.
29. When a company changes its name, and the bonds held as security are transferred to the new name, a letter accompanying a certified copy of the Supplementary Letters Patent must be forwarded to the regional excise duty office concerned. When a company is sold and the bond held as security is to be transferred to the new owner, a new safekeeping agreement and Form Y76 must be prepared by the registered owner. Another Form Y76 must be prepared by the new owner assigning the bond or bonds to the Receiver General of Canada.
30. Security is returned to the owner when the privileges afforded with the licence are no longer required and all of the obligations for which the security was posted have been met.
Claims against security
31. When security has been tendered in the form of cash, certified cheque or Government of Canada bonds or surety bonds and there has been a contravention of the Act or normal collection activities have failed to resolve an unpaid balance, the CRA will withhold an amount of the security that is sufficient to cover the unpaid balance.
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