How can you ensure your brewery, distillery, or winery is duty compliant?
How can you ensure your brewery, distillery, or winery is duty compliant?
Synopsis
7 Minute Read
It is crucial to understand the complexities of the federal excise duty program to ensure your winery, brewery, or distillery is duty compliant. In our recent webinar, MNP’s Danny Crawford explained:
- What the federal excise duty program is
- When duty is payable
- When to file returns with the CRA
Additionally, our advisors recently discussed compliance requirements with a CRA agent and shared insights from the conversation to help your business meet the CRA’s standards.
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The federal excise duty program impacts breweries, distilleries, and wineries in different ways — and it is important to ensure that your business is compliant to avoid penalties from the Canada Revenue Agency (CRA).
In our recent webinar, MNP’s Danny Crawford explained the complexities of the federal excise duty program — including the different licenses required under the Excise Act, when duty is payable, and when to file returns with the CRA. He also shared insights from his discussion with a CRA agent to help you understand some common areas where businesses typically fall short of compliance and provided tips to help your business meet the CRA’s requirements.
What is the federal excise duty program?
The excise duty is a levy imposed on spirits, wine, beer, malt liquor, tobacco, and cannabis. It is a direct cost for producers, who must pay a fixed rate that is generally calculated on the quantity produced, manufactured, or packaged.
The excise duty provides essential revenue for the federal government and supports public health goals. However, it also imposes significant compliance obligations and costs on those who produce these products.
Businesses require a license to produce and package the goods covered under the Excise Act in Canada:
- Spirits license — This license is required for distilled spirits with an alcoholic strength greater than 0.3 percent. It is also required for high alcohol beer and malt liquor with an alcoholic strength greater than 11.9 percent.
- Wine license — This license is required for beverages containing more than 0.5 percent alcohol by volume without distillation (except for distillation to reduce alcohol content) by fermentation of non-grain products.
- Users license — This license is required to fortify wine with bulk spirits. It also allows individuals to possess and use bulk alcohol in the production other products.
- Warehouse license — This license allows individuals to possess and store non-duty paid packaged alcohol.
- Brewer’s license — This is required for the production of any product other than wine that contains more than 0.5 percent alcohol by volume. The product must be fermented from malt, grain, etc. without any process of distillation or a beer concentrate.
When is duty payable?
The timing of when duty becomes payable differs depending on the type of alcoholic beverage and the circumstances of its production and sale. Producers are responsible for calculating, reporting, and remitting the duty to the CRA according to their specific circumstances.
Spirits and wine
Different duty rates apply to spirits and wine with different alcoholic strength. Duty becomes payable on spirits and wine when the packaged product is sold to consumers who are not able to acquire the goods duty free.
For example, a sale to a retailer will typically trigger a duty. However, sales to provincial boards such as the Alberta Gaming and Liquor Commission (AGLC) will be duty free because the AGLC has its own warehouse license that allows it to purchase the product without triggering the duty.
Breweries
Duty is paid upon production for breweries and cannot be deferred by transferring to a warehouse license. Duty rates are tiered by volume produced — for example, the rate for 2,001 hl to 5,000 hl is $7.104 while the rate for 50,001 hl to 75,000 hl is $30.192. It is important to note that many successful craft brewers are now brewing in excess of $100,000 hl and paying the same duty rate as the largest beer companies in Canada.
When to file returns with the CRA
Spirits, wine, or warehouse licensees
Those with a spirits, wine, or warehouse license must file returns on a monthly basis by default. Returns and payment are due the last day of the fiscal month after the reporting period.
After your business has been licensed and compliant for a minimum of 12 months, you can elect to file returns semi-annually. However, this option is only available if the total of all excise duties did not exceed $120,000 in the previous or current fiscal year.
Breweries
Breweries must file returns at the end of the calendar month and have a similar opportunity to file semi-annually if excise duties did not exceed the $120,000 threshold. Returns are due no later than the tenth working day of the month that follows the filing period. Payment is due on the last day of the month following the filing period.
