In a previous blog, and Part 1 of this Series, we discussed CRA’s recent audit activity focussed on Canada’s Vaping Industry,  which is significantly impacting vaping licensees, and leading to a number of different assessments for duty liability under the under the Excise Act, 2001.  An even more serious governmental focal point, however, is likely to be Health Canada’s proposed regulatory ban on flavoured or sweetened vaping substances and products, which appears to be another significant storm brewing for the industry.

Part II of this series on the vaping industry focuses on this issue, its regulatory history, and the expected cataclysmic event it may entail for the economic viability of many of these businesses.

Flavoured Vapes & Health Canada’s Regulatory Shadow

On April 11, 2019, Health Canada first announced “consultations” on prohibiting all vaping flavours other than tobacco, mint and menthol, and under the guise of addressing “youth access” to vaping products.  The proposed regulations, however, extended this prohibition to ALL purchasers of Vaping Products (i.e., full grown adults included).

Look out for our discussion next week on the “Hazy Logic” of these Regulatory Policy choices, Part 3 of 3 in this series.

More recently, Health Canada’s Forward Regulatory Plan indicated that the final regulations were expected by Spring 2024.  That date has obviously come and gone, but the most the most recent comments from Canada’s Minister of Mental Health and Addictions seem to indicate that the flavour ban is imminent.

Cataclysmic Implications for Industry?

Industry insiders have pointed out that the flavoured vape ban will be as cataclysmic event for the vaping industry – especially for the small to medium sized manufacturers operating in the flavoured vapes business segment.  Some estimates put the “flavoured vape” segment at 90% of business production.

As the same time, these same businesses face increased compliance audits from CRA, and increased levels of federal and provincial taxation – most recently increasing  this past July 1^st – an unwanted Canada Day Present from the government to Canada’s vaping community.

For businesses still grappling with the elasticity effect of these tax increases on demand (i.e., increased taxation drives away demand, which seeks other gray-market alternative supplies), not to mention the complexities of tax compliance in these areas, the revenue shrinking flavour ban could signal an end to the business opportunity.

Takeaways

Participants in the vaping industry are currently grappling with intensified taxation, increased CRA compliance audits and an imminent ban on flavoured vapes.  This unhappy trifecta may signal major business difficulties for 2025, and specialized legal assistance may be required to navigate the complex regulatory landscape.

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