Canadian distillers push for changes to ‘crushingly high’ federal tax on liquor

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Some of the most famous names in Canadian liquor have teamed up with craft distillers to push for a cut to what they call “crushingly high” federal taxes on spirits that put the industry at a disadvantage compared to rivals in other countries.

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The spirits industry has for years complained of an unfair tax burden, but this newly formed coalition of small and large players is hoping to turn the plight of craft distilleries into a federal election issue.

They argue that the federal excise tax on spirits — about $4 per standard bottle — is “tone deaf” and holds back the fledgling micro-distillery industry from the sort of explosive growth that micro-brewers have enjoyed for years.

“We’re having a hard time competing when we’re paying such an exorbitant amount of tax,” said Tyler Dyck, chief executive at Kelowna, B.C.-based Okanagan Spirits Craft Distillery, who is leading the Lift Canada’s Spirits coalition. “Obviously, we want to get this in front of all the federal leaders.”

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A reduction in tax revenues could be a tough sell during an election cycle that is expected to focus on unprecedented levels of government spending on pandemic support and recovery.

Pretty much everybody agrees that what the spirits industry is lacking, big and small, is money in their jeans for reinvestment in the business

Jan Westcott

The coalition, however, is getting support from two of the country’s biggest business advocacy groups: the Canadian Chamber of Commerce and the Canadian Federation of Independent Business (CFIB).

Federal taxes “combined with the hardship of the pandemic have led to a growing debt burden that is making it difficult” for many craft distilleries to stay in business, CFIB wrote to Finance Minister Chrystia Freeland last month.

A federal finance department spokesperson said he couldn’t comment on policy matters while the government is in its “caretaker period” during the election, but pointed out that both domestic and imported spirits are subject to the same federal excise duty rates in Canada.

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Distillers pay excise tax of roughly $12.74 per litre of absolute, or pure, alcohol they sell in Canada, which works out to $3.81 for every 750-ml bottle containing 40-per-cent alcohol, the coalition said. The government has been increasing its excise rate on alcohol each April, at the rate of inflation, since 2017 — known in the industry as the “escalator tax.”

Excise tax expenses range from $50,000 to $200,000 per month for Last Mountain Distillery in Lumsden, Sask., enough to compete with payroll as the business’ largest expense, said co-founder Meredith Schmidt.

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“If you tell somebody how much you pay every single month in excise tax, they’re like, ‘What?’” she said.

The coalition’s proposal, unveiled this week, calls for an 80-per-cent tax cut on the first 100,000 litres of absolute alcohol that a distiller makes, a change that would drastically reduce the burden on smaller producers while barely impacting large producers that pump out millions of litres a year.

“If you don’t do it now, we cannot grow,” said Dyck, who serves as president of the Craft Distillers Guild of British Columbia.

Jan Westcott, chief executive of the Spirits Canada trade association that represents the major commercial distilleries, including Canadian Club producer Beam Suntory Inc., Bacardi Ltd. and Corby Spirit and Wine Ltd., said it was important that “the industry was united” behind the campaign.

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“All of our members support this proposal,” he said. “Obviously, this is going to be a relatively modest break for them, but it’s a break nonetheless … The point of it is that everybody benefits to a certain extent.”

Westcott said teaming up with smaller distillers represents a “change in tact” for his group, which has spent much of its energy railing against “escalator” excise tax increases over the past four years.

“Pretty much everybody agrees that what the spirits industry is lacking, big and small, is money in their jeans for reinvestment in the business,” he said.

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The coalition is proposing a tiered system, similar to the one used to calculate excise on beer and wine produced in Canada. The system would drop the excise rate to $2.50 per litre for the first 100,000 litres, and $6.50 per litre for the next 400,000 litres, a 49-per-cent cut compared to the current rate. Any production of more than 500,000 litres would be taxed at the full rate.

The United States implemented a similar break for small producers in 2017, a move one trade group representing American craft distilleries called “a massive, massive lifeline” for the industry.

Without a similar reform in Canada, the domestic spirits industry will be at a significant disadvantage, the Canadian Chamber of Commerce said.

“Canadians already pay some of the highest alcohol taxes in the world that make it hard for our producers to compete globally,” chamber spokesman Phil Taylor said in an email.

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