The purpose of this paper is to address the application of the federal Goods and Services Tax (“GST”), Harmonized Sales Tax (“HST”) and British Columbia provincial sales tax (“PST”) to sales of medical marihuana. By “medical marihuana”, the paper refers to dried marihuana that is sold as a medication to mitigate the symptoms of a disease, disorder or abnormal physical state or its symptoms. We do not address the taxability of sales of marihuana for recreational uses.
The discussion in this paper applies to GST/HST, which applies throughout Canada (at a rate of 5%, or at a rate of 13-15% for sales to customers in five provinces as HST) and PST, which applies in British Columbia (at a rate of 7%). Quebec follows the same rules as the GST/HST for its Quebec Sales Tax. This discussion does not apply to the two other provincial retail sales tax regimes (Saskatchewan and Manitoba). This discussion applies to sales of dried marihuana and not to supplies of any prescription drugs that contain cannabis.
At present, sales of dried marihuana for medical purposes have been found by the Tax Court of Canada to be taxable supplies subject to GST/HST. However, this ruling is currently under appeal in the Federal Court of Appeal. While the appeal is pending, prudence dictates that cultivators and medical marihuana dispensaries should be aware of the risks of not collecting and remitting GST/HST on sales of dried marihuana.
Dried marihuana sold on the prescription of a person that is authorized to practice medicine, dentistry, podiatry or veterinary medicine or sold to alleviate pain should be exempt from PST. Sales of dried marihuana to persons authorized to possess marihuana under the Marihuana Medical Access Regulations (the “MMAR”) or the MMPR may be exempt from PST, but the law is not clear.
1. Statutory regime
In general, all goods sold in Canada are subject to GST at the rate of 5%, or HST of 13%-15% in the HST provinces, on the value of the consideration paid unless there is a provision of the Excise Tax Act (ETA) which excludes them from the application of GST. Schedule VI to the ETA lists goods that are “zero-rated”, meaning taxed at a rate of 0% (i.e., tax-free). The types of goods that are zero-rated include basic groceries, medical devices, certain agricultural products and certain drugs.
Schedule VI, Part I, section 2, paragraph (d) (“section VI-I-2(d)”) zero-rates federally controlled drugs under certain conditions. Section VI-I-2(d) provides that the following drugs or substances are zero-rated:
A supply of any of the following drugs or substances:
(d) 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, pursuant to the Controlled Drugs and Substances Act or regulations made under that Act, be sold to a consumer with neither a prescription nor an exemption by the Minister of Health in respect of the sale,
Section 17 of the Schedule to the Narcotic Control Regulations lists cannabis, cannabis (resin), cannabis (marihuana) as well as cannabidiol, cannabinol and tetrahydrocannabinol (THC). Therefore, it is clear that marihuana is a drug or substance included in the schedule to the Narcotic Control Regulations as required under section VI-I-2(d).
2. Canada Revenue Agency position
Since at least 2003, the Canada Revenue Agency (the “CRA”) has taken the position that all sales of marihuana were subject to GST/HST as taxable supplies because marihuana provided under the MMAR represented a supply of marihuana to certain consumers in limited circumstances without a prescription. The CRA took the position that an Authorization to Possess (“ATP”) issued under the MMAR was not a prescription (and not an exemption by the Minister of Health). Additionally, the CRA has routinely assessed GST/HST on sales or projected sales of marihuana from any “grow ops” referred to it by law enforcement through the CRA’s Special Enforcement Program or otherwise.
3. Hedges v. R.
The CRA’s view that supplies of dried marihuana were taxable was upheld by the Tax Court of Canada in Gerry Hedges v. R (“Hedges”). Mr. Hedges was a cultivator of marihuana who supplied dried marihuana exclusively to the British Columbia Compassion Club Society, a non-profit society established to create a legal environment for those who needed medicinal marihuana and to ensure access to an uncontaminated, safe product. The CRA assessed Mr. Hedges for GST on his supplies of dried marihuana. Mr. Hedges appealed the assessments to the Tax Court, arguing that his supplies of dried marihuana for medical purposes were zero-rated supplies under section VI-I-2(d).
