Written by Ruth Promislow, Hugo Alves and Mike Lickver
Is medical marijuana sold by a licensed producer pursuant to the Marihuana for Medical Purposes Regulations SOR/2013-199 (MMPR), exempt from goods and services tax (GST) under the Excise Tax Act RSC 1985, c E-15?
The recent decision of the Federal Court of Appeal in Hedges v The Queen, 2016 FCA 19 (Hedges), provides a helpful foundation for licensed producers (LPs) under the MMPR and their patients to argue that the sale of medical marijuana should not be subject to GST. However, a roadblock may still remain in that the language of the Excise Tax Act has not caught up with the MMPR regime thereby creating a legislative gap—a gap which may disappear if the Canadian Pharmacists Association (CPhA) has its way and is granted a "front line" role in the dispensing of medical marijuana.
Hedges - Background Facts
Hedges supplied marijuana to a dispensary whose members suffered from various ailments. Hedges never collected or remitted GST on his sales of marijuana to the dispensary. He was reassessed by Canada Revenue Agency and then sought to challenge that reassessment before the Federal Court, and then on appeal to the Federal Court of Appeal.
Hedges' case concerned the Medical Marihuana Access Regulations (SOR/2001-227) (MMAR) because the sales at issue occurred in 2007-2009, prior to the enactment of the MMPR (the successor legislation to the MMAR). Under the MMAR, a person could apply for an Authorization to Possess (ATP) which, if granted, permitted the possession of dried marijuana in accordance with the terms of the ATP. A "medical declaration" was required in order to obtain the ATP. The “medical declaration” was required to indicate (among other routine matters):
- the daily amount of dried marijuana and the form and route of administration that the applicant intended to use;
- the anticipated period of use; and
- that conventional treatments for the symptoms had been tried or considered and had been found to be ineffective or medically inappropriate.
Significantly, under the MMAR, the "medical declaration" did not require the medical practitioner to express any indication of the use or period of use of the medical marijuana. That is, the medical practitioner did not have to prescribe the use of medical marijuana; rather, the practitioner simply recited the applicant's intended use.
Excise Tax Act
Under the Excise Tax Act, there are defined categories of drugs that are zero-rated, meaning they are exempt from GST. Schedule VI-2(d) provides that a drug is zero-rated if that drug
"contains a substance included in the schedule to the Narcotic Control Regulations (C.R.C., c 1041) (NCR), other than a drug or mixture of drugs that may, pursuant to the Controlled Drugs and Substances Act (S.C. 1996, c.19) (CDSA) 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."
Cannabis is clearly included in the schedule to the NCR, therefore, put simply, if the drugs in question are not a narcotic included in the schedule to the NCR or may be sold without a prescription or an exemption by the Minister of Health in respect of the sale, they are not zero-rated and are therefore subject to GST.
Federal Court Decision
Cannabis is clearly a substance included in the schedule to the NCR. Therefore, in Hedges, the central issue before the Federal Court and the Federal Court of Appeal was whether the scheme under the MMAR allowed the sale of medical marijuana to consumers without a prescription or exemption. The Federal Court held that medical marijuana could be obtained under the MMAR without a prescription or exemption, and, therefore, was subject to GST.
The Federal Court rejected Hedges' argument that the "medical declaration" which was required to accompany an application for an ATP was a "prescription" for the purposes of the Excise Tax Act. The Federal Court rooted this finding in the definition of prescription in Schedule VI of the Excise Tax Act which defines it as:
"a written or verbal order, given to a pharmacist by a medical practitioner or authorized individual, directing that a stated amount of any drug or mixture of drugs specified in the order be dispensed for the individual named in the order” [emphasis added].
Schedule VI of the Excise Tax Act defines "pharmacist" as a person who is entitled under the laws of a province to practice the profession of pharmacy.
The Federal Court rejected Hedges' argument that the definition of "prescription" in the NCR—"in respect of a narcotic, an authorization given by a practitioner that a stated amount of the narcotic be dispensed for the person named in the prescription"—should supplant the more narrow definition of prescription in the Excise Tax Act. The Federal Court held that, in any event, the “medical declaration” would not constitute a prescription under the NCR.
