Recently, there was a pretty well written piece about taxes that showed up in the wake of the Ontario Craft Brewers’ charm offensive to get the public onside and prevent brewery closures within the province. It’s over here at baytoday.ca and written by Stu Campaigne interviewing New Ontario Brewing’s Mike Harrison. 

For the most part I agree with the content of the article, although there are a couple of points that I think are somewhat fanciful.

For one, I don’t believe that all of Ontario’s breweries are World Class, and if everyone’s being completely honest about it, no one else does either. Not 100% of them.

I also disagree that Ontario’s breweries are ever going to compete around the world in a really significant way, and it is for the following reason: Ask the average man on the street to tell you which ten breweries from Alberta he wants imported to this province. It’s a non-starter. Aside from a few darlings that are already well known enough to be out there (Bellwoods, Godspeed, Burdock, Collective Arts, Flying Monkeys), it is important to remember that developing an international reputation is extremely difficult and export is fraught with problems.

That said, the tax situation is well worth talking about. The problem is that the piece outlines the generalities of the situation very nicely and while it contains a call to action, it doesn’t really provide a lot of context for the place we find ourselves at the moment. 

In late 2023, we’re getting to the point where the province has pretty massive leverage over the brewing industry writ large because the Master Framework Agreement is coming to its end. When I commissioned polling in 2014 about the public attitude to grocery sales, or covered the first day of grocery sales for the CBC in 2015, this day seemed a very long way off indeed. 

But, this is where we are. The Master Framework Agreement is coming to an end, and any talk of taxation should take into account some of the effects that the MFA has had on the Ontario Beer Market. Because the Ontario government is essentially the wholesaler for the province (Yes, The Beer Store is owned by large foreign breweries, but they are forced to price match the LCBO), issues of taxation are completely bound up in the MFA.

Over the last couple of years, I’ve been aggregating data from Beer Canada, Statistics Canada, LCBO Annual Reports, and Beer Store Annual Reports for just such an emergency. 

Grocery Store Sales

One of the caveats in the MFA is that the number of grocery stores that can sell beer within Ontario is capped at 450. This has had some really interesting knock on effects because the LCBO is the wholesaler for grocery.

At the time that the MFA went into effect in 2015, The Beer Store made up 50.3% of the alcohol retail market in Ontario, with the LCBO sitting at 37.7%. This has largely reversed as a result of the MFA and the dwindling market share of beer when compared to wine and spirits, but mostly because of the MFA. The Beer Store now sits at 41.7% of the alcohol retail market while the LCBO is up to 51.9%. The Beer Store still controls 64.61% of the beer market in the province, with LCBO making up 35.39%.

What this means is that by becoming the wholesaler for wine, beer, and cider in grocery, the LCBO’s remittance to the province of Ontario has gone from $1.81 Billion to $2.55 Billion over the course of something like an eight year period, not including calendar year 2023. The MFA, which allows grocery retail, is worth $750 million to the province on an annual basis, and that amount is likely to increase over time as the number of LCBO convenience outlets has quietly grown by 180 over the same period while the number of Beer Stores has dropped by 30 to 420. 

From a revenue standpoint, the MFA is a winner for the province of Ontario, and that’s before you even consider the rate that beer is taxed at. If you were to allow another 450 licenses, you’re probably looking at extracting a similar amount of money from The Beer Store chain. It would beef the LCBO up to about $3.25 Billion in revenue because they would be the wholesaler for another 450 locations.

Wholesaling and CPI

Since the government at the provincial level has the ability to be the wholesaler for various products, it might make sense to look a little bit at what they’re doing in terms of a replacement good for beer: Cannabis. 

What’s that? Cannabis isn’t a replacement good for beer, I hear you say, oh beer writers and qualified economists? Ask the people under 25 who aren’t drinking beer whether they think that and get back to me. 

Now, the rollout of cannabis has been very interesting to observe anecdotally. Many of the chain coffee locations that once existed have become cannabis retailers. Toronto doesn’t seem any less jittery than it was for all of that. In fact, it might be a little more nervy. Would believe Ontario is up to 1536 locations as of June 2023? Of course you would. You can’t walk down the street without tripping over a Tokyo Smoke. 

Here’s the amazing thing about this. Since the Ontario Cannabis Store is the wholesaler for all of those shops, they’re playing around with the pricing of the product in order to find a level of margin retailers will accept that doesn’t completely bankrupt producers. The knock on effect of this is unthinkable in 2023: prices go down. 

Here’s how the consumer price index works. At some chosen point in time, a value of 100 is ascribed to a good or service. In the case of beer, it is 2002. In the case of cannabis, because it wasn’t legalized until the autumn of 2018, it is December 2018.

Here’s a table that will show you why Cannabis is really dangerous for the beer industry generally.

The CPI for cannabis is about the only CPI measure that has gone down considerably over the course of the last five years. You could get 1.53 times as much Cannabis in Dec 2022 for the same amount of money you would have paid in Dec 2018. It’s currently at 60.7 meaning that it’s actually about 1.65.

Compare that to beer, which is at a factor of 1.17 times more according to the chart. The September 2023 numbers suggest that it’s actually 144.1 which is closer to a 20% increase in five years. 

Now remember: The Ontario Government is pretty largely the wholesaler on both of these things, and the excise tax that makes up part of the increase to the CPI is determined by the wholesaler of these products. To wit: all of this is sort of made up from whole cloth. They can do whatever they want, as evidenced by the Cannabis CPI.

