Craft distilleries like Ottawa's North of 7 Distillery say a proposed tax on Ontario-made spirits could spell the death of their companies before they even get a chance to get off the ground.

The new tax, which would amount to what distillers say is 61.5 per cent on every bottle sold, was proposed last month and is among a number of new measures that form the Ontario Liberal government's upcoming budget bill.

Despite three years of consultation with the Ontario Craft Distillers Association, the province appears ready to adopt a taxation model that the small-scale alcohol producers say ignores their concerns and recommendations.

Barrels of spirits sit on their side at the North of 7 distillery. By law, the distillery has to wait three years before selling its first bottle of whiskey, said co-owner Jody Miall, and then once it's on the market the government pockets most of the money without lifting a finger. (CBC)

Greg Lipin, co-owner of North of 7 on St. Laurent Boulevard and secretary with the association, is baffled by the move.

"We were all excited when we were dealing with the premier's advisory committee, the budget last year saying this was coming, then we wait, and then almost a year later this is what they give us which is essentially nothing," said Lipin, who started the distillery with hopes of selling premium, all-natural bourbon-style whisky.

Higher tax rates for spirits than for beer, wine

Instead, he argues, craft distillers will continue to be taxed at a rate that is exponentially higher than craft beer and wine makers.

Ottawa-based consultant Ian Smiley helps clients locally, and around the world, start their own craft and hobby distilleries. The cards are stacked so high against the little guy in Ontario, said Smiley, that it's barely worth selling here at all.

On a $40-dollar bottle of gin, the province and the LCBO will get the majority of the money, said Smiley. Once the cost of overhead, bottling, equipment, ingredients and marketing are taken into account, he added, the distiller will be lucky to profit two dollars on the $40 bottle.

'They have huge power and sway in the industry.' - Greg Lipin, co-owner of Ottawa's North of 7 Distillery

Craft distillers were banking on the kind of graduated tax that wine and beer makers have enjoyed for years.

So, for example, distillers wouldn't have to pay tax on the first 100,000 litres of spirits they produced. It would allow craft distillers to sell a bottle of gin for $25 instead of $40, and to pocket a bit more of the earnings.

Hopes dashed

"The large distilleries, they don't want changes to this because they know it keeps the little guys out," said Smiley.

"In other words, the big distilleries have already learned how to cope under these conditions, with economies of scale. So I think they like it the way it is … Because it really does prevent the little guys from getting the thin edge of the wedge in and getting started," said Smiley.​

What the government has proposed, on the other hand, is a new tax they say would put more money in distillers' pockets by replacing an old LCBO mark-up fee.

Liberal Finance Minister Charles Sousa declined an interview with CBC News.

In a statement, he wrote that the distiller's share of the revenue would increase, from 39 per cent under the old LCBO fee, to 45 per cent under the new proposed tax.

The proposed law would give distillers a tax exemption on up to 1,250 litres of spirits for promotional purposes in order to help them make more people aware of their product.

'Super-complicated math problem'

The trouble with that exemption, according to Lipin, is that unlike the huge corporate distillers, North of 7 can't afford to give its premium products away.

On top of that, small distillers argue the new tax gives the Crown more revenue on all spirits sold, said Chevy Paterson, a co-owner of Guelph-based Dixon's Spirits.

"Why we're all mad at this is because they tied us up in this Premier's Advisory Council for two years," he said. "They made us all sign non-disclosure agreements so we couldn't talk to our elected representatives."

"We spent so much time and resources and effort about actual education of how our business works," he said. "This tax is so complex … we couldn't even figure it out," he said. "It's like a super-complicated math problem."

'Where's the rationale?'

"It doesn't make any sense," NDP Finance critic Catherine Fife said. "We put the question to the minister of finance, 'Where's the rationale? Explain how a 61.5 per cent tax at point-of-sale is going to be helpful to this industry?' Those questions have obviously gone unanswered."

Apart from the taxation levels, said Smiley, craft distillers face other impediments:

In order to get products to 'licensees' such as bars and restaurants, distillers have to first sell their products to the LCBO, who in turn sells to the licensees. Craft brewers and winemakers can market and deliver directly.

Big distilleries sell large volumes of spirits for bar-rail mixed drinks. Craft distilleries are never used "on the rail" because they're too expensive. With a graduated tax, small distilleries could bring down their prices and become an option for mixed drinks.

"Most of my Canadian clients, they start selling in the U.S. before they start selling in Canada sometimes," said Smiley, who adds he isn't hopeful the current government will change its plans.

"I do believe that this discussion is not over … We may not get anything more out of the Kathleen Wynne government but certainly a subsequent government — either Liberal or Conservative — could offer some relief in this respect. I wish I could be more encouraging."