Canadian cannabis producers’ unpaid tax bills soar as industry seeks reform

A growing number of Canadian cannabis businesses are failing to pay their federal excise taxes on time, a sign that companies are struggling and deferring their tax bill to meet more pressing needs – such as paying employees.

Industry officials said the unpaid taxes – nearly 100 million Canadian dollars ($72.4 million) for the first half of the federal fiscal year – are “a canary in the coal mine” signaling a financial crisis for licensed cannabis producers, and they’re urging the federal government to reconsider how the excise tax is calculated.

The figure is already significantly higher than last year’s total of CA$52.4 million.

Roughly 172 cannabis businesses had an excise tax deficit owed to the Canada Revenue Agency (CRA) as of September – the halfway point for the federal government’s fiscal year ending March 31, 2023.

In September, 259 cannabis licensees were required to remit excise duty under the Excise Act.

That means about two-thirds of Canadian cannabis businesses regulated by the federal government are struggling to make ends meet.

The number of cannabis companies with a tax debt has doubled every year since Canada legalized adult use in 2018.

As of March 2019, the figure stood at 12, rising to 33 in 2020, 68 in 2021 and 141 in March 2022.

The CEO of Toronto-based cannabis producer Sensi Brands isn’t surprised by the increase.

“When you factor price compression, excessive (federal and provincial) taxation and provincial distribution fees, to name a few, there is not a lot of margin left, which is forcing licensed producers to prioritize their payables to stay afloat,” said Anthony Giorgi, Sensi’s chief executive.

“They’re basically using their CRA excise tax as working capital. They need the working capital to keep running the company.”

Giorgi is on the board of the Cannabis Council of Canada, which is gathering industry leaders in Ottawa, Ontario, this week to mark the fourth anniversary of legalization and “push for urgent change to ensure the financial viability of the sector.”

Canada’s excise duty imposed on producers’ dried cannabis is either CA$1 per gram or 10% of the value of the gram, whichever is greater.

Growing unpaid tax bills stem in part from an industry skating on thin financial ice, industry officials have said.

They point to various factors, on top of a high federal excise tax:

• Severe price compression reduced the average price per gram of cannabis to about 50%, to CA$5.66 as of December 2021.
• The number of licensed producers entering the market is far outpacing those exiting.
• Most of the biggest LPs (by number of employees) continue to sell products at a steep loss, undercutting smaller rival producers.
• Provincial governments are syphoning too much margin, leaving little on the table for well-run businesses.
• The federal government poured hundreds of millions of dollars in free COVID-19 pandemic cash into the biggest producers, worsening the already-sizable oversupply of product.

Mounting tax debts

Federal excise debt, meanwhile, is continuing to rise.

The amount owed by cannabis businesses reached CA$97.5 million through roughly the first six months of the current fiscal year.

At the current pace, excise tax debt could reach CA$200 million before the end of the fiscal year in March 2023.

“Overdue excise duties are the canary in the coal mine for the financial crisis facing the legal cannabis industry,” said Pierre Killeen, vice president of legislative and regulatory affairs for the Cannabis Council of Canada.

Killeen said the data underscores the need for urgent action at the federal and provincial government level.

“The public health, safety and economic gains of legalization are hanging in the balance,” he said.

MJBizDaily previously reported that the most profitable cannabis businesses in Canada are entirely government-owned, while private-sector profits are scarce.

In response, the Ontario Cannabis Store (OCS) pledged to conduct “a holistic review” of its approach to pricing – including the markup it imposes on private marijuana companies.

The government-owned wholesaler is the most profitable cannabis corporation in Canada.

Most of the CRA debt as of September belonged to cannabis companies based in Western Canada – consisting of Alberta, British Columbia, Manitoba and Saskatchewan.

Seventy-seven businesses in those provinces owed CA$57 million in overdue excise payments as of September, the data shows.

In Ontario, 62 businesses owed about half that amount, or CA$28.9 million.

In Quebec, 14 companies had CRA debt worth CA$6 million, and 18 companies in Atlantic Canada (consisting of New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island) owed CA$5.5 million.

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By Matt Lamers, International Editor

October 18, 2022

Images Credit:

1. MJBizDaily

Source : MJBizDaily

Link to original article: Canadian cannabis producers’ unpaid tax bills soar as industry seeks reform