Death and (Excise) Taxes: Why Canadian Cannabis Brands Are Struggling to Survive

Nothing in the cannabis life is certain except death and excise taxes.

But for many artisanal cannabis growers in Canada, the burden of the excise tax has fueled measures to change it to a more equitable rate, especially as cannabis prices plummet.

The excise rate, which is set at $1 per gram for dried flower or 10% of the gram’s value, whichever is lower, penalizes cannabis producers by taking up to 30% of their sales, according to a Lucas white paper from Jenkins , Charlotte Bowyer and Dan Sutton, CEOs of Tantalus Labs.

Widely shared among cannabis growers, the paper warns that a spate of bankruptcies could sweep through the industry, as has happened in the US.

“Onerous taxes are not unique to Canadian industry. We’ve seen the same situation in California, where a tax burden of up to 40% of total retail costs has led to widespread bankruptcies, a thriving illicit market and tax boycotts,” the paper said.

The problem with taxing the wholesale price of weed

The situation is looking increasingly dire for many Canadian cannabis players. According to recent media reports, around 254 individual cannabis companies accumulated $73 million in excise debt from March 2019 to March 2022, CRA data shows. As of May 2022, approximately $52.4 million remains outstanding.

Another craft producer in Canada would like to see a cannabis tax rate change to mirror those enacted for alcohol companies. “This shouldn’t be viewed strictly on a per gram basis,” says David Marcus, President and Founder of Abide.

“Look at alcohol and how a higher concentration of alcohol is taxed at a higher rate. Beer is taxed differently than whiskey, but what if we taxed cannabis based on the percentage of THC in the flower?”

David Marcus, President and Founder of Abide.

Sutton noted in the paper that the excise rate should reflect the percentage of sale and retail price, not the wholesale price. He and Marcus agree that the government likely envisaged a 10% tax rate when gram rates were stable shortly after legalization.

But as the cannabis industry shrank, so did gram prices, while the $1-per-gram excise tax remained the status quo.

Lobbying efforts have increased over the past two years, just as Bill C-45 is expected to be reviewed in the next 18 months. A look at Canada’s Lobbyist Register reveals that seven cannabis companies have worked with federal politicians over the past year, as well as several meetings initiated by the Cannabis Council of Canada to discuss the excise tax.

Government agencies are slow to implement change

In early 2022, Omar Khan, senior vice president of marijuana retailer High Tide, met with officials from the Prime Minister’s Office and members of the official opposition to advise Ottawa on expanding its economic perspective on future cannabis regulation.

“When you talk to them and let them know that right now the GDP contribution is comparable to auto manufacturing, life sciences or even dairy, when you show them those stats, they’re pretty stunned,” Khan told BNN in Bloomberg an interview.

Recently, a new report by EY Parthenon, commissioned by the Cannabis Council of Canada, reiterated Sutton’s white paper calling for a review of the consumption tax rate for Canadian cannabis companies. It aims to create a single, harmonized federal tax stamp instead of provincial stamps and to reduce regulatory fees.

As the Globe & Mail notes, there is no indication that Ottawa intends to change its stance on the consumption tax. The only mention of a cannabis tax in the April budget was a nod to the government’s desire to give First Nations the ability to levy their own taxes.

“Health Canada has initiated a limited review of regulatory levies, but this exercise does not extend to excise taxes,” the report continued.

The regulations vary from product to product

Another thorny issue for companies that make both CBD and THC products like Abide is the distinction in tax regulations.

Abide produces hemp for their CBD products, but regulations require their CBD products to demonstrate that they contain low enough THC levels to be tax exempt; If the product contains enough THC, it falls under the excise duty rate.

“If we want to increase the CBD content to, say, 12%, which pushes the THC limit above the 0.3% threshold for an exemption, then we’re paying taxes now. In general, the regulations are pretty good, but they just need adjustments here and there.”

In fact, federal agencies should follow their own policies. When “Cannabis 2.0” arrived in Canada with a slew of edibles and oils, Ottawa opted for an excise tax of one cent per milligram of total THC. “If it worked for edibles, it should work for dried flowers, too,” says Marcus.

David Silberberg

David Silverberg is a freelance journalist who writes for The Toronto Star, BBC News, The Washington Post, Business Insider, Cannabis Health, Merry Jane, High Times and many other outlets. He is also a writing coach, helping freelance journalists and creatives to advance their careers.

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