In Hedges, the CRA advanced two grounds for its position that marihuana was not zero-rated under section VI-I-2(d). First, even though marihuana is included in the Schedule to the Narcotic Control Regulations, the CRA argued that dried marihuana was not a “drug” because it had not been approved for sale in Canada by Health Canada. Second, even if dried marihuana were a drug, it was carved out of section VI-I-2(d) because it could be sold to certain consumers under the MMAR with neither a prescription nor an exemption by the Minister of Health and so was not zero-rated (consistent with the CRA’s previously announced public interpretation of section VI-I-2(d)). The Tax Court rejected the CRA’s first position, but accepted the second argument and dismissed Mr. Hedges’ appeal.
With respect to the first issue, the parties agreed that the term “drug” in section VI-I-2(d) should be interpreted based on the definition of drug in the Food and Drugs Act (“FDA”). The FDA definition of “drug” included “any substance or mixture of substances manufactured, sold or represented for use in … the diagnosis, treatment, mitigation or prevention of a disease, disorder or abnormal physical state, or its symptoms, in human beings or animals.” (The parties thus agreed that “street drugs” sold for recreational use were not zero-rated.) However, the CRA’s position was that the only drugs zero-rated under section VI-I-2(d) were those that met the definition in the FDA and had been approved for sale in Canada by Health Canada and been given a “drug identification number” or DIN. The Tax Court held that dried marihuana was a “drug” for the purposes of section VI-I-2, not only because it plainly was represented for use in the treatment of a disease, disorder and for use in correcting organic functions, but also because the Tax Court had “no difficulty in concluding” that dried marihuana can have a therapeutic effect on humans. The Tax Court rejected the CRA’s argument that only Health Canada-approved drugs were zero-rated under section VI-I-2.
With respect to the second issue, the Tax Court concluded that marihuana was not zero-rated because it could be sold to certain consumers with neither a prescription nor an exemption by the Minister of Health under the MMAR, essentially accepting the CRA’s interpretation of section VI-I-2 of the ETA. Accordingly, Mr. Hedges’ sales of dried marihuana were held to be taxable.
The Hedges case is under appeal to the Federal Court of Appeal. The only issue before the Federal Court of Appeal is the correctness of the Tax Court’s interpretation of the carve-out clause in section VI-I-2(d). The CRA has not cross-appealed or disputed the Tax Court’s interpretation and ruling that dried marihuana sold as medical cannabis is a “drug”. However, the Tax Court decision represents the current state of the law that supplies of medical marihuana are taxable supplies and subject to GST/HST.
4. Current practice
In view of the decision in Hedges that supplies of marihuana are subject to GST, cultivators and medical marihuana dispensaries should be aware of the risks of not collecting and remitting net GST on sales of dried marihuana. If the Hedges decision is upheld by the Federal Court of Appeal, then failure to report and remit net tax payable will likely result in the CRA assessing penalties and interest in addition to the GST/HST liability. In many cases, suppliers will not be able to go back to their purchasers to recover GST/HST they did not previously charge (even though they can legally do so), simply for practical reasons — e.g., many small sales to consumers. Furthermore, directors of corporations that fail to remit GST or HST are subject to personal liability for unremitted GST/HST, penalties and interest.
