The Canadian spirits industry has been through many pivotal changes and innovations throughout the years.
Yet, it is still caught in a prohibition-style web of outdated rules, regulations and heavy taxation. The strength and resilience of the industry and those who dedicate their work to it is not because of the laws and regulations, but despite them.
It goes without saying that smart regulatory frameworks are essential for maintaining order and safety. Still, others perpetuate the current system’s complexity and inconsistency, creating a challenging environment along the entire supply and value chain from farmers to distillers, bar owners, consumers and everything in between. Among all the challenges that may come with creating distilled spirits, there are three topics that the industry agrees can all use some change.
The hidden issue: Provincial markups
While federal excise taxes remain a colloquial topic in spirits, most of what contributes to the high cost of spirits are provincial markups. As of April 1, 2024, the federal excise tax is approximately $13.57 per litre of absolute alcohol. A standard 750-ml bottle of 40 per cent ABV spirits amounts to $4.07. Significant, yes, but provincial markups are a far larger culprit in the retail price of spirits.
High provincial markups drive consumer prices and squeeze margins, especially for smaller distilleries that can’t absorb these additional costs. In some provinces, a bottle of spirits has an approximately 140 per cent mandatory minimum markup. Believe it or not, this is on the low end of normal. It can go as high as an effective tax rate of nearly 200 per cent in some provinces. These markups are applied not only on the product, but also on top of the federal excise tax. On average, a bottle of spirits carries a 75 per cent tax, which becomes even more pronounced with higher-end bottles.
With all these barriers to trade in Canada, proudly made Canadian products often need to find homes outside of their own backyard.
The margins for suppliers on a “reasonably priced” bottle would be around seven dollars, but after environmental levees, bottle deposits and provincial-specific taxes, that number gets smaller and smaller when compared to the total price. With minuscule margins like these, it’s par for the course producers can have difficulty operating efficiently.
Monopoly: It’s not just a game
Imagine the classic board game, but instead of properties and railroads, you’re dealing with government-controlled liquor boards. Welcome to “Monopoly: Spirits Edition.” As you land on “Imported Spirits Avenue,” you’re ready to start bidding on the tile (the correct way to play, according to the rules).
Still, the government, wearing the hats of rule-maker and banker, simply states, “We’ve got partners abroad, you can’t bid on this tile, take it or leave it.” You sigh and pay up, watching your stash of money shrink. Then, you draw the “Price Hike” card. The minimum price legislation has kicked in, increasing costs again. The producers down on “Distillery Row” are slicing their margins to slivers, essentially giving away their goods so that players remain in the game.
Circling the board, it becomes clear that every strategic maneuver is blocked by taxes and red tape. The coffers of the “banker” swell as innovation and competition languish. In this skewed game, you have to wonder: Is winning even possible, or is it just a fantasy in a game where the house always wins?
Trade within Canada
Selling spirits across provincial borders within Canada is so complicated that Canadian producers making premium Canadian spirits find it more accessible and preferable to export to the United States. The Canadian Free Trade Agreement’s Action Plan on Trade in Alcoholic Beverages acknowledges how unharmonious interprovincial trade is currently.
First, stringent personal use exemptions restrict the number of alcoholic beverages individuals can transport across provincial boundaries. Second, there is a widespread prohibition of e-commerce platforms in many provinces, which limits market accessibility for everyone. Third, it is impossible to create new sales channels because administrative burdens, inefficient special-order systems and complex sales procedures bog down current processes.
Finally, there is a pressing need for greater transparency and accessibility of information, as producers often struggle with opaque pricing structures and unclear listing practices. With all these barriers to trade in Canada, proudly made Canadian products often need to find homes outside of their own backyard.
Conclusion
As far as regulated industries go, the spirits sector has one of the shortest sticks you can draw, and yet the industry has continued to show time and time again that Canadian spirits is something worth fighting for. The open and continuous collaboration of public and private sector can drive data-driven and evidence-based regulations that support Canadian distillers and welcome modernization, fair market access, liberalization of trade and a better economic impact.
