Canada’s cannabis industry prays for tax reform in federal budget

Canada’s Liberal government unveils its 2024 budget on Tuesday, and the country’s cannabis industry wants one thing above all: relief from a heavy excise-tax burden.

Struggling Canadian cannabis companies have been asking for a tax cut for years now, without success.

However, the 2024 budget being released Tuesday afternoon comes soon after two recent developments that offered a shred of hope for tax reform.

In a February pre-budget report, the House of Commons Standing Committee on Finance recommended limiting the excise-tax rate to 10%.

Not long after, Canada’s long-awaited legislative review of recreational cannabis legalization recommended that the federal finance department “consider a review of the excise tax model.”

Regardless of those recommendations, industry insiders interviewed by MJBizDaily weren’t optimistic that excise-tax reform will be announced Tuesday.

“We don’t have any indication at this point that there will be something in the budget,” said Paul McCarthy, the newly appointed president of the Cannabis Council of Canada (C3) industry group.

The odds of an excise-tax cut in the budget are “very uncertain,” said Frederico Gomes, a cannabis equity analyst with Calgary, Alberta-based ATB Capital Markets.

“No one knows. What I would say is that it does seem that there’s a consensus forming around the need for a reform,” Gomes added.

“You saw that in the (Cannabis Act) legislative review, you saw that with this House of Commons (finance committee) report.”

Unpaid marijuana excise taxes have been on the rise, hitting 273.4 million Canadian dollars (roughly $200 million) near the end of 2023.

Some of those unpaid taxes have been deemed uncollectable by the Canadian government, as the number of canceled cannabis business licenses has increased.

Ottawa also has started garnishing provincial wholesalers’ payments to cannabis producers that haven’t paid their taxes.

Canada’s legalization review panel noted that the excise tax “was originally designed when the average price of dried cannabis was significantly higher than it is today.”

Leading up to legalization, policymakers worked on the assumption that marijuana would retail for roughly CA$10 per gram.

They developed a two-pronged tax structure for excise taxes on cannabis flower (including pre-rolls), taxing those products at whichever number is higher:

In today’s low-price environment, “the 10% rate rarely applies,” according to a briefing note presented to Canada’s finance minister and obtained by MJBizDaily.

That means cannabis flower is effectively taxed at the flat minimum fee of CA$1 per gram.

“Most Canadian (licensed producers) pay excise taxes equivalent to 30%-40% of gross domestic rec sales,” Pablo Zuanic, managing partner at New York-based Zuanic & Associates, wrote in a March research note.

Cannabis extract products such as concentrates, edibles and vape carts are taxed differently than flower, at 1 cent per milligram of THC.

“The disparity between what you pay on the extracts side and what you pay on the flower side makes competing for extract (stock-keeping units) very difficult, particularly for smaller volume operators like ourselves,” said Kirk Tousaw, a cannabis industry lawyer and CEO of Duncan, British Columbia-based micro-producer Great Gardener Farms.

Tousaw said a 1-gram pre-roll with 28% THC costs Great Gardener CA$1 in excise tax because it’s taxed as flower.

But the same company’s 1-gram infused pre-roll with 26% THC requires an excise-tax payment of CA$2.60 because it’s treated as an extract, he said.

“Then, if you get into the very high-THC products like rosin, vape carts that we have in market that are in the high 60s – 68%, 69% THC – now you’re paying CA$6.90 a gram,” Tousaw said.

“It’s tough to compete on that, particularly when you’re also competing against high-THC vape carts, for example, that are made with a hydrocarbon extraction process that’s cheaper and easier.

And, therefore, the products are starting out at a much cheaper price point.”

Three-quarters of federal excise-tax revenue is shared with Canada’s provincial governments, except for Manitoba.

Tousaw believes the matter of excise-tax reform could be complicated by that arrangement, since the provinces would have to agree “to make sweeping changes to the excise-tax system.”

On a recent quarterly earnings call, Tilray Brands Chief Financial Officer Carl Merton also hinted at potential complications from provincial involvement in the excise-tax regime.

“The key to the government’s plan and needed relief for our industry is that the provinces not enact their own excise tax to reflect the loss in taxes they are reaping from the status quo, increase their profits at the (provincial wholesale cannabis boards) or mandate that the tax savings are passed on directly to the consumer in the form of lower pricing,” Merton said during prepared remarks.

Merton said an excise-tax reduction to 10% could be worth $80 million to Tilray on an annual basis, highlighting the amount of money at stake for large producers.

ATB Capital Markets analyst Gomes said cutting the tax to 10% would be “a game changer” and would be enough for some licensed producers to swing to profitability.

Some portion of producers’ theoretical savings from excise-tax reform would probably be passed on to consumers, he believes.

“It’s just a natural outcome from a very competitive market, where the market remains very fragmented,” Gomes said.

“The LPs are competing for market share.”

C3 President Paul McCarthy said “a lot is at stake” for the industry group’s members.

After years of downsizing and cutbacks, McCarthy added, “I think we no longer have this significant imbalance between supply and demand.”

“That being the case, the fact that these licensed producers, to a large extent, still remain unprofitable is a very, very big problem,” he continued.

“We need to look to regulatory reform so that we have the proper playing field to allow licensed producers to serve this market and do so in a sustainable and profitable way.”

For micro-producer Tousaw, an excise-tax reduction would be a “massive change, particularly if it’s applied across the board to all cannabis products.”

That said, Tousaw said he’s “not optimistic” about seeing a tax cut in this year’s budget, observing that the excise taxes are “generating substantial revenue for government.”

“And my sense is,” he added, “they’re not going to be willing to give up their piece of it.”

Solomon Israel can be reached at solomon.israel@mjbizdaily.com.