Alcohol Excise Tax Increase in Canada: What Restaurants Need to Know

Canada’s alcohol excise tax increase

Starting April 1, 2024, the excise tax on beer, wine and spirits is set to increase by 4.7%—the largest increase in 40 years. Since the tax is an “escalator tax,” it increases automatically at a rate tied to inflation. There’s no vote or debate in Parliament before the  increase goes ahead. But given high inflation and rising operating costs, the increase has caused a stir, with industry leaders and stakeholders voicing concern over its potentially devastating impacts on the already hard-hit hospitality industry. 

Editor's note: On March 16, 2024, Finance Minister Chrystia Freeland announced that the federal government was going to scrap the planned 4.7% hike to the alcohol excise tax, capping the increase at 2% until 2026. This article, originally published on March 14, has been updated to reflect these new developments.

What are excise taxes?

Excise taxes are legislated taxes levied on specific goods or services, especially those that are considered to have a high social cost, like alcohol and tobacco. Excise taxes on these types of goods may also be called “sin taxes”. The argument is that these goods are bad for people’s health, so they cost our public health system more money and alcohol taxes are supposed to offset those additional costs. 

While there are some excise taxes that are paid directly by the consumer, property taxes for example, excise taxes are usually paid by businesses, who then indirectly pass on the cost to the consumer by raising their prices. 

Not to be confused with provincial liquor board fees and sales taxes, the alcohol excise tax is imposed at the point of production, which means it cascades and is magnified as it moves through the supply chain, ultimately increasing the retail cost paid by restaurants and bars. 

Why is the excise tax increasing so much?

The alcohol excise tax is automatic and tied to inflation. In 2023, with overall inflation at 6%, the federal government capped the excise tax at 2% “for one year only.” Now, with inflation cooling and the temporary cap expired, the tax is slated to increase by nearly 5 percent. Restaurants Canada and other industry leaders are calling on the federal government to maintain the 2% cap to provide “much-needed predictability, relief and stability for the industry.”

Editor's note: On March 16, 2024, Finance Minister Chrystia Freeland announced that the 2% cap on the alcohol excise tax increase would be extended to 2026.

Impact on restaurants

The alcohol excise tax increase in Canada is expected to have a significant impact on restaurant profit margins, which were thin before the pandemic hit and inflation hit the roof.

While the pandemic is over, restaurants are still trying to claw their way back to profitability amidst sky-high food prices and labor cost increases. According to recent data from Restaurants Canada, 62% of restaurants are operating at a loss or barely breaking even, compared to 10% pre-pandemic and 53% in the summer of 2023.

Given that many restaurants operate with profit margins of only two to three percent, this additional financial burden could be the final nail in the coffin for some operators. 

So, why don’t they just raise their prices?

Well, restaurants aren’t the only ones struggling with cost increases. According to a recent survey by RBC, Canadians are very worried about the rising cost of living. While the overall inflation rate is cooling, the cost of living continues to go up, with consumers paying more than 20% more for a basket of groceries relative to 2020, not to mention jaw-dropping rental price increases (~20%), mortgage costs (~30%) and property taxes (5-11%) to boot. To make ends meet, many Canadians are cutting back on non-essentials, and restaurants are often first on the chopping block. 

With this tax increase, among other federal tax hikes slated for April 1, restaurants will face a difficult choice. Do they absorb the increased costs to maintain prices but at the expense of their profit margins, or pass the costs on to customers and risk losing sales and customer loyalty? 

Strategies for restaurants

While the most impactful way to manage increasing costs is by increasing efficiency and cost control throughout your operations, there are a number of things that restaurants can do to mitigate the impact of tax increases on their business. These include:

• menu engineering and pricing strategies
• beverage cost control measures
• marketing and communication adjustments

Menu design and pricing strategies

Never underestimate the power of intelligent menu design. From modifying what’s on offer to designing a menu for maximum profitability, here are some of your options.

• Reexamine your offering: consider focusing on high-margin beverages or introducing new products that are less affected by the tax increase. Craft and domestic beers, for example, may offer better margins compared to big-brand and imported beers. Alcohol-free beverages offer both higher margins and cater to a growing market of nondrinkers.
• Offer pairing specials: offer food and drink pairings at a special price. This not only promotes higher-margin items but also enhances the dining experience.
• Consider dynamic pricing: unless prohibited by your province or territory, dynamic pricing like “happy hours” during less busy hours can attract customers with lower prices, helping to balance out profit margins throughout the day.
• Get crafty with menu design: use your sales data to identify your most popular and most profitable menu items. With Lightspeed’s Magic Quadrant, for example, you can find this out in seconds. Then use menu engineering to design a menu that will draw your guests’ attention towards more profitable items. 

Alcohol cost control measures

Effective cost control is vital for restaurants, but especially when it comes to alcohol, which is expensive to buy and more “valuable” than food in the sense that its margins are generally much higher. 