The Federal Court held that the “medical declaration” was not a prescription because it was not an order to a pharmacist nor an authorization itself; it was a document supporting an ATP application. The Federal Court further noted that the “medical declaration” that accompanied an ATP application was not communicated directly to a dispenser; it went back to the government for determination of success or failure of an application, and the “medical declaration” was no guarantee that an ATP would ultimately be issued.
On the issue of exemption, the Federal Court held that the ATP was not an "exemption", but, rather, just an authorization, noting that clearer wording would have been used if Parliament had intended to categorize the ATP as an exemption. The Federal Court ruled that if medical marijuana was available in some instances without a prescription or exemption, then the drug was not to be zero-rated even if it was sold pursuant to an exemption in certain scenarios. Therefore, if one obtains medical marijuana through an exemption, it will still be taxed because it may be obtained without an exemption in other scenarios.
Federal Court of Appeal Decision
On appeal, Hedges did not pursue the argument that the ATP was a prescription for the purposes of the Excise Tax Act and, therefore, the central issue before the Federal Court of Appeal (FCA) was whether the ATP under the MMAR constituted a Ministerial exemption.
The FCA rejected Hedges' argument that the ATP is an exemption by the Minister, holding that the MMAR did not refer to an ATP as an exemption and that an "exemption by the Minister of Health" contemplates an administrative action in the form of a permit, licence or authorization.
Implications for Sales of Medical Marijuana under the MMPR?
The question that a court will have to consider is whether the legislative scheme under the MMPR allows the sale of marijuana by LPs to patients without a prescription or an exemption by the Minister of Health in respect of the sale. If the answer to both of those questions is yes, then marijuana sold under the MMPR will not have zero-rated status and will be subject to GST.
Section 12(4) of the MMPR provides that an LP may sell dried marijuana to a patient of that LP (or the patient's responsible person), a hospital employee if the medical marijuana is for the purposes and in connection with their employment, or a person to whom an exemption relating to the marihuana has been granted under section 56 of the CDSA. Therefore, the wording of section 12(4) of the MMPR provides that medical marijuana can be sold to a patient without an exemption. Put another way, section 12(4) of the MMPR sets out the categories of persons to whom a LP may sell marijuana for medical purposes—some of which do not require an exemption by the Minister under section 56 of the CDSA.
However, on the issue of whether medical marijuana requires a prescription under the MMPR (and is therefore zero-rated), there is a distinction (arguably a significant one) to be made between a "medical declaration" under the MMARs and the "medical document" under the MMPR. Under the MMPR, it is necessary for a prospective patient to submit a "medical document" to an LP along with their application to become a patient of the LP. The “medical document” is defined in section 129 of the MMPR as a document provided by a health care practitioner to a person who is under their professional treatment and that indicates, among other routine matters, the daily quantity of medical marijuana to be used by the patient, expressed in grams, and the period of use.
The reasoning of the Federal Court in Hedges may be helpful in arguing that the “medical document” under the MMPR is a prescription:
- The Federal Court held that the “medical declaration” is not an order. In contrast, “the medical document” directs that a specific amount of marijuana be dispensed to the patient.
- The Federal Court held that the “medical declaration” is not communicated directly to a dispenser. In contrast, the “medical document” is communicated directly to the LP (the dispenser).
- The Federal Court held that the “medical declaration” is no guarantee that an ATP will ultimately be issued, as the individual must still meet the MMAR requirements. In contrast, provided the LP accepts the applicant as a patient and has product available, the “medical document” is a guarantee that medical marijuana will be dispensed.
The MMPR, therefore, represents a significant shift from the MMAR in that a medical practitioner must prescribe the use of medical marijuana and the "medical document" issued by the medical practitioner appears to meet virtually all of the requirements of a prescription under the Excise Tax Act, except one.
