Excise Warehouse Transfer Rules Tighten

In the Alcohol Industry, as with its heavily-taxed cousins – the tobacco, vaping, and cannabis industries – taxation is all about levying tax on producers at the time of final packaging, or on importers at the time of importation. There are exceptions, BUT only under heavily regulated and controlled circumstances.

Two of these exceptions are for transfers to Excise Warehouses owned by other Excise Licensees ("Licensees"), or transfers to Exporters. The Canada Revenue Agency ("CRA") has recently been tightening its "documentation" requirements around these two types of transfers, auditing Licensees for compliance with those new requirements and issuing HUGE assessments (including 200% penalties) where even de minimis non-compliance is found.

In this Beer, Wine & Spirits Industry Report we examine these recent changes and the new landscape for the Canadian Alcohol Industry.

Transfers Between Excise Warehouses

The CRA recently issued Excise Duty Notice EDN103 ("EDN103"), which clarifies its interpretation of the Excise Act, 2001's rules on transferring non-duty-paid packaged alcohol ("NDP Alcohol") between one Licensee's Excise Warehouse (the "Shipper") and another's (the "Recipient"). Noncompliance with this strict interpretation of the rules is increasingly being penalized.

First, EDN103 clarifies that before transfers, the Shipper must verify that the destination is a licensed Excise Warehouse and is specifically listed on the Recipient's licencing letter. The Shipper must also confirm that the Recipient accepts liability for the Excise Duty on the transferred products. Finally, the Shipper MUST report the NDP Alcohol's removal from its Excise Warehouse on Form B262, Excise Duty Return – Excise Warehouse Licensee, under the category "Reductions to inventory: Non-duty-paid / Removed for delivery to other excise warehouses". EDN103 also clarifies that if a Shipper transfers NDP Alcohol to any destination that is NOT a CRA-approved Excise Warehouse, the alcohol cannot be shipped on a non-duty-paid basis. In such cases, the Shipper must pay the Excise Duty as soon as the alcohol leaves its Excise Warehouse.

Transfers to an Exporter

Similarly strict rules apply when NDP Alcohol is transferred from an Excise Warehouse for export. As explained in Export Memorandum EDM9-3-1 ("EDM9-3-1"), a Licensee can remove NDP Alcohol for export without paying Duty only with sufficient documentary evidence that the goods will actually leave Canada. Those documents allow the entire shipment to be traced from its origin in Canada to its foreign destination and must be obtained by the Licensee within three months of reporting the export and must be retained for subsequent CRA verification.

During such a transfer, liability for the Excise Duty remains with the Canadian Licensee until the goods have been exported. However, if that Licensee is not able to supply the required documentation to the CRA, they will have to pay the unpaid Excise Duty and may face penalties – and more and more often the CRA IS following through on these penalties for insufficient documentation.

Takeaways

For those in the Beer, Wine & Spirits Industry, removing ANY NDP Alcohol from an Excise Warehouse comes with strict compliance requirements. The CRA is getting more aggressive with its Excise Audits, and if it finds even ONE mistake, it may subject a business to a MASSIVE penalty.

Specialized Counsel can help industry participants navigate through this complex regulatory environment and avoid sustaining unnecessary penalties from the CRA.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.