Here are a few strategies for better alcohol cost control:

• Negotiate with suppliers: where possible, work with suppliers to negotiate better prices or discounts for bulk purchases. Smaller restaurants with less purchasing power may have limited success with this strategy (but there’s no harm in trying).
• Tighten inventory control: minimize loss due to spoilage, waste or even theft with an inventory management tool that shows you exactly what you have in stock, how much you’ve sold and how much you need to order so you don’t run out (or order too much). Use sales and product data to calculate recipe costs and margins by ingredient—and find opportunities to improve. With Lightspeed Inventory, you can even get low stock alerts and automate your recurring orders to your suppliers.

“When we punch in a cocktail in Lightspeed, [the system automatically deducts] all the ingredients it takes to make it. So when I pull [a product] report, I see how much mint I used, how much vodka I used, how much of everything I used to make this cocktail. And if one of those ingredients is very expensive, maybe we can substitute it with a less expensive product which gives the same [result].” — Rohit Sharma, General Manager, Bar 404

• Eradicate overpouring and wastage: overpouring and wastage can have a huge impact on your bottom line. For the financial health of your restaurant, it’s so important to standardize drink recipes and train staff on proper pouring and storage techniques to ensure consistent cost per serving and eliminate wastage. For example:
  • Use pour lines to take the guesswork out of the perfect wine pour. If you don’t like how that looks on glassware, something as simple as marking a pour line somewhere behind the bar can work wonders for reducing wine overpouring.
  • Insist on measured pours. Yes, bartenders look way cooler when they’re free pouring, but it’s killing your profit margins. What’s the point of painstakingly calculating how much to charge for an ounce of tequila if you’re consistently overpouring by 50 percent?
  • Use proper First In First Out (FIFO) techniques for wine and beer. Because even big-brand bottled beers that are chock-full of preservatives will eventually go skunky in the fridge. Proper stock rotation is absolutely essential to prevent unnecessary waste behind the bar. 
  • Reconsider wines by the glass. We don’t mean removing wines by the glass completely—that would be absurd—but how many choices should you reasonably offer your guests? Too many wines by the glass can result in poor stock rotation and a whole bunch of half-full bottles turning into vinegar by the end of the week. Again, use your data to identify your top sellers and products with good retention rates—which is Lightspeed talk for products that keep guests coming back. 
  • If you have space, keep backup kegs in the fridge so they’re cold enough when it’s time to tap. If the beer is too warm when you hook it up, it’s going to be foam city and your profits will be pooling in your drip trays. 

Marketing and communication adjustments

It sounds cliché but we really are all in this together. Canadians everywhere are struggling with the high cost of living, especially at the grocery store. With the right communication approach, restaurants can make the changes they need to turn a profit without alienating their customers. 

Here are a few tips for communicating price increases to customers in the right way:

• Explain any price adjustments openly to your customers. Honesty about the reasons behind price increases can help maintain trust and understanding. 
• Try using terms like “adjust” or “update” rather than “raise” and “increase” when communicating price changes.
• Show them the data behind your decision so they understand that your prices are the result of careful consideration.

Bottom line 

Restaurants are under cost pressures that aren’t going away any time soon. But with the right tools, restaurants can boost efficiency and reduce operating costs so their business can navigate today’s challenges—and thrive tomorrow. 

Want to know how Lightspeed Restaurant can help? Talk to one of our experts today. 

FAQs

Is Canada raising taxes on alcohol?

Yes, Canada is raising taxes on alcohol. The federal government had planned to increase the alcohol excise tax by 4.7% on April 1, 2024—the largest alcohol excise tax increase in 40 years. However, on March 16, 2024, Finance Minister Chrystia Freeland announced that the federal government would maintain the 2% cap on the annual alcohol excise tax increase until 2026.

Is the alcohol tax going up in Ontario in 2024?

In Ontario, while the federal tax on alcohol is set to increase, the province has announced that it will halt its own scheduled increase in the beer tax and LCBO mark-up rates that were due to take effect on March 1, 2024. This freeze is part of a consistent effort over the last six years to prevent automatic adjustments based on inflation, providing approximately $200 million in relief during that period. The freeze is now extended until March 1, 2026.

How much tax is on alcohol in Canada?

Alcohol taxes in Canada are pretty high, especially in comparison to the United States. Estimates by the Canadian Chamber of Commerce suggest that taxes account for over 47% of the price of beer, 65% of the price of wine and 80% of the price of spirits. 

Why is alcohol tax so high in Canada?

Canada’s high alcohol tax rates are usually attributed to the burden of alcohol-related diseases on the public health system, as a means of discouraging excessive alcohol consumption and as a source of revenue for the government.

How can I avoid federal excise tax?

You can’t really avoid paying federal excise taxes (legally). Excise taxes are levied at the production and importation levels, creating a ripple of price increases from producer to distributor and ultimately the buyer. Some producers might absorb a portion of these taxes to maintain competitive pricing, but ultimately, the taxes are paid to the federal government.

What is the case for raising the alcohol tax?

The case for raising alcohol taxes is often centered on public health. Raising prices on “unhealthy goods” like alcohol supposedly discourages excessive consumption, thus reducing alcohol-related harm. It’s also seen as a method to increase government revenue, which can be allocated to public services, including the public health system responsible for treating health conditions that are the consequence of alcohol abuse.