GST on Marihuana
Should consumers be charged GST on marihuana?
Yes, according to the Tax Court of Canada in Hedges v. The Queen, 2014 TCC 270, because marihuana is legally available for purchase without a prescription and without a Ministerial exemption.
Most goods and services are subject to a 5% GST. Some supplies, like basic groceries and prescription medications, are zero-rated, meaning that the supplier does not charge GST but can still claim Input Tax Credits. Some supplies are exempt, such as educational services, meaning that the supplier does not charge GST but, unlike zero-rated supplies, the supplier cannot claim Input Tax Credits with respect to that supply.
In this case, Mr. Hedge grew and sold $311,446 worth of marihuana over the three years at issue, and was assessed $14,968.43 in unremitted GST, interest and penalties. He appealed the assessment, arguing that his marihuana was a Zero-Rated Supply.
Schedule VI-I-2(d) of the Act lists a number of Zero-Rated Supplies that are taxed at a rate of zero, including:
a drug that contains a substance included in the schedule to the Narcotic Control Regulations, other than a drug or mixture of drugs that may be sold to a consumer without a prescription [or, for supplies after February 26, 2008, an exemption by the Minister of Health] pursuant to the Controlled Drugs Substances Act or regulations made under that Act.
Drugs are generally zero-rated, but drugs that can be sold without a prescription or Ministerial exemption are carved out of that category. The Court interpreted this provision to exclude not only drugs that can be bought over-the-counter, but also drugs that can be bought “with no Government control, regulation, [or] intervention”.
Was the Dried Marihuana a “Drug”?
Recognizing that the term “drug” commonly encompasses both recreational and therapeutic use of substances, the Court reviewed the regulatory framework governing drugs and medical marihuana and adopted the following definition of “drug” from the Food and Drugs Act:
“drug” includes any substance or mixture of substances manufactured, sold or represented for use in
(a) the diagnosis, treatment, mitigation or prevention of a disease, disorder or abnormal physical state, or its symptoms, in human beings or animals,
(b) restoring, correcting or modifying organic functions in human beings or animals, or
(c) disinfection in premises in which food is manufactured, prepared or kept;
Noting that the definition depends on the purported use of a substance, and not its proven effectiveness, the Court had no difficulty finding that dried marihuana represented for use therapeutically is indeed a “drug” whether it has been proven effective or not. As such, dried marijuana would be zero-rated if not caught in the exclusionary carve-out for drugs that may be sold without a prescription or Ministerial exemption.
Can Marihuana Be Sold Without a Prescription or Ministerial Exemption?
The Court interpreted the carve-out provision to mean “an exclusion of drugs that can simply be bought with money and with no Government control, regulation, intervention….”
The Marihuana Medical Access Regulations set out a process for applying for an Authorization to Possess marihuana for medical purposes which allows the holder to possess a certain amount of marihuana, roughly calculated to be a 30 day supply, and to acquire it from a set list of sources. The process involves an application by the individual and a declaration of support by a medical practitioner. If the conditions are met, the Minister of Health “shall” issue an authorization.
Is the Authorization to Possess a “prescription” or an “exemption”? No. The Court held that a prescription is an “order given to a pharmacist”, and since this Authorization to Possess was not to a pharmacist it is not a prescription.
Is the Authorization to Possess a Ministerial exemption? Sections 56 of the Controlled Drugs and Substances Act allows the Minister of Health to “exempt any person or class of persons or any controlled substance or precursor or any class thereof from the application of all or any of the provisions of this Act or the regulations if, in the opinion of the Minister, the exemption is necessary for a medical or scientific purpose or is otherwise in the public interest.”
Compare that blanket exemption with the Marihuana Medical Access Regulations, which permitted Authorization to Possess holders to obtain marihuana from one of three sources: from Health Canada, through personal production, or by designating another person to produce it for them. The Court found that these permissions, or authorizations, were not “exemptions” in the context of the Controlled Drugs and Substances Act.
The Court concluded that under the Marihuana Medical Access Regulations, marihuana could be sold without a prescription and without a Ministerial exemption. As such, it was carved out of the category of zero-rated supplies, and subject to the regular 5% GST rate.
Unfortunately, these reasons cannot be extrapolated to form a general rule for all sales of marihuana. The Court pleaded with Parliament to clarify the rules:
If the Government intends that all sales of dried marihuana are to be zero-rated, say so clearly. If the Government intends that all sales of dried marihuana are to be subject to GST, say so clearly. If the Government intends to have dried marihuana as a prescribed drug and only dried marihuana obtained by a prescription is to be zero-rated, say so clearly.
Since the periods at issue in this case Parliament has revised the regulatory framework, replacing the Marihuana Medical Access Regulations with the Marihuana for Medical Purposes Regulations. Under the new regulations the Minister no longer issues Authorizations to Possess, but leaves it to the individual user and their doctor to register directly with a licensed producer. It appears that the government is focusing on regulating the supplier rather than the consumer.
In any event, the new scheme is unlikely to change the critical finding in this case, which is that government authorization to purchase marihuana is not necessarily sweeping enough to qualify as a Ministerial exemption. At least for now, dried marihuana can be purchased “over-the-counter”, so to speak, and is thus subject to a 5% GST.
Matthew Canzer can be contacted at 250-869-1122 or firstname.lastname@example.org
 Narcotic Control Regulations, Controlled Drugs and Substances Act, Food and Drugs Act, Marihuana Medical Access Regulations and Marihuana Exemption (Food and Drugs Act) Regulations.
 Hedges, at para. 67.
 Hedges, at para. 69.
 Hedges, at para. 72.
 Made under s.55(1) of the Controlled Drugs and Substances Act and were repealed on March 31, 2014.
 Hedges, at para.84.
 Hedges, at para.99.