EDM7-1-1 Manufacturers of Tobacco Products

June 2013

NOTE: This version replaces the one dated July 2003.

Disclaimer:

The information in this memorandum does not replace the law found in the Act 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 office for additional information. These offices are listed at Contact Information – Excise Duties, Excise Taxes,  Fuel Charge and Air Travellers Security Charge.

Definitions

1. The following terms are used in this memorandum, as per section 2^{Footnote 1} :

An excise stamp means a stamp issued by the Minister under subsection 25.1(1) and that has not been cancelled under section 25.5.

Manufacture, in respect of a tobacco product, includes any step in the preparation or working up of raw leaf tobacco into the tobacco product. It includes packing, stemming, reconstituting, converting or packaging the raw leaf tobacco or tobacco product.

Manufactured tobacco means every article, other than a cigar or packaged raw leaf tobacco, that is manufactured in whole or in part from raw leaf tobacco by any process.

A tobacco licensee is a person who holds a tobacco licence under section 14 of the Act.

Tobacco manufacturing equipment means any machinery or equipment designed or modified specifically for the manufacture of a tobacco product.

A tobacco product means manufactured tobacco, packaged raw leaf tobacco or cigars.

Licence requirements

Issuance of a tobacco licence

2. A person must apply for a tobacco licence to be authorized to manufacture tobacco products. The tobacco licence is issued by the CRA.

3. Information on the requirements and procedures for obtaining a tobacco licence under the Act is provided in Excise Duty Memorandum EDM2.2.1, Obtaining and Renewing a Licence.

Security

4. Under paragraph 23(3)(b), a person applying for a tobacco licence is required to provide security to the CRA as well as maintain it with the CRA. The amount of security required to be posted, according to section 5 of the Regulations Respecting Excise Licences and Registrations, is available in Excise Duty Memorandum EDM2.2.2, Security Requirements for Licensees. Additional information on posting security is provided in the following Excise Duty memoranda: EDM2.2.3, Surety Bonds and Government of Canada Bonds and EDM 2.2.4, Approved Financial Institutions and Acceptable Bonding Companies.

5. Subsection 25.1(1) states that a tobacco licensee must obtain excise stamps from the CRA to indicate that duty, other than special duty, has been paid on a tobacco product. According so subsection 25.1(3), a person is required to provide security to the CRA to obtain excise stamps.

6. Section 4.1 of the Stamping and Marking of Tobacco Products Regulations sets out additional security requirements for excise stamps before they can be issued to a tobacco licensee. For more information on the tobacco stamping regime, see the section in the memorandum entitled "Stamping and marking requirements".

Manufacturing tobacco products without a licence

7. It is prohibited under subsection 25(1) to manufacture tobacco products unless it is done in accordance with a tobacco licence issued by the CRA. Therefore, subject to the exceptions noted in paragraphs 10 and 11 of this memorandum, anyone who manufactures tobacco products in Canada is required to obtain a tobacco licence from the CRA.

Deemed manufacturer of tobacco products

8. Under subsection 25(2), a person who provides equipment in their place of business for use by another person to manufacture a tobacco product is deemed to be manufacturing the tobacco product, and the other person (using the equipment) is deemed not to be manufacturing the tobacco product. Accordingly, the person providing the equipment in their place of business must acquire a tobacco licence and fulfil all other obligations imposed on a tobacco licensee under the Act, such as packaging and stamping.

9. Tobacco products made by the person using the equipment provided by the other person in their place of business will have duty imposed at the rates set out in Schedule 1. The Act does not provide for a refund of excise duty already paid on tobacco used by the person using the equipment.

Manufacturing for personal use

10. According to paragraph 25(3)(a), an individual who is not a tobacco licensee may manufacture cigars or manufactured tobacco from packaged raw leaf tobacco or manufactured tobacco on which excise duty has been paid, provided that the tobacco or cigars are for the individual’s personal use.

11. Also, according to paragraph 25(3)(b), an unlicensed individual may manufacture cigars or manufactured tobacco from raw leaf tobacco grown on land on which the individual resides, provided that:

• the tobacco or cigars are for their personal use or the personal use of the members of their family who reside with the individual, and who are 18 years of age or older; and
• the quantity of tobacco or cigars manufactured in any year does not exceed 15 kilograms for the individual and each family member who resides with the individual, and who is 18 years of age or older.

12. The "personal use" of a good by an individual means the use of the good by the individual or by others at the individual’s expense. It does not include the sale or other commercial use of the good.