Cultivators and dispensaries that want to comply with the CRA’s position and the Tax Court ruling, but still protect their rights in case the ruling is reversed, should be very careful not to explicitly charge GST/HST to their customers. If sales are shown as collecting GST or HST, then the vendor must remit that GST or HST even if no tax was payable, and only the customer can get a refund (via credit note from the vendor, or by way of rebate application to the CRA for “tax paid in error”). On the other hand, if sales are made on the basis of “includes all applicable taxes”, or “GST/HST is included in the price if applicable”, then the supplier can remit GST or HST as a fraction of those sales (e.g., 5/105ths for GST), and then file a notice of objection to the assessment of its return within 90 days, if the CRA issues a Notice of Assessment. If the CRA does not “assess” the return, the supplier can file a rebate claim with the CRA for “tax remitted in error”, subject to a two-year limitation period. No rebate can be claimed if the return has been assessed. By the time the objection or rebate claim has been considered, the Federal Court of Appeal likely will have issued its ruling on Hedges.
1. Preliminary remarks
Unlike with GST, there is no case law on the subject of the application of PST to medical marihuana. Accordingly, where PST legislation on the application or exemption of PST to medical marihuana is uncertain, the Tax Court’s analysis of the application of GST to medical marihuana may be of assistance.
2. Statutory regime
Sales of “tangible personal property” in British Columbia are subject to sales tax under Part 3 of the PSTA. The term “tangible personal property” is defined as, inter alia, “personal property that can be seen, weighed, measured, felt or touched, or that is in any other way perceptible to the senses, and includes natural or manufactured gas.” Based on this broad definition, marihuana is “tangible personal property” under the PSTA. Therefore, barring an exemption, sales of marihuana are subject to PST.
The Provincial Sales Tax Exemption and Refund Regulation, (the “PSTERR”) exempts certain drugs and health products from PST imposed under Part 3. Specifically, under subsection 3(1), the following are exempt from PST:
3(1)(c) drugs and other substances for the treatment, mitigation or prevention of a disease or disorder, if the drugs and other substances are:
(i) sold on the prescription of a practitioner, or
(ii) provided as part of a promotional distribution by a pharmaceutical company to a practitioner;
3(1)(e) drugs and other substances that alleviate pain and are in a form designed to be taken internally, whether orally or otherwise, or applied externally.
Each of these requirements is considered below.
3. Ministry of Finance position
The Ministry of Finance has not provided a published administrative position on the application of the PST to marihuana. In its PST bulletins, the Ministry has largely repeated the categories of exempt drugs listed in the legislation. The Ministry of Finance has not taken an officially published position on whether marihuana is a drug for PST purposes but has indicated to the media that since marihuana sold under the MMPR is classified as a medicine, PST was not applicable.
4. Is medical marihuana a “drug” or “other substance”?
The term “drug” is not defined in either the PSTA or the PSTERR. Additionally. However, as discussed above, the Tax Court decision in Hedges provides guidance. In the context of interpreting the term “drug” in section VI-I-2(d), the Tax Court adopted the definition of “drug” found in the FDA on the basis that the FDA is the primary regulatory regime for the approval and the identification of drugs. Further, the Tax Court held that dried marihuana sold for use therapeutically is a drug as defined under the FDA, while suggesting that dried marihuana sold for use recreationally would not be a drug as defined in the FDA. The Tax Court’s comments in Hedges could be persuasive in arguing that dried marihuana sold for use therapeutically is a “drug” for the purposes of the PSTERR.
In the event that the term “drug” in the PSTERR does not include marihuana used for medical purposes, the phrase “other substances” broadens the scope of the exemption and, given its context in the PSTERR, would likely include marihuana used for medical purposes.
If dried marihuana were considered to be a drug for the purposes of the PSTERR, PST would still apply unless one of the other exemption criteria were met. Specifically, the marihuana must: (i) be sold on the prescription of a practitioner; (ii) be provided as part of a promotional distribution by a pharmaceutical company to a practitioner; or (iii) alleviate pain.
5. Exemption by prescription
(a) Who is a “practitioner”?
For the purposes of the PSTERR, a “practitioner” is a person that is authorized to practice medicine, dentistry, podiatry or veterinary medicine and other health care professionals who are authorized to prescribe drugs or devices.
(b) What is a “prescription”?
