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Canadian official warned about cannabis industry ‘financial distress’

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Canadian Finance Minister Chrystia Freeland was warned last fall about systemic “financial distress” facing the country’s cannabis producers, including skyrocketing tax debt and widespread insolvencies.

The calamities facing the industry were spelled out in briefing materials obtained through an access-to-information request and shared with MJBizDaily.

One of the documents included with the briefing note, drafted by an official within the Department of Finance Canada’s Tax Policy Branch, updates Freeland on the financial state of Canada’s adult-use market.

According to the report, “It remains the case that after five years of legalization, there are no licensed producers of legal cannabis products that are consistently profitable.”

The briefing note, titled “Update on financial distress in cannabis production industry,” documents a litany of issues facing the sector, including:

  • Unfair profits earned by some provincially owned cannabis wholesalers.
  • Snowballing unpaid excise taxes by cannabis producers.
  • Almost no sustainable profits earned by cannabis companies.
  • A disproportionate number of cannabis producers entering creditor protection and even bankruptcy.
  • Falling prices, made worse by ‘inventory liquidations’ by companies that go under.

A separate memorandum marked “Secret” was sent to the minister of finance and was almost entirely redacted.

The “financial distress” briefing note came amid the industry’s lobbying efforts to ease taxes levied against cannabis producers.

Industry group Cannabis Council of Canada told MJBizDaily it had briefed officials at the Department of Finance Canada and Health Canada many times about the “lopsidedness” in marijuana taxes and regulation but had limited success.

“It’s (the federal government’s) model. Over and over, we’ve suggested so many ways to fix this: lowering the tax rate, fixing the clumsy excise stamp administration, removing taxes for patients and more,” Rick Savone, Cannabis Council chair, said when asked by MJBizDaily to comment on the briefing materials.

“The federal government’s design of the program is flawed on so many levels, but it’s their own design.

“Maybe the next federal budget will finally acknowledge our industry’s financial struggles by delivering concrete actions, as Minister Freeland has done recently for other regulated industries.”

The briefing note said that dried cannabis, which represents majority market share, is still subject to excise duties of 1 Canadian dollar (74 cents) per gram, or 10% of the wholesale price, whichever is higher.

The report acknowledges, however, that “in practice, the 10% rate rarely applies.”

That might be the first time the government acknowledged the excise tax is usually CA$1 per gram of dried cannabis, which is generally much higher than 10% of the wholesale price.

Cannabis tax debt and insolvencies

The report to Freeland shows that Canada’s cannabis producers increasingly are falling behind on their federal excise tax obligations, a situation MJBizDaily has been reporting for some time.

Federally licensed cannabis producers owed the Canada Revenue Agency (CRA) CA$279.2 million as of June 30, 2023, according to the report.

The federal report went into more detail than has been released to the public, noting that, as of June 2023:

  • 83 businesses had a tax debt of less than CA$1 million. Collectively, they owed CA$34.1 million.
  • 40 businesses had a tax debt of between CA$1 million and CA$5 million. Collectively, they owed CA$67.7 million.
  • 9 businesses had a tax debt of CA$5 million-CA$10 million. Collectively, they owed CA$29.3 million.
  • 16 businesses had a tax debt of more than CA$10 million. Collectively, they owed CA$99.8 million.

Subsequent and unrelated to the briefing materials, Canada’s tax-collection agency followed through on a threat to garnish cash from some licensed cannabis producers delinquent on their excise-duty payments.

The move was a major escalation in the CRA’s efforts to collect excise debt. Days later, cannabis firm BZAM was granted creditor protection with massive unpaid tax bills.

The briefing materials for Freeland also acknowledged the disproportionate number of cannabis companies that have filed for creditor protection.

“In addition, 14 cannabis companies filed for creditor protection in 2022 under the Companies Creditors Arrangement Act, representing 36% of all CCAA filings last year.

Another 12 companies have filed a “concern” with the Office of the Superintendent of Bankruptcy in 2023, which includes receivership, creditor protection under the CCAA and bankruptcies,” the report notes.

In the report to Freeland, the government acknowledges that so-called “inventory liquidations” are affecting the broader market by driving down overall prices.

“One consequence of the firms going out of business has been the discount selling of their remaining stock to other producers and wholesalers/retailers,” according to the report.

“This is further driving down cannabis prices and keeping more viable product stagnating in inventory.

“This will likely deepen the financial struggles of other firms still operating in the legal market.”

Gouging by provinces?

The federal report notes that some provincial governments are extracting more profit from the cannabis industry than expected, while almost no “consistent” profit is earned in the private sector.

Provincial governments receive money from the cannabis industry mainly in two ways:

  • Most provinces signed Coordinated Cannabis Taxation Agreements in which the federal government collects the cannabis excise tax and redistributes roughly three-quarters of it back to provincial coffers.
  • Through province-owned wholesalers, or in Quebec’s case, province-owned retail stores.

The report notes that “Beyond the federally administered excise duty, (provincially owned) cannabis authorities involved in the wholesale, distribution and retail of cannabis products continue to perform strongly, in large part due to their monopsony buying and price-setting power.”

The report cites New Brunswick, Ontario and Quebec as operating provincially owned cannabis wholesalers whose profits from the industry “matched or exceeded” their revenues received from the excise duty.

In fact, the most profitable cannabis businesses in Canada are entirely owned by provincial governments.

The federal report concludes: “This is equivalent to a near or actual doubling of the CA$1 per gram excise duty in these (provinces).

“These profits are beyond what was envisioned in the CCTAs, which was for margins and mark-ups to be reasonable and only cover operating costs and capital expenses, and to generate a normal rate of return comparable to what would be expected in the private sector.”

When Canada’s federal government releases its budget for the 2024-25 fiscal year in mid-April, industry stakeholders will be watching for signs of potential excise tax relief.

In its report in advance of the 2024 federal budget, the House of Commons’ Standing Committee on Finance proposed adjusting the excise-duty formula for cannabis.

The committee wants the excise duty changed so that it’s limited to a 10% ad valorem rate, meaning 10% of the value of a transaction, which would amount to a substantial reduction in excise payments in most cases.

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.



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