The Ontario Ministry of Finance is continuing to “lead the charge” against Ontario tobacco wholesalers – turning the industry upside down with assessments worth tens of millions of dollars for failure to collect the Ontario Provincial Tobacco Tax (PTT) on sales of cigars and other non-cigarette tobacco (loose tobacco, pipe tobacco chewing tobacco, snuff, etc.) to Status Indians on Federal Indian reserves.
For many wholesalers these assessments come as a complete surprise, and often years after the actual sales have been made, resulting in significant interest amounts owing on top of the penalty assessed.
To a lesser extent, the Canada Revenue Agency (CRA) also continues to take a similar position regarding the GST/HST status of cigarettes, cigars, and virtually all other tobacco products sold to Status Indian’s on Reserve.
Previously most industry insiders might have reasonably assumed — perhaps based on Ontario's apparent acquiescence in the wide-spread industry practice of exempting all sales of non-cigarette tobacco sold to Status Indians on Federal Reserve — that sales of cigars and other non-cigarette tobacco was exempt of PTT (and GST/HST) in these situations.
Perhaps not so, given Ontario’s recent assessment activities.
While Ontario has been assessing wholesalers selling to Status Indians dating back to 2013-2014, a recent uptick in the number of assessments in 2017-2019 indicates that this is an area where the Ministry of Finance is continuing to focus, and an indication that a Ministerial decision has been made to stay the course on this policy and issue further assessments.
We would not be surprised to see further assessments continue throughout 2019 and into 2020 in respect of past sales to Status Indians, while the first assessments from 2013-2014 continue to work their way through the Ontario Superior Court appeals process.
In January of 2018 Ontario attempted to clarify its position by sending a number of wholesalers a notice “reminding them” of their responsibilities regarding the sale of cigars and other non-cigarette tobacco products on reserve. This notice indicated Ontario’s view, possibly for the first time in the public domain, that sales of cigars and other non-cigarette tobacco was subject to a limitation, and that sales to Status Indians that exceed “typical retail levels” should be subject to pre-collection of tax.
What makes this so troubling is that there appears to be a special exemption for just these kinds of sales, provided for the exclusive use of the Indian purchaser, and found in section 23(2) to Regulation 1034 under the Tobacco Tax Act – but no mention in the actual legal text of any limitation on sales in “typical retail levels”.
This apparent change in policy position – or strident efforts to re-engage in an unlegislated quote system – has been, and continues to be, a major thorn in the side of virtually any vendor of non-cigarette tobacco on reserve, and is potentially unlawful on Ontario’s part.
All Ontario tobacco wholesalers and retailers engaged in exempting sales of tobacco products to Status Indians are seemingly at risk of similar audits and assessment. Legal advice is likely called for.
Indeed, wholesalers and retailers on the receiving end of a Notice of Assessment for Ontario tobacco tax (issued under the Ontario Tobacco Tax Act) or GST/HST (issued under the GST legislation in Part IX of the Excise Tax Act) should get independent legal advice, as there are a number of reasons why this position may not be supportable at law.
Millar Kreklewetz LLP practices in this area, and Rob Kreklewetz and John Bassindale have significant recent file experience with this particular issue, both in the Ontario PTT context, and the federal GST/HST context (assessments issued by the CRA).
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