July 2006

The purpose of this notice is to explain the rules applicable to related or associated persons for determining the allocation of the 75,000-hectolitre production volume limit for purposes of the reduced rates of excise duty, effective on July 1, 2006.

The Budget of May 2, 2006 announced new reduced rates of excise duty for beer that came into effect on July 1, 2006. The rate reduction provisions are explained in Excise Duty Notice EDBN9, Reduced Rates of Excise Duty on Beer Brewed in Canada and apply to the first 75,000 hectolitres (hL) of beer or malt liquor brewed in a calendar year by a licensed brewer, and any person related to or associated with that brewer. Where a brewer is related or associated with one or more other brewers, the reduced rates of excise duty are available only to an aggregate total of 75,000 hL of beer produced by all of the related or associated brewers, and not to each brewer in that group.

Election to allocate the production volume limits

A licensed brewer must disclose if it is related to or associated with any other brewer(s). In addition, each of the brewers involved must complete and file an election agreement, informing the Canada Revenue Agency (CRA) how the 75,000-hectolitre production volume limit will be allocated among the related or associated brewers.

Any brewer who is currently related to or associated with any other brewer(s) must file the election agreement by August 15, 2006. At that time, brewers may also allocate the annual 75,000 hL quantity for the calendar year 2007 and the years beyond. If the 2007 allocation has not yet been determined, the brewer must file the election agreement for that year by January 15, 2007.

Brewers who begin production after July 2006 and who are related to or associated with any other brewer(s) must file an election agreement by the same day on which they file their first form K50B, Monthly Return – Excise Duty – Beer . For example, a brewer who files their first K50B for February 2007 must file that form, together with their election, if applicable, by March 14, 2007.

This election agreement will remain in effect until:

(a) there has been a change in the reported relationships; or

(b) there has been a change in the allocation among the related or associated brewers.

Where either (a) or (b) applies, each brewer affected must file a new election agreement by the tenth working day of the month following the change.

Attached is the new form entitled Agreement Among Related or Associated Brewers to Allocate Production Volume Limits, which has been developed to assist brewers in filing this election. As the form is not prescribed, a brewer may choose to use its own form, but must include the same type of information that appears in the CRA form. Brewers should retain a copy of the completed election agreement for their records, as well as any other information used to prepare them, as this information will be subject to verification.

For purposes of the Excise Act, the determination of whether two or more licensed brewers are related or associated generally follows the same rules used under the Income Tax Act.

Related persons

Persons are related to each other if they are related persons within the meaning of subsections 251(2) to (6) of the Income Tax Act. In those subsections, references to "corporation" shall be read as references to "corporation or partnership" and references to "shares" or "shareholders" shall, in respect of a partnership, be read as a reference to "rights" or "partners".

Further information on how the related persons rules apply can be found in Income Tax Folio S1-F5-C1, Related persons and dealing at arm's length.

Associated persons

A particular corporation is considered to be associated with another corporation if they are considered to be associated under subsections 256(1) to (6) of the Income Tax Act. A person other than a corporation is associated with a particular corporation if it is controlled by that person, or by a group of persons of which that person is a member, and each person in the group is associated with each of the others.

Further information on how the associated persons rules apply to corporations can be found in Income Tax Interpretation Bulletin IT-64R, which is available on the CRA website at www.cra-arc.gc.ca/E/pub/tp/it64r4-consolid/README.html.

Partnerships and trusts

Under the Excise Act, a person is considered to be associated with:

(a) a partnership, if the person and all other persons associated with the person are entitled to more than half of the partnership’s total profits, or would be entitled to more than half of the total profits if the partnership had profits; or

(b) a trust, if the total of the values of the interests held by the person and all other persons who are associated with the person is more than half of the total value of the interests in the trust. Association with a third person

A person is also considered to be associated with another person if each of them is associated with the same third person.

Submitting an election agreement

Each licensed brewer who is required to submit an election agreement must send it to their regional excise duty office.

Further information may be obtained from the regional excise duty offices. A list of regional excise duty offices is available in Excise Duty Memorandum 1.1.2, Regional Excise Duty Offices on CRA’s Web site at www.cra-arc.gc.ca/menu/EXMS-e.html.