A potential roadblock exists in the language of Schedule VI of the Excise Tax Act. As set out above, Schedule VI of the Excise Tax Act (the relevant section dealing with zero-rated supplies) defines "prescription" as "a written or verbal order, given to a pharmacist by a medical practitioner or authorized individual, directing that a stated amount of any drug or mixture of drugs specified in the order be dispensed for the individual named in the order" [emphasis added]. The requirement that the order be "given to a pharmacist" poses a problem for the position that a “medical document” under the MMPR is a "prescription" for the purposes of the Excise Tax Act because such document is not given to a pharmacist. Therefore, while the MMPR represent a new regime whereby a patient must be prescribed the use of medical marijuana, the wording of the Excise Tax Act appears to be inconsistent with this shift.
An application to determine the tax status of medical marijuana sold pursuant to the MMPR will require the court to engage in the task of interpreting and constructing the Excise Tax Act and the MMPR. In the construction of statutes, "there is a presumption of coherence: provisions of a statute are intended to work together logically and rationally and an enactment is presumed not to contain contradictions and inconsistencies."1 The duty of the courts is to resolve apparent conflicts in statutes and regulations.
An argument could therefore be made to the Federal Court that the term "prescription" as used in Schedule VI of the Excise Tax Act must be interpreted in a manner that is consistent with the scheme of the MMPR. The sale of medical marijuana now requires what is effectively a prescription. Whether the prescription is given to and filled by a pharmacist or an LP should be of no consequence in the determination of whether the medical marijuana is zero-rated. It should be noted that recent commentary from the College of Physicians and Surgeons of Ontario supports the position that a “medical document” issued pursuant to the MMPR is a prescription. In its policy on Marijuana for Medical Purposes the College states:
"The MMPR requires that patients obtain a medical document completed by an authorized health-care practitioner in order to access a legal supply of dried marijuana for medical purposes. The medical document contains information that would normally be found on a prescription."
Enter the Pharmacies
In February 2014 the CPhA authored a letter to the applicable federal regulatory authorities providing comments on Health Canada's draft MMPR regulations as published in Part 1 of the Canada Gazette on December 15, 2012 (Draft Regs). The Draft Regs provided that pharmacists who were authorized by their provincial government and pharmacy regulatory authority would be able to obtain medical marijuana from LPs under the MMPR and dispense medical marijuana to patients who obtain a “medical document.” In arguing that pharmacists did not want to be involved in the dispensing of medical marijuana and should be removed from the Draft Regs the CPhA stated that,
"[t]he MMPR would allow pharmacists to dispense medical marijuana. We are not aware if many pharmacists would be prepared to do this, and many [provincial and territorial] governments and pharmacy regulatory authorities may not allow this. While the distribution process would be regulated, there remains the concern with pharmacists dispensing a product that does not have adequate safety and effectiveness evidence. In addition, the potential security risks to pharmacies due to robberies would need to be considered."
In April 2016 the CPhA made a dramatic 180-degree turn in its position, stating that,
"[t]o enhance public and patient safety in the rapidly evolving medical marijuana movement, today the CPhA is recommending that pharmacists play a front-line role in patient management and the dispensing of medical marijuana."
Whether the federal government amends the MMPR to allow pharmacies to dispense medical marijuana in some fashion remains to be seen. However, the reintroduction of pharmacies into the MMPR as a party authorized to dispense medical marijuana would certainly have implications for patient access, existing industry dynamics and, notably, taxation.As stated above, a medical document issued under the MMPR meets all of the criteria of a "prescription" under the Excise Tax Act except the technical requirement that such prescription be "given to a pharmacist." Assuming that a "front line" role in the dispensing of medical marijuana entails allowing the pharmacist to directly accept a patient's “medical document” and dispense medical marijuana (as opposed to just having the pharmacy act as a location to pick up an order that a patient has placed directly with an LP), a “medical document” issued under the MMPR will meet all of the requirements of a prescription under the Excise Tax Act and, therefore, the medical marijuana dispensed by the pharmacist should be zero-rated and exempt from GST. This tax savings will be welcomed news to medical marijuana patients, but perhaps less welcomed by the federal government's taxing authorities.
- Shebib v. Canada (Attorney General),  3 FCR 607, 2003 FCA 88 (CanLII)