Overview of Canada’s Vaping Duty

Canada’s Vaping Duty framework applies to vaping products manufactured or imported to Canada and applies both federally and provincially.  The applicable rules are enforced through a coordinated system in “specified vaping provinces”, which currently include Alberta, Manitoba, Ontario, Quebec, New Brunswick, Northwest Territories, Nunavut, and the Yukon, and Prince Edward Island – with some of these being added to the system earlier this month.

Compliance Pitfalls

Vaping industry participants like manufacturers and importers are generally required to be licenced and adhere to what on one level might appear to be heavily ambiguous legislation, which often creates more questions than it answers.  Broad definitions of base terms like “vaping substances” make for potential over-reach in the legislation, with raw materials like Propylene Glycol (“PG”) and Vegetable Glycerin (“VG”) seemingly regulated in the hands of a licensee – even if having multi-uses in industries beyond vaping.

The rules for licensing are also difficult to gauge, with CRA taking the view that wholesalers or retailers involved in marginal manufacturing (e.g., blending or mixing vaping substances, packaging, labelling, etc.) are also potentially liable to be licensed.

In the eyes of the CRA, this can mean that even innocuous transactions in raw materials like PG and VG will attract unexpected regulation and taxation – with some CRA audits focusing on these very issues right now.

Alleged non-compliance can lead to assessments, and severe financial consequences, which follows from the extremely high levels of vaping duties being imposed on extremely low volumes.  For example, the duty technically applies at about $11.20 for the first 10 millilitres (“mL”) of product, with a $2.24 tax applying for each additional 10 mL. Sample duty calculations from the CRA can be found here.

For industrial manufacturers and importers, this means that even small assessments of sales or raw materials (e.g., 5,000 litres of unaccounted for raw materials) can result in astronomical duties (e.g., that over $1 million in this example).

Compounding problems, bonds typically put in place by vaping licensees can be realized upon for payment of assessed amounts and corporate directors expect to be assessed personally for short falls.

Takeaways

The Canadian tax and regulators rules affecting the Vaping Industry are complex and vaping manufacturers and importers are being aggressively audited by CRA, leading to significant exposure and even personal liability for directors.

Vaping audits or assessments usually need the benefit of specialized legal advice, very early on in the process.

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