canada’s-canceled-licenses,-‘uncollectible’-cannabis-taxes-soar
Canada’s canceled licenses, ‘uncollectible’ cannabis taxes soar

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Image of a Canadian worker checking a cannabis plant

(Photo by YARphotographer/stock.adobe.com)

The number of canceled cannabis business licenses have soared alongside the amount of “uncollectable” excise tax in Canada.

At least 123 federal cannabis business licenses either were canceled or pending cancellation in 2023, according to new data provided to MJBizDaily by the Canada Revenue Agency (CRA).

That figure is almost triple the number of licenses canceled in 2022.

Companies with canceled licenses are unable to cultivate, produce, package or possess non-duty-paid cannabis.

The data paints a picture of an industry facing micro- and macroeconomic challenges, many of which were spelled out in briefing materials for Finance Minister Chrystia Freeland and obtained through an access-to-information request.

The latest CRA data shows that at least 212 licenses were canceled between federal marijuana legalization in late 2018 and Feb. 29, 2024, with 58% of the cancellations happening in 2023 alone.

Tanner Stewart, co-founder and CEO of cannabis license holder Stewart Farms in New Brunswick, suggested the excise tax is a contributing factor to companies exiting the industry.

“At the end of the day, the excise tax is so severe that it truly impacts your balance sheet from a margin perspective,” he told MJBizDaily in a phone interview.

Health Canada’s website currently lists 982 licensed producers.

Uncollectable cannabis duty

The amount of unpaid excise tax owed by cannabis companies that has been deemed uncollectable or potentially uncollectable has soared of late, largely because of insolvencies.

Uncollectable duty approached 50 million Canadian dollars ($37 million) as of Feb. 29, 2024, the CRA data shows.

That’s an 11% increase from approximately CA$45 million a year ago.

The uncollectable or potentially uncollectable duty equals around 5% of the government’s total estimated cannabis duty.

In the 2022-23 fiscal year ended March 31, federal excise duties from cannabis amounted to roughly CA$894.6 million, of which CA$667.6 million was transferred to provincial and territorial coffers.

The CRA tracks “uncollectable duty” because of insolvency and canceled licenses.

Duty lost through insolvency increased to CA$38.4 million as of Feb. 29, 2024, a 52% increase compared with 11 months earlier, when CA$25.3 million was deemed “uncollectable” because of insolvencies.

Cannabis tax debt

About half of all licensed cannabis producers in Canada have excise debt, the CRA data shows.

In total, 171 out of 355 licensees, or 48%, owed money to the CRA as of Feb. 29, with the total duty amounting to CA$262 million.

That is a small decline from the CA$273.4 million owed as of Dec. 29, 2023, which at the time marked a 72% increase compared to the figure from about one year earlier.

A small number of companies accounted for most of the debt.

Duty Payable Reported No. of Licensees with Duty Arrears >CA$25,000 No. of Licensees % With Duty Arrears Total Excise Duty Arrears (in $Millions)
Less than $1M of duties reported 104 249 41.8% $49.02
CA$1 million-CA$5 million 38 65 58.5% $72.33
CA$5 million-CA$10 million 6 12 50% $30.17
More than CA$10 million 23 29 79.3% $110.53
Total 171 355 48.2% $262.05

Tax pivot

The levy charged to Canada’s cannabis businesses is so high that the federal government is increasingly among the top unpaid creditors of insolvent cultivators, according to an MJBizDaily review of insolvency filings.

That has forced some companies to adapt their business strategies.

Stewart said he pivoted the business from adult-use cannabis to the medical and export sectors to avoid large excise tax bills.

“We work with a few medical platforms,” he said.

“Because that’s a B2B transaction (not involving a wholesaler), we don’t have to worry about accumulation of excise debt. And we’re focused on exports to Australia.

“Coming into 2024, as a small craft supplier, we did an assessment of what was lowering our margins, and we realized it wasn’t worth it to stay in the Canadian domestic recreational market with our smokable products.

“So, we pivoted to medical sales in Canada.”

Stewart takes issue with executives of large, publicly traded cannabis companies calling for the CRA to crack down on rival businesses that are behind on their taxes.

“How many companies that have been posting permanent losses paid their excise tax just from investors?” he said.

“You can’t say, ‘Give us excise reform,’ and also, ‘Crack down more aggressively on businesses.’”

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.