CPI and Beer Excise

Step over here for a minute and look at historical excise rates for beer in Ontario.

Now, if you’re the beer industry in Ontario, which I’m going to say leans a little left, one of the things that you’re probably not super comfortable recognizing is that when Doug Ford said he was going to bring back Buck a Beer in 2018, he did so by removing mandated annual price increases. Now it didn’t work, but if you’re an Ontario brewer, you’ve been the direct beneficiary of that because the beer basic tax rate has not increased since March of 2018. 

You have three taxes in play, and I’ll just copy and paste the first two as they are concrete and standard to all participants except brewpubs. 

1) Beer volume tax

The beer volume tax is calculated based on the volume of beer bought. The tax rate is 17.6 cents per litre regardless of whether the beer is draft beer or non‑draft beer and whether the beer was made by a beer manufacturer or a microbrewer.

2) Environmental tax

The environmental tax is 8.93 cents for each non‑refillable container in which the beer bought is packaged.

3) Basic Beer Tax

This one depends on the size of your brewery and the format you’re selling. 

Adding all those together, if you’re selling a litre of canned beer as a microbrewer, you’re paying about $0.75 assuming two 473ml cans, and slightly more in 355ml cans. It’s a lot. You’re down about a quarter of the price of the finished product before you take into account labour, materials, packaging, lease, energy, water, power, LCBO markup, and feeding the brewery cat. 

Now, it’s worth pointing out that while the CPI on beer has dramatically increased over the last five years, the excise tax has not been part of that increase. All of the external factors I’ve just mentioned have gone up precipitously as a result of Covid-19, supply chain disruption, labour demands, bad harvests, and the fact that the brewery cat is very hungry.

Here’s why the system badly needs reform, and I’m pasting verbatim: 

The beer basic tax rates are adjusted based on the Consumer Price Index for Ontario over the past three years. Legislation has been passed to no longer require annual adjustments and to instead authorize the Minister to prescribe a date in a year as of which the basic tax rates are to be adjusted. The Minister has prescribed March 1, 2024, as the next adjustment date and every March 1st thereafter. Current rates will continue until February 29, 2024.

The CPI in March of 2018 was 134.6. 

The CPI in September 2023 was 159.7.

If the March 1, 2024 adjustment to the beer basic tax rate were to take just that figure into account, you’re looking at an increase in the beer basic tax rate by 1.186 or an increase of about eight cents a litre across the board. 

Let’s say you’re a small brewer making 1000 hL a year. That’s most of the breweries in Ontario. That’s an additional $8,000 you’ve got to come up with, up from about 75,000. By my reckoning, most of the breweries in Ontario are under 2000 hL a year. That’s maybe 250 small businesses that are cornerstones of their communities getting kneecapped by an arbitrary system of increase. It would be what, two or three million dollars in additional excise revenue? 

Even if you take into account the sum total of the excise payments for those businesses on an estimated amount of beer produced (let’s call it 300,000 hL) at $0.83 per litre, it’s only $24.9 million dollars.

For reference, when the Liberals were in power in the early 2010’s, Dalton McGuinty was paying out $1.2 million in opportunity funding for small craft breweries in the province at a time when there were 40 players in the market. Adjusted for the number of companies, the subsidy would have been about half of what the smallest breweries in the province pay in excise currently.

A Suggestion

It seems weird to say it, but there are breweries out there where $8,000 is going to be make or break in the current economic climate. It doesn’t seem like a lot of money, but it sure as hell is when the can company wants to deliver COD. 

We’re in a situation where raising excise taxes in March of next year is clearly going to be ruinous for some participants in the market; Small businesses especially.

The provincial government has run on the basis that it is “Open For Business,” and shutting down business is very bad from an optics standpoint. Currently, the excise situation is based on the previous government’s determination of what would have been a good idea, but in 2018, it was impossible to know the situation with which such an industry would be faced.

Looking briefly at the federal taxation structure for beer excise, we can see that the federal government has a graduated system of excise based on manufacturer size, but that there are several additional gradations. The Ontario system reduces excise under 49,000 hL, but there’s no concession for producers much smaller than that.

If you were to amend the Ontario excise system in such a way that it operated similarly, you might end up with a basic beer tax that looked like this, where taxation is proportional to the size of the business. 

It’s implicitly understood within Ontario’s Beer and Wine Tax as it’s currently written that smaller breweries should not, on principle, pay the same amount of tax as their larger counterparts. Adopting the federal structure not only simplifies jurisdictional thought process, but allows for annualized adjustments based on CPI for the foreseeable future. Small businesses are effectively subsidized, allowing them to grow and the conservative government can claim they cut red tape and taxes all in one fell swoop.

The time to do this is in the middle of MFA renegotiation. Clearly, the number of retail locations in which beer is available has the opportunity to expand, and as demonstrated, additional wholesale locations for the LCBO mean that the province is remitted money in profit which would heretofore have been absorbed as cost savings by the large breweries who own The Beer Store. Since 2015, the province is $750 million up annually. They could do even better with more locations. As suggested earlier, another 450 over the next five years, would probably total another $500-$750 million. 

There doesn’t seem to be anything stopping the Ontario government from making that move in 2025, but there’s a tremendous amount of leverage to be had over Molson Coors, AB InBev, and Sapporo on the way to that juncture. Perhaps threaten them with another mandated $150 million in store refurbishments if they act up. “Nice century old chain of stores,” you can hear them say. “Be a shame if something happened to them.”

I think you could actually come out ahead on it while helping small businesses and continuing to modernize retail alcohol in the province.