Canada’s Finance Minister Raises Alarm over
Cannabis Industry Crisis
Cannabis Crunch: Canada’s Top Finance Official Highlights Growing Concerns

Cannabis Crunch

Summary

• Canada’s cannabis industry is facing serious financial challenges, according to the country’s finance minister.
• Documents disclosed after a request for access to information highlighted the industry’s significant tax liabilities and a pattern of insolvencies among producers.
• The finance minister was informed about the financial health of the adult-use cannabis sector through an internal document from the Department of Finance Canada’s Tax Policy Branch.
• The document revealed that licensed producers have been unable to achieve profitability even after five years since the legalization of cannabis.
• The briefing also outlined other critical problems, including disproportionate profits for provincial cannabis wholesalers, accumulating unpaid excise taxes by producers, lack of sustained profitability in cannabis companies, a high number of producers filing for creditor protection or going bankrupt, and price depreciation due to inventory sell-offs.

Canada’s cannabis industry is reportedly in a state of financial upheaval, with the finance minister receiving alerts about serious economic difficulties. These challenges include vast outstanding tax liabilities and a pattern of insolvencies affecting producers. The situation was revealed in documents that were disclosed after a request for access to information.

The finance minister was updated on the financial health of the nation’s adult-use cannabis sector via an internal document from the Department of Finance Canada’s Tax Policy Branch. Disturbingly, the document indicated that after five years since the legalization of cannabis, profitability continues to elude licensed producers.

The briefing, titled “Update on financial distress in cannabis production industry,” outlined critical problems such as:

• Disproportionate profits reaped by provincial cannabis wholesalers.
• Accumulating unpaid excise taxes by producers.
• Lack of sustained profitability within cannabis companies.
• A high number of producers filing for creditor protection or going bankrupt.
• Price depreciation exacerbated by inventory sell-offs from failing companies.

A memo marked as “Secret,” which was directed to the finance minister, was notably redacted nearly in full.

During a time when the cannabis industry has been lobbying for tax relief, the “financial distress” brief emerges. The Cannabis Council of Canada, an industry association, has expressed its concerns regarding the unfair tax burdens and regulations to officials from the Department of Finance Canada and Health Canada but to little avail.

According to Rick Savone of the Cannabis Council, numerous recommendations were made—including a tax reduction and regulation reformation—to address these financial inefficiencies, but the federal government has yet to make substantial changes.

While the next federal budget might present solutions, for now, the market struggles to remain financially stable, with dried cannabis subject to a tax rate of 1 Canadian dollar per gram or 10% of the wholesale price, whichever is higher, though the 10% rate seldomly applies.

The data presented to Minister Freeland illustrated a concerning increase in excise tax debt among cannabis producers, with a collective debt to the Canada Revenue Agency reaching CA$279.2 million as of mid-2023.

The breakdown of indebted businesses is as follows:

• 83 companies owe less than CA$1 million, totaling CA$34.1 million.
• 40 companies owe between CA$1 million and CA$5 million, adding up to CA$67.7 million.
• 9 companies are each between CA$5 million to CA$10 million in debt, equating to CA$29.3 million collectively.
• 16 companies bear tax debts exceeding CA$10 million, with a collective owing of CA$99.8 million.

In an assertive move, the Canada Revenue Agency began garnishing proceeds from certain cannabis producers that had fallen behind on tax payments.

Furthermore, Freeland’s brief acknowledged an unusually high rate of cannabis businesses seeking creditor protection. In 2022, 14 companies applied for creditor protection, accounting for 36% of all such filings. Additional filings have continued into 2023.

Lastly, the report described how the exit of businesses from the market, through “inventory liquidations,” is creating downward pressure on cannabis prices, exacerbating the financial plight of the sector.