Regulations Amending the Regulations Relieving Special Duty on Certain Tobacco Products and the Regulations Respecting Prescribed Brands of Manufactured Tobacco and Prescribed Cigarettes: SOR/2023-242

Canada Gazette, Part II, Volume 157, Number 24

Registration
SOR/2023-242 November 9, 2023

EXCISE ACT, 2001

P.C. 2023-1135 November 9, 2023

Her Excellency the Governor General in Council, on the recommendation of the Minister of National Revenue, makes the annexed Regulations Amending the Regulations Relieving Special Duty on Certain Tobacco Products and the Regulations Respecting Prescribed Brands of Manufactured Tobacco and Prescribed Cigarettes under paragraph 304(1)(o) of the Excise Act, 2001 footnote a.

Regulations Amending the Regulations Relieving Special Duty on Certain Tobacco Products and the Regulations Respecting Prescribed Brands of Manufactured Tobacco and Prescribed Cigarettes

Regulations Relieving Special Duty on Certain Tobacco Products

1 Schedule 1 to the Regulations Relieving Special Duty on Certain Tobacco Products footnote 1 is amended by adding the following in alphabetical order:

2 Schedule 2 to the Regulations is replaced by the Schedule 2 set out in the schedule to these Regulations.

Regulations Respecting Prescribed Brands of Manufactured Tobacco and Prescribed Cigarettes

3 Schedule 1 to the Regulations Respecting Prescribed Brands of Manufactured Tobacco and Prescribed Cigarettes footnote 2 is amended by adding the following in alphabetical order:

4 Schedule 2 to the Regulations is amended by adding the following in alphabetical order:

Coming into Force

5 These Regulations come into force on the day on which they are registered.

SCHEDULE

(Section 2)

SCHEDULE 2

(Section 3)

Cigarettes

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

In order to be relieved from tobacco marking requirements and the requirement to pay special duty, brands of tobacco must meet all legislated criteria and be listed in the schedules to the Regulations Respecting Prescribed Brands of Manufactured Tobacco and Prescribed Cigarettes (Marking Regulations) and the Regulations Relieving Special Duty on Certain Tobacco Products (Special Duty Regulations).

Four Canadian tobacco manufacturers have applied and met the criteria to have 29 brands of manufactured tobacco added to Schedule 1 of both the Marking Regulations and the Special Duty Regulations. One of those four Canadian tobacco manufacturers has applied for and met the criteria to have three brands of cigarettes added to Schedule 2 of both regulations.

In order to extend relief to these manufacturers, Schedules 1 and 2 of both the Marking Regulations and the Special Duty Regulations must be amended to include the brand names.

Background

During the late 1980s and early 1990s, large volumes of exported tobacco products were being smuggled back into Canada without the payment of excise levies and sold in the illicit market. The financial incentive for smuggling resulted from the difference between the cost of exported tobacco products, which were not subject to an excise duty at the time, and the cost of domestic tobacco products, which were subject to excise duty. This difference enabled the smuggling of previously exported tobacco products back into Canada to be sold at much lower prices than legal tobacco products while still generating profit.

As part of an anti-smuggling initiative, tobacco products destined for export were required to be specifically marked to indicate that they were not for sale in Canada and subject to a special duty to reduce the financial incentive associated with smuggling. The special duty is generally equivalent to the excise duty payable on tobacco products manufactured for the Canadian market and is refundable after export when specified conditions are met. The specific wording, format, and application of tobacco markings and other information are outlined in the Stamping and Marking of Tobacco, Cannabis and Vaping Products Regulations.

For tobacco products of a particular brand to qualify for relief from the marking requirements, the brand must be prescribed in Schedule 1 or 2 of the Marking Regulations. In addition, the product to be exported must meet other criteria set out in subsections 38(3) or 38(4) of the Excise Act, 2001. For example, in addition to being listed in Schedule 1 of the Marking Regulations, the brand of tobacco cannot be commonly sold in Canada. Also, in addition to being listed in Schedule 2 of the Marking Regulations, cigarettes of the brand must be of a different type or formulation than cigarettes manufactured and sold in Canada under the brand at any time.

Brands included in Schedule 1 can apply to any “manufactured tobacco” product, including cigarettes, while brands in Schedule 2 can apply only to cigarettes. Generally, the brands in Schedule 1 would not be recognized by Canadian consumers, as they cannot be commonly sold in Canada. While the brands in Schedule 2 can be sold in Canada, the characteristics (taste, etc.) of the product for export would be different than the characteristics of the product sold in Canada, and we would not expect there to be a significant demand in Canada for the formulation being exported.

For tobacco products of a particular brand to qualify for relief from special duty, the brand must be prescribed in Schedule 1 or 2 of the Special Duty Regulations. In addition, the product to be exported must meet other criteria set out in subsections 58(1) or 58(2) of the Excise Act, 2001. For example, tobacco products listed in Schedule 1 of the Special Duty Regulations cannot have been sold in Canada in excess of specified quantities. Similarly, cigarette brands included in Schedule 2 of the Special Duty Regulations must be of a different type or formulation than cigarettes manufactured and sold in Canada at any time.

Relief from the tobacco marking requirements works concurrently with the relief from special duty. Consequently, the prescribed brands identified in the Marking Regulations are identical to the prescribed brands identified in the Special Duty Regulations.