Under the PSTERR, a “prescription” is defined as “a formula or direction given by a practitioner, for a remedy or treatment for a disease or disorder.” The issue, then, is whether a medical declaration under sections 6 and 8 of the MMAR or a medical document under subsection 129(1) of the MMPR is a “prescription” for the purposes of the PSTERR.
As noted above, in Hedges the Tax Court concluded that a medical declaration under the MMAR was not a “prescription” for the purposes of the ETA. However, in Hedges, the Tax Court considered the definitions of “prescription” in Schedule VI to the ETA and in the Narcotic Control Regulation. The definition in section VI-1-1 provides that a “prescription” means:
A written or verbal order given to a pharmacist by a medical practitioner or authorized individual, directing that a stated amount or any drug or mixture of drugs specified in the order be dispensed for the individual named in the order
Based on this definition, the Tax Court found that a medical declaration under the MMAR was not a “prescription” under section VI-I-2(d) for a number of reasons. First, the Tax Court held that:
Prescription requires an order given to a pharmacist. The medical declaration required to be completed under the MMARs is not an order nor is it given to a pharmacist. It is clearly not a prescription within this definition, but simply a declaration of support by a medical practitioner for an individual’s application for an ATP.
Second, the Tax Court held that a medical declaration under the MMAR is not communicated directly to a dispenser; instead, it is sent to the government of Canada for the determination of the success or failure of an individual’s application for an ATP. Further, an individual applying for an ATP under the MMAR must still meet requirements other than receiving a medical declaration before receiving an ATP. Therefore, The Tax Court concluded that a medical declaration under the MMAR was not a “prescription” pursuant to section VI-I-2(d).
Similarly, in analyzing whether a medical declaration under the MMAR was a “prescription” under section 2 of the Narcotic Control Regulations, as argued by Mr. Hedges, the Tax Court held that a medical declaration was not a “prescription”. The Tax Court noted that under the Narcotic Control Regulations, a prescription required a practitioner to authorize a stated amount of a substance to be dispensed.  However, the quantity of marihuana authorized to be held by an individual under the MMAR related to a question of the amount of dried marihuana an individual could possess before being subject to prosecution, not the dosage that individual was required to take.
The analysis of the definition of “prescription” by the Tax Court in Hedges may not apply to the definition of “prescription” in the PSTERR for a number of reasons. First, the definition of “prescription” in the PSTERR is less restrictive than the definitions in the ETA or the Narcotic Control Regulations. Section VI-I-2(d) defines a “prescription” as an order given to a pharmacist by a medical practitioner. The PSTERR definition of “prescription” refers to “a formula or direction given by a practitioner”. The definition in section VI-I-2(d) requires the order to be given to a pharmacist while the PSTERR is silent as to whom the formula or direction must be given. Accordingly, it is arguable that the Tax Court’s analysis in Hedges has limited utility in an analysis of the definition of “prescription” under the PSTERR.
Second, other courts, professional bodies and other provincial authorities have adopted a broader approach to the definition of “prescription”. For instance, in R v. Mernagh, the Ontario Court of Justice held that a declaration under the MMAR was equivalent to a prescription:
though the [medical] declaration does not contain the express language of prescription, authorization or endorsement, it would be naïve to suggest that it is anything less than those things. The physician, by signing the declaration, is enabling the patient to use marihuana as medicine.
On May 5, 2015, the Board of the College of Physicians and Surgeons of British Columbia revised its standard titled “Marijuana for Medical Purposes.” According to this standard, “The College considers the medical document authorizing patient access to marijuana to be equivalent to a prescription.” Similarly, in March, 2015, the College of Physicians and Surgeons of Ontario (the “CPSO”) reviewed and updated policy #1-15, its policy on marihuana used for medical purposes. Under policy #1-15, the CPSO takes the position that the medical document required under the MMPR is the equivalent to a prescription. The government of Saskatchewan has expressed similar views. As recently as December, 2014, Saskatchewan’s Ministry of Finance Revenue Division reasserted its view that, “Marijuana authorized by a doctor for medical use under the federal [MMAR] is a drug that is only available by prescription and is tax exempt.”