How to ensure compliance with the CRA
Our advisors recently sat down with a CRA agent to discuss the compliance requirements for breweries, distilleries, and wineries. We have shared our insights from the conversation below to help your business meet the CRA’s reporting standards:
Labelling standards
The CRA stressed the importance of ensuring the alcoholic strength of your product is appropriately labelled to avoid duty overpayment. For example, you are overpaying duty if you sell a distilled spirit labelled at 40 percent, but the actual alcohol content is only 39.7 percent.
Errors in five percent loss allowance
The CRA notes it has been finding errors in submissions for the five percent loss allowance of packaging gauge tanks. This loss allowance reduces the amount of beer on which duty is calculated by acknowledging losses occur during packaging and must be applied based on actual production and packaging records. It is vital to continue regauging your tanks to ensure your losses are recorded and reported accurately.
$250 late filing penalty for brewers
The CRA notes that many brewers file returns on the date payment is due instead of on the date the return is due — and late filing results in a $250 penalty every time. It is important to remember that returns are due on the tenth working day of the month to avoid late penalties. Our advisors recommend filing your returns with the best information your business has available and amending as necessary later to avoid penalties.
Duty rates and calculation for brewers
The CRA recommends using its series spreadsheet for duty rates calculation. This software can calculate the duty properly on all applicable tiers — such as calculating the duty on the first 20,000 hl of beer at the lower rate. This helps reduce errors and ensures your returns are accurate.
Brewer’s duty: Rounding to whole numbers
The CRA’s online filing system allows brewers to input hectolitres to a single decimal. However, the CRA has indicated this is not required and brewers can round to the whole number when packaging. For example, 99.9 hl can be rounded to 99 hl.
Contract packaging of beer
The CRA clarified that the licensee that has the higher duty rate pays the rate in situations involving the contract packaging of beer. For example, Company A is under contract to package for Company B. Company A pays a duty rate of $7 per hectolitre while Company B pays a rate of $14 per hectolitre. This means Company A will pay $14 per hectolitre but does not show the volume packaged as part of its production. Company B does not pay duty but counts the volume packaged as part of its production.
Bonding for brewers
Brewers must pay a bond which acts as a guarantee that the brewer will fulfill their tax obligations to the CRA. The bond is based on the single highest duty paid in the past 12 months. For example, a new brewery may pay a duty of $12,000 in its first year and its average monthly duty is $1,000, which allows it to post the minimum bond of $5,000 to operate. If it pays a duty of $10,000 in its best-performing month, the CRA confirms that the spike in production and duty requires a new bond to be put in place next year.
Bonding for distilleries and wineries
Distilleries and wineries have the option to post cash for security within the first year of operations to avoid the cost of putting a bond in place until sales are normalized. The CRA confirms that a bond will be put in place based on the highest volume in the previous 12 months after the annual review of security requirements. Onsite aging of whiskey, rum, and wine is included in the calculation.
Reporting bulk inventory losses
The CRA has noticed returns showing a steady increase in bulk inventory over time — which may be a sign of not properly accounting for losses caused by evaporation or redistillation. The CRA will impose duty on production if the lost volume is not accounted for since that means it hasn’t been packaged and moved duty free to a warehouse license.
This makes it crucial to stay on top of your inventory adjustments each period to appropriately record losses and avoid paying duty on lost volume. Small adjustments over time are expected but larger adjustments may draw scrutiny from the CRA.
Co-packaging arrangements
Brewers may obtain a spirits license to package spirits under contract. The CRA notes that the owner of the bulk spirits is responsible for paying duty in these cases — not the brewer with possession.
Additionally, moving the product over to another company for packaging involves losing possession of the product. That means if there is a spillage, there is no opportunity for duty relief and the owner will pay all the duty on it. However, the owner can try to get compensation from the contract packager to pay for the duty on the spillage.
Contact Danny Crawford | Partner
Contact MNP’s Danny Crawford for more information on how to ensure your brewery, distillery, or winery is duty compliant.
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