The Canadian House of Commons Standing Committee on Finance (FINA) issued a report in late February outlining several recommendations regarding the country’s regulated adult-use cannabis industry, including the recommendation to adjust the tax structure of the beleaguered market. Recommendation 329 in FINA’s report calls on legislators to “make adjustment to the excise duty formula for cannabis so that it is limited to a 10% ad valorem rate, and to the operation of the duty, including the requirement to apply an excise stamp on cannabis products.”
In other words, the recommendation, in part, is to address Canada’s outdated price-based tax structure that has caused taxes to spike as the cost of cannabis has declined since the country’s 2018 legalization.
While any government-driven push to address what has become a crippling tax structure for many businesses is welcome news, what comes next may be cause for more measured expectations.
The Current Tax Structure and Its Challenges
The existing tax structure requires that licensed producers (LPs) pay a federal excise duty tax and an additional cannabis duty on packaged products that are “delivered to a purchaser (for example, a provincially authorized distributor/retailer or final consumer),” according to the Government of Canada. For dried cannabis flower, the total tax is CA$1 per gram. That tax was set when the average price per gram for dried flower, prior to adult-use legalization and under the pre-existing medical cannabis market, was $10 per gram, said Pierre Leclerc, president and CEO of the Association Québécoise de l’Industrie du Chanvre et du Cannabis (AQIC, translated to the Quebec Association of the Hemp and Cannabis Industry), which works with the industry and Canadian government to advance the Quebec cannabis and hemp industries.
But in the March 2023 Cannabis Business Times cover story, several LPs commented that as prices declined significantly in the years following adult-use legalization, taxes took increasingly larger percentages of LPs’ revenue pie. “[The tax rate] makes sense at $10 [per gram], and everyone was OK with that, but then the prices have gone down by 50 percent, 60 percent, 70 percent—maybe more on some products—[and] then all of a sudden, a flat [rate] doesn’t make a lot of sense,” said Phil Niles, executive vice president of GreenSeal Cannabis Co., an LP based in Stratford, Ontario.
“If the market price per gram dips from $10 to $4, for instance, then the effective $1-per-gram excise tax rate increases from 10% to 25%,” CBT reported.
For some producers, “what used to be around 10 percent is now in some cases up to 75 percent of the product’s retail price,” Leclerc said. “So it is a big, a big problem for us. It’s really hard for the legal industry to compete against the illegal market when you have up to 75 percent of your product price … that is directly made out of taxation. It’s virtually impossible.”
So FINA’s recommendation to cap the excise duty at 10% is significant and would have a tremendous impact on Canadian LPs, he said.
The Excise Stamp Recommendation’s Significance
Also potentially impactful is FINA’s recommendation “to make adjustment to … the operation of the duty, including the requirement to apply an excise stamp on cannabis products.”
LPs are required “to get a bond or to make a deposit to CRA [Canada Revenue Agency] to get those stamps,” Leclerc said. Then every LP must manually put an excise stamp on every product’s packaging for the province in which it will be sold, which is costly in terms of the labor required. Most producers do so manually, Leclerc said, as machinery to automate the process has posed challenges of its own.
If an LP wants to send any products to another province, Leclerc said, “you have to peel off the stamp, claim your CRA credit tax credit and then put a new stamp for another province. So you can imagine from an operation standing point how much money it represents.”
Leclerc said that the excise stamp “adds nothing for the Canadian citizen,” as most products from unlicensed operations “have counterfeit stamps.”
Optimism Low for Recommendations’ Adoption
However, based on his experience and political knowledge from his role with the AQIC and previous work for the Quebec Government, Leclerc isn’t optimistic about the chances these recommendations will actually be implemented by the Legislature.
Once FINA makes the recommendation, it is “passed on to all the different [government] departments, and they just acknowledge it, and then they can have conversations with the PMO [Office of the Prime Minister] or with the Finance Department [prior] to the [annual ] budget” being released, Leclerc said. (According to the Government of Canada, the Budget 2024 will be released April 16.)
“We'll see if the Minister of Finance will choose some of those recommendations or not,” he said.
One positive, he said, is that “the Canadian cannabis industry did a lot of work in the last three years with the Ministry of Finance and with the cabinet of the Minister of Finance to make sure that they were well aware of the excise tax situation for our industry.”
And another is that “from a legislative or operation point of view, it's really easy for the federal government to change the excise tax,” Leclerc said. “I mean they could … put it in the budget and then as soon as the budget would be adopted, it would change the legislation right away. So that would be really, really, really easy.”
However, “from a political point of view, it's something else,” he said.
Leclerc said he tells AQIC members: “Manage your expectations because the way the excise tax share with the provinces is structured, only 25 percent stays on the federal level and 75 percent of the excise tax goes to the province. … So [the government] would have to tell the provinces, ‘Hey, you know what, there's going to be $100 million missing in your account next year because we will take off the $1 per gram excise duty. So I'm not really sure right now with a minority government that they're going to go there. It's possible, but I really doubt it. Provinces are craving for money. The federal government has a hell of a debt for numerous reasons, so I don't really see it happening.”
He believes a much more realistic expectation than any type of actual excise tax reduction is to see in the Budget 2024 “something saying that they would put in place some sort of a working group or a commitment to do an analysis on the excise tax model, or on the excise stamp, which is another burden for the industry … and the possibility to get a digital stamp instead of a physical stamp on cannabis product. Or even completely get rid of that stamp and use instead a 2D code on the packaging.”
The catch-22 of the government potentially not wanting to cut into federal and provincial tax dollars by reducing the excise tax is that, Leclerc said, those dollars will likely eventually disappear anyway. “If the government does nothing, at the end of the day, one of the most progressive and liberal policies of the Canadian government [i.e., federal cannabis legalization] will probably fail, because we won't be able to get a sustainable cannabis industry in Canada.”