13. It is prohibited under subsection 32.1(1) to possess tobacco manufacturing equipment with the intent of manufacturing tobacco unless the person is a tobacco licensee. However, possession by an individual of tobacco manufacturing equipment is permitted for manufacturing tobacco for their personal use as contemplated under subsection 25(3) of the Act. The size and capacity of the tobacco manufacturing equipment in their possession cannot exceed the requirements of the individual’s personal use.

Obtaining other licence types

14. Depending upon their activities, tobacco licensees may be required to possess other types of licences. For example, a tobacco licensee may require an excise warehouse licence.

15. Under subsection 19(1), a tobacco licensee who intends to possess unstamped manufactured tobacco or cigars will be required to have a separate excise warehouse licence. This type of licence authorizes the tobacco licensee to possess in their excise warehouse manufactured tobacco or cigars that are not stamped with a tobacco stamp.

16. Additional information with respect to the types of licences a person may be required to possess to perform certain activities regulated under the Act is available in Excise Duty Memorandum EDM2.1.1, Licence Types. Additional information on the warehousing of tobacco products is available in Excise Duty Memorandum EDM8.1.1, Excise Warehouses.

Stamping and marking requirements

17. Under section 34, a tobacco licensee cannot enter a tobacco product into the duty-paid market, unless the product has been packaged by the licensee, and stamped at the time of packaging with prescribed information printed on the package. Section 36 further states that the absence of an excise stamp on a tobacco product is notice to all persons that duty has not been paid on that product.

18. If the tobacco or cigars manufactured in Canada are not stamped by a tobacco licensee, the tobacco licensee must enter the tobacco or cigars immediately into their excise warehouse, as is required under section 37.

19. Additional information relating to stamping and marking of tobacco products and the prescribed information required to be indicated on packaged tobacco is available in the Stamping and Marking of Tobacco Products Regulations.

20. Additional information on the tobacco stamping regime is also available in the following Excise Duty notices: EDN29, Tobacco Stamping Regime – Excise Stamp Order Process, EDN30, Tobacco Marking Reqirements under the Amended Stamping and Marking of Tobacco Products Regulations, and EDN32, Federal Excise Stamp Mandatory on Tobacco Products as of July 1, 2012.

Excise duty on tobacco

21. As set out in subsection 42(1), excise duty is imposed on tobacco products manufactured in Canada and is payable by the tobacco licensee who manufactured them, at the time they are packaged. Excise duty is also imposed on imported tobacco products or raw leaf tobacco and is payable by the importer, owner or other person who is liable to pay any customs duty on the products or tobacco.

22. According to subsection 42(2), partially manufactured tobacco imported by a tobacco licensee for further manufacture is deemed to be manufactured in Canada by the licensee. Since the excise duty imposed on tobacco products manufactured in Canada is not payable until they are packaged, the partially manufactured tobacco is not subject to excise duty at the time of importation.

23. Paragraph 43(a) states that additional excise duty is imposed on cigars manufactured and sold in Canada, by the tobacco licensee who manufactured the cigars, at the time of their delivery to a purchaser.

Rates of excise duty

24. Rates for excise duty are available at Excise Duty Rates.

Cigarettes
s 1, Schedule 1

25. The rates of duty on cigarettes are imposed under paragraphs 1(a) and (b) of Schedule 1 to the Act in the following manner:

• the rate applicable to paragraph 1(a) for each five cigarettes or fraction of five cigarettes contained in any package, and if the cigarettes are black stock for delivery by the tobacco licensee who manufactured them:
  • to a duty free shop or customs bonded warehouse,
  • to a person for use as ships’ stores in accordance with the Ships’ Stores Regulations, or
  • for export for delivery to a foreign duty free shop or as foreign ships’ stores; and
• in any other case, the duty rate applicable to paragraph 1(b) for each five cigarettes or fraction of five cigarettes contained in any package.

Tobacco sticks
s 2, Schedule 1

26. The rates of duty on tobacco sticks are imposed under paragraphs 2(a) and (b) of Schedule 1 to the Act in the following manner:

• the rate applicable to paragraph 2(a) for each tobacco stick, and if the tobacco sticks are black stock for delivery by the tobacco licensee who manufactured them:
  • to a duty free shop or customs bonded warehouse,
  • to a person for use as ships’ stores in accordance with the Ships’ Stores Regulations, or
  • for export for delivery to a foreign duty free shop or as foreign ships’ stores; and
• in any other case, the duty rate applicable to paragraph 2(b) for each tobacco stick.