It is difficult to provide a definitive conclusion on whether a medical declaration under the MMAR or a medical document under the MMPR or some kind of other physician’s declaration would be a “prescription” for the purposes of the PSTERR. It would appear to be at least arguable that these declarations meet the fairly broad definition of prescription under the PSTERR.
6. Exemption by alleviation of pain
The PSTERR provides a broad exemption for drugs and other substances that alleviate pain and are in a form designed to be taken internally, whether orally or otherwise, or applied externally. Marihuana is used to alleviate pain as was recognized in the MMAR which listed “severe pain” as one of the “category 1 symptoms” under the Schedule to the MMAR. Therefore, assuming medical marihuana is a drug, even if it is not sold pursuant to a prescription of a practitioner, it should be exempt from PST when sold for the purposes of alleviating pain.
 GST is imposed under the federal Excise Tax Act, R.S.C., 1985, c. E-15, (the “ETA”). PST is imposed under the Provincial Sales Tax Act, S.B.C. 2012, c. 35 (the “PSTA”).
 Marihuana Medical Access Regulations, SOR/2001-227 (repealed by the Marihuana for Medical Purposes Regulations, SOR/2013-119 (“MMPR”), at section 267 but still partially in force under the court order in Allard et al. v. Canada, 2014 FC 280 (under appeal to the Federal Court of Appeal)).
 ETA subsec. 165(1).
 The HST provinces at present are: Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador. The provincial portion of the HST is imposed under ETA subsec. 165(2).
 ETA, subsection 165(3). A zero-rated supply is distinct from an “exempt supply” under the ETA. A person making zero-rated supplies but can claim input tax credits (“ITCs”) to recover the GST paid on the costs of producing and selling the goods. A person making exempt supplies does not collect GST but also cannot claim ITCs.
 Narcotic Control Regulations, C.R.C., c. 1041, Schedule, section 17.
 The CRA announcement at CICA Commodity Tax Symposium on September 24, 2003 reported in David M. Sherman, Canada GST Service (Toronto: Carswell).
 The CRA also took the position that supplies of cannabis marihuana, cocaine and heroin were not zero-rated notwithstanding their presence on the Schedule to the Narcotic Control Regulations because “provisions in the [Narcotics Control Regulations] allow for the sale of narcotics to consumers without a prescription”: CRA Headquarters Interpretation Letter (June 14, 2004 (file 46389)). The CRA did not identify the provisions of the Narcotic Control Regulations in question.
 Hedges v. R., , 2014 TCC 270. The authors, Mr. Campbell and Mr. Sherman, were co-counsel for Mr. Hedges in the Tax Court.
 Food and Drugs Act, R.S.C. 1985, c. F-27, subsection 2(1).
 Hedges, at paragraph 69.
 Hedges, at paragraph 59-61.
 Hedges, at paragraphs 71 to 96. The analysis of the trial judge is discussed in more details below in the discussion of the PST.
 Federal Court of Appeal file no. A-456-14. As of the date of this paper, the parties have filed their Memoranda of Fact and Law. Oral argument likely will be heard in the Fall of 2015.
 For further information on the technical statutory interpretation issues related to the application of the carve-out clause in section VI-I-2(d) that will be argued at the Federal Court of Appeal, see David M. Sherman’s paper “Does GST or HST apply to Medical Marijuana?” (November 2014) at <http://davidsherman.ca/files/opener.php?file=GST on cannabis Nov-14.pdf>.
 If the cultivator or dispensary is a “small supplier”, (in general terms, a person whose taxable supplies, along with other persons within the same control group, do not exceed $30,000 in four consecutive calendar quarters), that person is not required to register for GST or collect GST/HST on sales and it not entitled to claim ITCs.
 ETA, section 224.
