Unpaid cannabis tax in Canada balloons to almost CA$200 million

May 26, 2023 · MJ Biz Daily

An excise stamp needs to be affixed to all legal cannabis products sold in Canada.

The amount of unpaid federal excise tax owed by Canada’s cash-strapped licensed cannabis producers more than tripled in the latest fiscal year from a year earlier as companies complain they’re getting buried by government fees and levies.

Federally licensed cannabis producers owed the Canada Revenue Agency 192.7 million Canadian dollars ($145 million) as of March 31, 2023, a more than threefold increase over the 2021-22 fiscal year’s CA$52.4 million.

Levy debt has been on a steep upward curve since Canada legalized cannabis in 2018.

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.

As of the end of March, the levy debt stood at:

  • CA$147,425 in 2019.
  • CA$4.4 million in 2020.
  • CA$16 million in 2021.

“This massive and accelerated growth of total excise owing as well as total number of (licensed producers) in arrears is indicative of a sector-wide inability to survive under current excise tax policy,” Dan Sutton, CEO of British Columbia-based cannabis producer Tantalus Labs, told MJBizDaily in a phone interview.

Sutton has led a drive in recent years to try to convince the federal government to amend the tax.

Different excise rules apply to various cannabis derivatives and other products such as edibles.

The data obtained by MJBizDaily shows that federal tax debt is piling up at an increasing number of licensed cannabis producers.

In March 2020, only 68 regulated cannabis businesses owed an excise debt to the federal government.

One year later, that had shot up to 141 companies with excise debt.

As of March 2023, that figure had skyrocketed to 213 companies, or approximately 70% of the 305 licensees, required to pay excise duty.

Taxman upping pressure

As cannabis excise debt soars across Canada, the Canada Revenue Agency has been increasing the pressure on producers with outstanding payments.

One letter the agency sent to a licensed producer – and obtained by MJBizDaily – used the subject line: “Legal warning about your cannabis duty debt.”

The revenue service warned the business: “If you do not pay the full amount or respond to this letter within 14 days, we may enforce Cannabis Duty provisions of the Excise Act, 2001 without further notice.”

MJBizDaily asked the Canada Revenue Agency (CRA) how many legal warning letters had been sent to cannabis businesses regarding their outstanding levy debt.

“The CRA does not release information that could jeopardize the integrity of the tax system,” a spokesperson responded via email, adding:

“The Canada Revenue Agency is firmly committed to responsible enforcement in order to preserve the integrity of Canada’s tax system.

“The CRA’s collection policy is to resolve issues in a mutually satisfactory way.

“The CRA encourages taxpayers to contact us and to work with us to develop suitable payment arrangements based on their ability to pay.”

How did this happen?

Tantalus Labs’ Sutton argues Canada’s tax policy for cannabis was built around an “egregious miscalculation” of long-term wholesale price.

The excise formula was created by policymakers who expected wholesale prices for flower – the most popular consumer segment – to be at least CA$10 per gram.

Instead, actual prices are less than CA$1 in some cases, leaving almost no margin for licensed producers.

“The original estimation of CA$10 per gram wholesale price has never been close to reality, and LPs are buckling under the weight of a tax burden that often extracts 30% of top-line revenue,” Sutton said.

“Government has acknowledged the need for ‘recalibration’ as early as 18 months ago, but continued inaction has pushed the entire industry, especially small business, to a critical breaking point.”

Current wholesale prices are closer to CA$2.75 per gram or less, depending on the product, with some flower coming in under CA$1 per gram.

The lower price means that cannabis producers are paying an unexpectedly high excise tax – one that was based on a wholesale price nearly four times the current level of wholesale prices.

In 2022 alone, cannabis wholesale prices crashed by more than 40% as struggling cultivators chose to sell off their unsold marijuana instead of destroying it.

The average price per gram for bulk wholesale flower in 2022 was CA$1.06 a gram on the Canadian Cannabis Exchange (CCX), a live trading platform for B2B wholesale marijuana, a steep decline from an average price of CA$1.80 a gram in 2021.

Consumer prices have been in freefall since 2019, the first full year of legalization, as the Canadian market was flooded because of cannabis overproduction.

Windfall for government

Private-sector profits are few and far between, but governments of various levels have made a windfall from cannabis sales.

The total excise duty assessed by the CRA on cannabis producers swelled to CA$752.5 million in 2021-22, up by almost half from the 2020-21 fiscal year, when the federal government pulled in CA$514 million.

Canadian provincial and federal governments collected more than CA$1.5 billion in cannabis-related profit and tax revenue in fiscal 2021-22.

Over the same 12-month period, retail cannabis sales in Canada amounted to CA$4 billion.

That means, before any profit was made in the private sector, 38% of all cannabis-related revenue went to the federal or provincial governments.

The federal tax, three-quarters of which is shared with provinces and territories, isn’t the only way the government collects taxes and fees from cannabis businesses.

In the 2021-22 fiscal year, which went from April 2021 to March 2022, government-owned provincial cannabis authorities’ profits totaled CA$332.3 million, according to Statistics Canada figures.

That figure wasn’t available for 2022-23.

Other tax revenue from Canadian cannabis sales in 2021-22 were:

  • Harmonized sales tax: CA$236.1 million.
  • Goods and services tax: CA$110.7 million.
  • Provincial/territorial sales tax: CA$110.8 million.
  • Other provincial/territorial revenue: CA$9.8 million.

Still, Canadian governments at all levels are missing out on millions of dollars in unpaid taxes and fees when cannabis producers ultimately fail.

When Phoena Holdings, formerly known as CannTrust Group, filed for creditor protection in April, its fourth-largest unpaid creditor was the federal tax collection agency and was owed approximately CA$870,000.

Health Canada, the federal cannabis regulator, was owed almost CA$100,000.

The Town of Pelham, Ontario, where a cultivation facility was located, was owed CA$23,031. (Full Story)

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