Manufactured tobacco
s 3, Schedule 1

27. The rates of duty on manufactured tobacco other than cigarettes and tobacco sticks are imposed under paragraphs 3(a) and (b) of Schedule 1 to the Act in the following manner:

• the rate applicable to paragraph 3(a) for each 50 grams or fraction of 50 grams contained in any package, and if the manufactured tobacco is black stock for delivery by the tobacco licensee who manufactured it:
  • to a duty free shop or customs bonded warehouse,
  • to a person for use as ships’ stores in accordance with the Ships’ Stores Regulations, or
  • for export for delivery to a foreign duty free shop or as foreign ships’ stores; and
• in any other case, the duty rate set out in paragraph 3(b) for each 50 grams or fraction of 50 grams contained in any package.

Cigars
s 4, Schedule 1, Schedule 2

28. The rate of duty on cigars is imposed per 1,000 cigars as set out in section 4 of Schedule 1 to the Act. An additional duty on cigars also applies at the rate set out in Schedule 2 to the Act. The additional duty on cigars is the greater of the set duty per cigar and the set percentage computed on the sale price, in the case of cigars manufactured in Canada, or on the duty-paid value, in the case of imported cigars^{Footnote 2}.

Relief of duty

Unstamped tobacco
s 45

29. The duties imposed under sections 42 and 43 of the Act are relieved on tobacco products that are not stamped. Unstamped tobacco products are prohibited from being entered into the duty paid market.

Raw leaf tobacco
s 46

30. Excise duty is relieved on raw leaf tobacco imported by a tobacco licensee.

Stamped manufactured tobacco
s 48

31. Excise duties are also relieved on stamped manufactured tobacco that was manufactured in Canada by a tobacco licensee and that is imported by the licensee for reworking or destruction.

Maintaining records and filing returns

Keeping records

32. Every person who possesses a tobacco licence under the Act is required, under subsection 206(1), to maintain all records that are necessary to determine whether they are in compliance with the Act.

33. Additional information on the requirement to maintain books and records is available in the following Excise Duty memoranda: EDM9.1.1, General Requirements for Books and Records and EDM9.3.1, Export Documentation.

Filing returns

34. Section 160 requires every tobacco licensee to file Form B267, Excise Duty Return – Tobacco Licensee, for each reporting period, and to calculate and remit any excise duty payable on that return. A licensee who possesses more than one licence is required to file separate returns for each licence. For example, a tobacco licensee who also possesses an excise warehouse licence will also be required to file Form B262, Excise Duty Return – Excise Warehouse Licensee.

Fiscal months

35. According to subsection 159(1), where a licensee has determined a fiscal month for GST/HST purposes, the same fiscal month applies for purposes of excise duty. Where such a fiscal month has not yet been determined, a person may choose a fiscal month using established GST/HST rules, or use a calendar month.

Branches or divisions filing separate returns

36. As set out in subsection 164(1), where a tobacco licensee has branches or divisions with distinct operations under a tobacco licence, the licensee may apply to the CRA for authority to file separate returns for each branch or division.

37. Additional information on the filing of monthly returns, remitting excise duty, and paying the correct amounts of excise duty is available in Excise Duty Memorandum EDM10.1.1, Returns and Payments.

38. Additional information on the amounts to include on an excise duty return is provided in the following Excise Duty memoranda: EDM10.1.3, Completing an Excise Duty Return – Excise Warehouse Licensee and EDM10.1.8, Completing an Excise Duty Return – Tobacco Licensee.

Debts and the collections process

39. Excise duty and other amounts payable under the Act are debts recoverable in Federal Court or any other court of competent jurisdiction or in any other manner provided under the Act, according to subsection 284(1.1).

40. A tobacco licensee who owes excise duty or is late filing returns may receive a notice or a telephone call from a CRA official as a reminder of their obligation to pay past due excise duty or file outstanding returns.

41. Subsection 189(4) states that if a licensee has to file any returns under the Act, the Customs Act, the Excise Act, Excise Tax Act, the Income Tax Act or the Air Travellers Security Charge Act, but has not done so, any refund they are entitled to will be held until all required returns are filed.

42. According to section 290, if a licensee is entitled to a refund but has any outstanding amounts owing under the Act, that refund may be deducted from the outstanding amounts or set off such amounts. Any difference may be refunded to the licensee. Additional information relating to refunds is available in Excise Duty Memorandum EDM10.3.1, Refunds.

Offences and penalties

43. Under section 214, any person who manufactures tobacco products without a licence (other than an unlicensed individual who manufactures tobacco products for personal use, as noted in paragraphs 10 and 11 of this memorandum) is in contravention of the Act and is guilty of an offence and, upon conviction, may be liable to a fine or to imprisonment, or to both.