Excise Duty Bond for Vaping Products in Canada
Author: Kyle Muscat
As announced in the 2022 federal budget, the Canadian government has introduced a vaping excise duty tax that now requires all vaping e-liquid and prefilled cartridges to be excise-tax stamped.
Essentially, all vaping liquids sold in Canada must be stamped with the associated duties remitted back to the CRA at the end of each month. This ruling applies regardless of the nicotine content contained in the product.
There are two sets of requirements imposed under this legislation which we will touch on below.
How does this affect e-vape manufactures?
All domestic vaping product manufacturers must now register with the CRA for a vaping product license along with registration under the vaping excise stamp regime. For the purpose of this license, manufacturers can be defined as:
- Those engaged in blending or mixing vaping substances
- Those who add vaping substances into a vaping device
- Those involved in packaging or repackaging vaping product for final sale
For those who are classified as a manufacturer, excise duties are to be calculated and remitted on a monthly basis using the B600 Vaping Duty and Information Return.
How does this affect e-vape importers?
Those who import packaged vaping products into the Canadian duty-paid market must apply to be a vaping prescribed person. With the bulk of vaping product manufacturing done overseas, most will fall under this category. Applying as a vaping prescribed person will allow the importer to obtain vaping excise stamps for their products.
For those who are classified as a vaping prescribed person, excise duties are required to be remitted at the end of each month using the Form B601, Vaping Information Return – Prescribed Person.
How to calculate vape excise duties
Under the current excise duty framework, the CRA requires duties to be paid based on a per ml or per gram equivalency. The formula for calculating the applicable duty on vaping products is as follows:
For vaping liquids:
- $1 per 2mL, or fraction thereof, for the first 10mL of vaping substance in the vaping device or immediate container
- $1 per 10mL, or fraction thereof, for amounts over the first 10mL
For vaping solids:
- $1 per 2 grams, or fraction thereof, for the first 10g of vaping substance in the vaping device or immediate container
- $1 per 10g, or fraction thereof, for amounts over the first 10g
Vaping Excise Duty Example:
Let’s suppose a Canadian company is a licensed distributor for a line of disposal vaping products which are manufactured overseas. The importer is designated as a vaping prescribed person and responsible for applying excise duty stamps before selling products into the duty-paid market.
Over the course of a month, the importer sold 15,000 disposal vapes, each containing 5mL of vaping liquid. Excise duties payable would be calculated as follows:
= (duties payable per unit) * (# units sold)
= ($3) * (15,000)
Registering under the CRA’s vaping excise duty regime
As a requirement of the excise duty regime, those who apply the excise stamps are required to post security to the CRA. The amount of which is equal to the average calculated monthly excise duties owed over a (12) month period. This can range anywhere from $5,000 up to $5M and can be posted in the form of cash, a letter of credit or an excise duty bond.
The requirement for organizations to post cash or a letter of credit will consequently tie up working capital that could otherwise be used to fund operations. In response to this, we have worked with insurers to develop an alternative form of financial security that is acceptable by the CRA. This is called an excise duty surety bond.
What is a vape excise tax bond?
As mentioned, an excise duty bond is a financial instrument which can be provided to the CRA as an acceptable form of security under the vaping excise duty regime. The bond itself is underwritten by a surety insurance company and offers a number of key benefits when compared to posting cash or a letter of credit. This includes:
- Efficiently priced; at a cost often below that of a letter of credit
- Frees up working capital; no need to post cash or collateralize a letter of credit
- “Off-balance sheet” item; does not erode operational lines of credit
In the event that an organization is unable to pay their excise duties owed, the CRA would then make a call on the bond – requiring the surety company to make payment on their behalf.
How much does a vaping excise bond cost?
The cost of a bond will vary depending on the financial strength of the organization for which it is issued. In other words, this can be viewed as the organization’s perceived ability to satisfy their excise duty obligations over the course of the year. Typically, this will range from 1% to 2% of the bond amount – charged annually.
A vaping device importer is required to provide the CRA with $100,000 in financial security. The surety company has agreed to issue the bond at a rate of 1.5%.
= $100,000 * 0.015
In the above example, the cost of the bond would be $1,500 for a 12 month period.
How do I get a vape excise tax bond?
Because a surety bond can be viewed as an extension of credit, underwriters will first want determine the financial strength of the corporation and its owners. At a minimum, they will often require:
- Most recent audited financial statements
- Business plan & projections
- Statements of Personal Net Worth from the main shareholders
The surety company may require additional information in their determination of the corporation’s financial health and ability to fund operations throughout the year. Once satisfied, the bond can be issued directly from our office for delivery to the CRA.
Ready to Obtain a Vaping Tax Bond?
Our dedicated team of experts are eager to assist with your insurance and bonding needs. We welcome calls to our office and can assist in determining your eligibility for a bond. For immediate inquiries, please contact us directly at (416) 708-8201.