To benefit from these relief measures, manufacturers wishing to have a brand of tobacco product prescribed and included in a schedule must submit an application to the Canada Revenue Agency (CRA). Each application must include a detailed business plan and supporting information, which should include at least the following elements:

In this particular submission, four tobacco manufacturers have provided detailed business plans and supporting documents requesting that 32 brands be prescribed.

Objective

The objective of these amendments is to extend relief from the marking requirements and special duty for 32 brands by adding 29 brands of manufactured tobacco to Schedule 1 and 3 brands of cigarettes to Schedule 2 of both the Marking Regulations and the Special Duty Regulations. Currently, there are 310 prescribed brands listed under Schedule 1 and 4 prescribed brands listed under Schedule 2 in each regulations.

Business opportunities exist in foreign markets for Canadian tobacco manufacturers to produce tobacco products that meet the tastes of those foreign consumers. These amendments provide relief that reduces the burden faced by Canadian tobacco manufacturers entering foreign markets.

Description

These amendments will extend relief from tobacco marking requirements and special duty for certain brands of tobacco by adding them to Schedules 1 and/or 2 of the Marking Regulations and the Special Duty Regulations made under the Excise Act, 2001.

Amendments to the Marking Regulations include the following:

Additions to Schedule 1

Additions to Schedule 2

Amendments to the Special Duty Regulations include the following:

Additions to Schedule 1

Additions to Schedule 2

Regulatory development

Consultation

Tobacco manufacturers

Excise Duty Notice EDN65 Information for Tobacco Manufacturers – Prescribed Brands of Tobacco Products was published on July 21, 2020, on the CRA website to inform tobacco manufacturers of CRA’s intention to put forward a proposal for regulatory amendments and to invite them to submit brand names for consideration. An opportunity for tobacco manufacturers to contact the CRA with questions or comments was provided in the notice.

Modern treaty obligations and Indigenous engagement and consultation

The Regulations Amending the Regulations Relieving Special Duty on Certain Tobacco Products and the Regulations Respecting Prescribed Brands of Manufactured Tobacco and Prescribed Cigarettes (the Regulations) are not expected to have any differential impacts on Indigenous people or implications for modern treaties, as per Government of Canada’s obligations in relation to rights protected by section 35 of the Constitution Act, 1982, modern treaties, and international human rights obligations.

Instrument choice

Regulatory amendments are the only option available, as the Excise Act, 2001 requires that brands must be prescribed by adding them to the appropriate schedules in order to receive relief from the marking requirements and special duty.

Regulatory analysis

Benefits and costs

As part of the application process, tobacco manufacturers are required to submit detailed information regarding each brand name. The CRA analyzed the submissions to ensure that criteria relating to current sales in Canada, proposed export markets and cigarette formulations, where applicable, were met. These activities are conducted as part of regular program operations and are not substantial to these Regulations, as they are non-recoverable (sunk costs).

There is a benefit for tobacco brands relieved from marking requirements. In general, tobacco manufacturers mark tobacco products for foreign markets in accordance with the requirements in the jurisdiction where they will be sold. Relief from the marking requirements allows tobacco manufacturers to be more competitive in foreign markets by entering into contracts to manufacture particular tobacco products exclusively for export markets.

Tobacco manufacturers who have brands prescribed in the appropriate schedule of the Special Duty Regulations benefit from the removal of the administrative costs associated with the application for a refund of special duty paid.

Tobacco manufacturers pay duty and taxes in foreign markets in accordance with the requirements in the jurisdiction where they will be sold. Where the payment of special duty is required, it is refundable after export when evidence is submitted to demonstrate that the taxes and duties imposed in the destination country have been paid and other general conditions are met.

Small business lens

The small business lens does not apply, as there are no associated impacts on small businesses.

One-for-one rule

The one-for-one rule does not apply, as there is no change in the administrative burden on business.

Regulatory cooperation and alignment

Given the legislative framework in Canada and the administrative nature of the amendments, there is no associated regulatory cooperation or alignment component.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

No gender-based analysis plus (GBA+) impacts have been identified for these Regulations.

Implementation, compliance and enforcement, and service standards

These regulatory amendments will come into effect on the day on which they are registered.

The CRA is responsible for ensuring compliance with the requirements of the Excise Act, 2001 at the manufacturer level. Manufactured tobacco that does not meet the prescribed brand conditions set out in the legislation is ineligible for relief either from the tobacco markings or the special duty.

In order to confirm that prescribed brands are exported from Canada, the CRA conducts audits and verification visits of tobacco manufacturers. When a tobacco manufacturer cannot demonstrate that the conditions have been met, the CRA may impose any sanctions the legislation provides.

The Canada Border Services Agency (CBSA) examines export shipments of tobacco products as part of their regular duties.

The Royal Canadian Mounted Police (RCMP) is responsible for enforcement activities relating to the illegal possession, purchase, or sale of tobacco products in Canada.

No additional resources will be required by the CRA, the CBSA, or the RCMP for the implementation of these amendments or related compliance and enforcement activities.

Contact

Excise and Specialty Tax Directorate
Canada Revenue Agency
Place de Ville, Tower A, 11th Floor
320 Queen Street
Ottawa, Ontario
K1A 0L5
Telephone: 1‑866‑330‑3304