How Does The Federal Excise Duty Tax Increase Affect Your Business?  

What’s the federal excise tax (alcohol tax)? 

  • The government of Canada imposes excise duty on alcoholic beverages. 

  • The rates are adjusted once a year in April based on the Consumer Price Index.

  • According to CityNews Vancouver, the new rate in 2023 is set to increase by more than 6%.[1]

  • If the new rate becomes effective on April 1, 2023, it will be the biggest rate hike in recent years as the consumer price index is based on runaway inflation. 

Planning for the excise tax increase

I hope that you have already adjusted your business model to plan for potentially the biggest beer tax increase. 

Essentially, there are 2 ways to go about it - Eat the cost or Pass it on to the end consumers.

I will walk you through the scenarios and look into how each choice will impact your bank account. I also made a few business and financial assumptions, you can find them at the end of this article. [3]


Figure 1 shows an analysis of the excise rate increase and the impact on a brewer’s revenue. 

Note that the wholesale price is not the brewers’ revenue! Surprised?

BCLDB and the other provincial liquor boards pay themselves first. They take their cut for markup and levies. And brewers get paid the leftover amount which is called In-Bond cost in the beverage industry.   

Eat the Cost 

Using the 2022 excise rate column as the baseline, If a brewer chooses to absorb the tax increase, revenue loss will be 2 cents (or 15% less) for each pack of 4x473 ml beer. 

To estimate the total revenue loss, a brewer who makes 5,001-15,000hl will lose $4,100 - $13,000 in revenue.   

Pass It On

The goal here is to neutralize the revenue loss by increasing the wholesale price by 2 cents. In the end, you get to make the same revenue as before.  

What’s the ripple effect on retail price? 

Two theories here:

  1. A 2-cent increase in the wholesale price is negligible. I speculate small retailers may take the hit and consumers continue to pay the same price as before in the short term. The reality is small businesses don’t have the resource to go through the hassle of updating hundreds or even thousands of display prices in their retail stores. 

  2. Some businesses, especially big corporations, will use the largest excise tax increase dialogue and the perception of runaway inflation optics to hike up their wholesale price at an even higher percentage to bank more revenue and margin. Because the price increase is significant, retailers will pass it on to the end consumers.  


Planning for the future

Remember, as a small craft domestic brewer, you get a reduced rate on excise tax. To show you the rate differential, below is a screengrab of the reduced excise duty rate published by the CRA.[2]

One of the most important business decisions is how much beer to produce. You need to plan your production based on demand. In addition, look at your production schedule often and plan ahead of time so you aren’t surprised by the large excise tax bill when your production volume lands you in a higher tax bracket.

Why does this matter?

For example, your typical production volume is less than 5,000hl annually. Your brewery has the capacity and you decide to make another 100hl for a seasonal one-off beer.

Now, the combined total annual volume becomes 5,100hl.

Because 5,100hl is in a higher tax bracket and despite the total volume landing at the low end of the scale, your excise tax rate jumps to $13.928 from $6.964 per hl, That’s 2 times higher than before.

This is incredibly frustrating to business owners because when you look at the top line, you think the business is doing great. You see volume and sales are up. But then, you look at the bottom line you see your business is becoming less profitable because higher excise tax is eating into your margin.

Final Thoughts:

Financial forecast and scenario planning are the heart of your business. Without a solid financial plan, it’s impossible to tell if you even have a viable business or results to expect. Contact us, we are happy to help.

By Sean Wang CPA, CMA - Founder | Margin Master | Mountain Biker

References:

[1]Source https://vancouver.citynews.ca/2022/11/05/bc-beer-wine-new-federal-tax-alcohol-pricier

[2]Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/edrates/excise-duty-rates.html

[3]Business and financial assumptions for the theoretical illustration in Figure 1.

  • Your annual production volume is between 5,001 and 15,000 hl   

  • The excise duty rate is $13.928 per hl in 2022 

  • The new excise duty rate including a 6% increase is $14.764 per hl in 2023

  • The rate difference is $0.836 per hl. To give you more clarity, for each pack of 4x473ml beer, you will pay 2 cents more in beer tax.  

  • Your business inputs stay the same (sales mix, price, and cost) 

  • You use private distribution.