 ETA, section 323.
 ETA, subsection 225(1).
 ETA, subsection 232(1).
 ETA, section 261.
 ETA, section 261.
 ETA, paragraph 261(2)(a).
 PSTA, section 1.
 PSTERR, B.C. Reg. 97/2013.
 Bulletin PST 207 “Medical Supplies and Equipment” (revised February 2015); Bulletin PST 206 “Grocery and Drug Stores” (revised October 2013).
 “Corporations move in on Canada’s medicinal cannabis industry”, The Georgia Straight, March 18, 2015).
 Hedges at paragraph 66.
 Ibid. at paragraph 67.
 As noted, Hedges is being appealed by Mr. Hedges to the Federal Court of Appeal. However, the Federal Court of Appeal’s decision will not be binding on the Supreme Court of British Columbia, which would make a determination of the application of the PSTA and PSTERR to medical marihuana, but it could be persuasive. Also note that the PSTA and the PSTERR employ different language than the wording found in the ETA, which could provide room to distinguish the definition of “drugs” in the PSTERR from “drug” in the ETA.
 This paper will focus on (i) and (iii) only since (ii) (i.e., the provision of medical marihuana as part of a promotional distribution by a pharmaceutical company to a practitioner) is, at this time, an unlikely occurrence.
 Pursuant to subsection 1(1) of the PSTERR, a “practitioner” has the same meaning as in the Pharmacy Operations and Drug Scheduling Act, S.B.C. 2003, c. 77 (the “PODSA”). Under section 1 of that statute, a “practitioner” is a person that is either: (a) authorized to practice medicine, dentistry, podiatry or veterinary medicine; or (b) in a class of persons prescribed by the minister for the purpose of the definition of “practitioner” and authorized under the Health Professions Act (the “HPA”) to prescribe drugs or devices in the course of providing the services of a designated health profession as defined in section 1 of the HPA. With respect to (b), the classes of persons prescribed by the minister for the purpose of subparagraph 1(b)(i) of the definition of “practitioner” in the PODSA include the following: midwives, nurses practicing nursing as nurse practitioners, optometrists, pharmacists (for the purposes only of prescribing ethinyl, estradiol, norgestrel and progestin for emergency contraception) and naturopathic physicians (Prescribed Health Care Professions Regulation, B.C. Reg. 129/2009 at section 2). Most of these clasess are permitted to prescribe drugs of some kind in the course of providing the services of a designated health profession under the HPA (Health Professoins Designation Regulation, B.C. Reg. 270/2008). However, the scope of the drugs that these classes can prescribe is limited by regulations and each profession’s college standard and guidelines.
 PSTERR at subsection 1(1).
 This aspect of the Tax Court decision is not under appeal.
 Hedges at paragraph 84
 Hedges at paragraph 87.
 A criminal case, R v. Falconi, 31 C.C.C. (2d) 144 (Ont. Co. Ct.), and another tax case, Pagnotta v. R.,  4 C.T.C. 2613 (T.C.C. [Informal Procedure]) made similar conclusions on the definition of “prescription”.
 Ibid. at para 88.
 R. v. Mernagh, 2011 ONSC 2121 (Ont. S.C.J.) at paragraph 250
 See online: https://www.cpsbc.ca/files/pdf/PSG-Marijuana-for-Medical-Purposes.pdf
 See online: http://www.cpso.on.ca/CMSPages/PortalTemplate.aspx?aliaspath=%2fPolicies-Publications%2fPolicy%2fMarijuana-for-Medical-Purposes
 Ministry of Finance Revenue Division, Saskatchewan Provincial Sales Tax Rulings (December, 2014) at paragraph 23.3. See online: http://finance.gov.sk.ca/pst/RulingsManual.pdf
 Severe pain, severe nausea, cachexia, anorexia, weight loss, muscle spasms and seizures were listed as “category 1 symptoms” under the Schedule to the MMAR.