Cannabis business leaders urge government to review excise tax as prices decline

Cannabis business leaders urge government to review excise tax as prices decline

With cannabis now selling for much less than the anticipated $10 per gram, the excise tax – levied at the moment of manufacture, rather than at retail – is taking a much larger chunk of producers’ profits.Ted S. Warren/The Associated Press

Cannabis business leaders are calling on the federal government to make an urgent review of the excise tax laws applied to their industry, saying the flat-fee tax structure is detrimental as cannabis prices decline.

They say the tax structure reflects assumptions about the industry made before legalization that have now been proven wrong. The key assumption relates to the price of cannabis per gram, which had been expected to sell for around $10. The excise tax for dried cannabis was set as either 10 per cent or a $1 flat fee per gram – whichever amount was higher.

But with cannabis now selling for much less than the anticipated $10 per gram, the excise tax – levied at the moment of manufacture, rather than at retail – is taking a much larger chunk of producers’ profits. They now commonly pay between 20- and 45-per-cent tax, instead of the 10 per cent initially expected, said George Smitherman, president of the Cannabis Council of Canada.

If the excise tax structure was updated to reflect this reality, he said, cannabis producers would be able to lower their prices to match the illegal market, while keeping a larger portion of the profits.

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The plea comes as the cannabis industry faces one of its most difficult years yet. With investors disillusioned after several years of losses, and with interest rates on the rise, analysts are predicting widespread industry consolidation over the next few years.

“The sense of urgency in the industry is extreme because the financial conditions are very, very tough,” Mr. Smitherman said.

Behind their argument is new research that shows that, in some cases, licensed cannabis producers are keeping around a fifth of the proceeds from the sale of their products.

The report, prepared for the CCC by EY’s global strategy consulting arm, assessed the effect of tax on the cannabis industry. It found that for each gram of value-priced cannabis sold at an Ontario dispensary, just 22.7 per cent of the total proceeds went to the producer; 35 per cent of the value was paid in a combination of excise duties and harmonized sales taxes. The Ontario Cannabis Store and the retailer each took about a 20-per-cent cut through markups.

In an e-mail statement, Fred O’Riordan, tax policy leader at EY Canada, echoed key policy considerations included in the consulting firm’s report: ‘reducing and harmonizing’ excise rates, and reducing taxation on cannabis 2.0 products – such as edibles – to incentivize healthier consumption options.

The Department of Finance did not reply to The Globe and Mail’s request for comment.

Beena Goldenberg, chief executive officer of cannabis producer Organigram, is not expecting “wholesale changes.” Instead, she is urging the government to consider reducing the financial burden on cannabis companies gradually. One way would be to strike down the 2.3-per-cent regulatory fee that Health Canada applies to cannabis revenue.

“They’re getting so much from the taxes,” she said. “Why burden us with an extra fee to cover the regulatory costs of this industry?”

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

While hopeful that there may be a solution, turning the tax tide may be a challenge, said Mandesh Dosanjh, chief executive officer of Delta, B.C.-based producer Pure Sunfarms Corporation. Mr. Dosanjh said his company regularly pays up to 50 per cent of its income toward taxation and levies amid a market he calls the toughest he has ever seen.

“I’m a realist. I’ve never seen a government agency suddenly reduce their incoming revenue streams,” Mr. Dosanjh said.

Instead, he said, an option could be to simplify some of the complexities that add administrative and supply chain burden. One is the different rates of excise tax per province. “If we just rolled out a national excise stamp, that would create much more efficiency for the producers without having an extra financial burden.”

In its 2022 federal budget, Ottawa proposed some changes to the excise tax, including lowering the payment rate to quarterly instead of monthly for some cannabis companies and convening an expert cannabis table to discuss industry issues. At the time, industry leaders said the changes were helpful but did not go far enough in addressing the excise tax issue.

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