Tax Bulletin TT 4-2004, March 2004

• This bulletin contains important information for tobacco tax collectors under the Tobacco Tax Act (Act) as well as others involved in the distribution of tobacco products.

Highlights

• The Act was amended to provide authority for the Minister to assess a penalty where a person's unverifiable tobacco losses are in excess of a prescribed threshold. The amendments were made December 5, 2001.
• Regulation amendments were introduced to provide the method for calculating a threshold for unverifiable losses as well as a method for calculating unverifiable losses and excess unverifiable losses. These amendments to Regulation 1033 made under the Act are effective February 27, 2004.
• The information in this bulletin does not replace the law found in the Act and related Regulations.

Background

Penalty for Unverifiable Losses which Exceed Threshold

While the Ministry acknowledges that there are legitimate unverifiable product losses in the course of manufacturing and distribution of tobacco products, it has been determined that the tax revenue erosion resulting from unverifiable losses which exceed a certain threshold is not acceptable.

The purpose of the amendments described in this bulletin is to provide an incentive to reduce unverifiable product losses while limiting tax revenue erosion.

Subsection 19(3.4) of the Act provides for the assessment of a penalty where a person's unverifiable loss of tobacco is found to be in excess of a prescribed threshold.

The penalty is an amount equal to the tax that would have been collectable by the person if the tobacco had been sold to a consumer liable to pay tax. Regulation 1033, as amended, provides the method for calculating unverifiable losses, excess unverifiable losses, and also provides a threshold for unverifiable losses. The method of calculation of losses and the threshold are detailed below.

These amendments do not apply to losses which may be verified by supporting documentation. For further information on lost, destroyed, stolen, or contaminated tobacco, please refer to Ontario Tax Bulletin TT 3-2000, published October 2000.

Elements of Calculation

An unverifiable loss exists where an amount of tobacco cannot be accounted for. Available inventory is the amount of tobacco that must be accounted for. It is the total of opening tobacco inventory plus additions to inventory during a selected period, less closing inventory. A person's unverifiable loss is that portion of the available inventory which cannot be shown, to the satisfaction of the Minister, to have been sold, lost, stolen, destroyed, contaminated, consumed or distributed.

A threshold for acceptable losses has been prescribed. Any loss of tobacco which exceeds this threshold is an excess loss and it is on any excess loss that a penalty may be assessed.

The threshold is not an allowance. Only where the person has satisfied the Minister that inventory reconciliations show unverifiable losses, will those losses be recognized.

Method of Calculation

Available Inventory

A person's available inventory of tobacco is calculated over any period of 36 consecutive months using the formula:

A + B - C

In this formula,

"A" is the amount of the person's opening inventory of tobacco at the beginning of the period,

"B" is the amount of tobacco produced, received or purchased by the person during the period, and

"C" is the amount of the person's closing inventory of tobacco at the end of the period.

Unverifiable Losses

Unverifiable losses is the amount of a person's available inventory less the amount of tobacco that the person verifies to the satisfaction of the Minister to have been sold, lost, stolen, destroyed, contaminated, consumed or distributed.

Prescribed Threshold

The prescribed threshold for unverifiable loss is 0.1% (one-tenth of one percent).

Excess Unverifiable Losses

Excess unverifiable losses exist where the person's unverifiable losses exceed the threshold multiplied by the person's available inventory. That is:

excess unverifiable losses = unverifiable losses - (0.1% × available inventory)

If this calculation results in a negative figure, the person does not have excess unverifiable losses.

Penalty

Penalty on Excess Unverifiable Losses

A penalty may be assessed on any excess unverifiable losses. The penalty is an amount equal to the tax that would have been collectable by the person if the tobacco had been sold to a consumer liable to pay tax.

Additional Information

If this bulletin does not completely address your particular situation, refer to the Act and related Regulations, or contact the:

Ministry of Revenue
Client Accounts and Services Branch
Tobacco Tax Program
33 King Street West
PO Box 625
Oshawa ON  L1H 8H9

• Toll-free: 1 866 ONT-TAXS (1 866 668-8297)
• Fax: 905 436-4511
• Teletypewriter (TTY): 1 800 263-7776

This bulletin and various other English and French tax materials published by the Ministry of Revenue may be obtained online at ontario.ca/revenue.

The Tobacco Tax Act and Ontario's other public statutes and regulations may be obtained online at www.e-laws.gov.on.ca.

ISBN 0-7794-5748-X

© Queen's Printer for Ontario, 2004