Cannabis business leaders call on government to review excise tax as prices decline

Cannabis business leaders are urging the federal government to urgently review the excise taxes applied to its industry, saying the structure of the flat-rate tax is detrimental as cannabis prices fall.

They say the tax structure reflects pre-legalized industry assumptions that have now been shown to be incorrect. The key assumption refers to the price of cannabis per gram, which was expected to sell for about $ 10. The excise tax on dry cannabis was set at 10% or a flat rate of $ 1 per gram, whichever is higher.

But with cannabis now being sold for much less than the $ 10 per gram expected, the excise tax, which is levied at the time of manufacture, rather than retail, is taking a much larger share of the profits. of producers. They now typically pay between 20 and 45 per cent of taxes, instead of the 10 per cent originally planned, said George Smitherman, chairman of the Cannabis Council of Canada.

If the special tax structure were updated to reflect this reality, he said, cannabis growers could reduce their prices to match the illegal market, while maintaining a larger share of profits.

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The request comes as the cannabis industry faces one of its toughest years to date. With investors disappointed after several years of losses, and with rising interest rates, analysts predict a general consolidation of the sector over the coming years.

“The feeling of urgency in the industry is extreme because the financial conditions are very, very harsh,” Mr. Smitherman.

Behind his argument is new research that shows that in some cases, licensed cannabis growers keep about a fifth of the revenue from the sale of their products.

The report, prepared for the CCC by EY’s global strategy consulting arm, assessed the effect of the tax on the cannabis industry. He found that for every gram of cannabis with a value price sold at an Ontario dispensary, only 22.7 per cent of the total revenue went to the producer; 35 percent of the value was paid in a combination of excise taxes and harmonized sales taxes. The Ontario cannabis store and retailer cut profits by 20% each.

In an email statement, Fred O’Riordan, EY Canada’s tax policy leader, echoed the key policy considerations included in the consultancy’s report: “reduce and harmonize” excise duties and reduce taxes on 2.0 cannabis products, such as groceries. to encourage healthier consumption choices.

The Department of Finance did not respond to a request for comment from The Globe and Mail.

Beena Goldenberg, executive director of cannabis producer Organigram, does not expect “wholesale changes.” Instead, it urges the government to consider gradually reducing the financial burden on cannabis companies. One way would be to eliminate the 2.3 percent regulatory rate that Health Canada applies to cannabis revenue.

“They’re getting a lot of taxes,” he said. “Why charge an additional fee to cover the regulatory costs of this industry?”

Since 2018, the Canadian cannabis industry has contributed a total of about $ 15.1 billion in tax revenue to Canada, $ 2.9 billion of which came from sales and excise taxes, according to a recent Deloitte study.

While hopefully there may be a solution, changing the fiscal direction can be a challenge, said Mandesh Dosanjh, CEO of Pure Sunfarms Corporation, a producer in Delta, BC. Mr. Dosanjh said his company regularly pays up to 50 percent of its tax revenue in the middle of a market it considers the hardest it has ever seen.

“I am realistic. I have never seen a government agency suddenly reduce its revenue streams, ”Mr Dosanjh said.

Instead, he said, one option might be to simplify some of the complexities that add administrative and supply chain burden. One is the different types of excise tax by province. “If we just launched a national label, that would create a lot more efficiency for producers without having an additional financial burden.”

In its 2022 federal budget, Ottawa proposed some changes to the excise tax, such as reducing the quarterly rather than monthly payment rate for some cannabis companies and convening a panel of cannabis experts to discuss the industry. At the time, industry leaders said the changes were helpful, but they did not go far enough to address the issue of excise taxes.

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