It’s been just three short years since cannabis was legalized in Canada, but it’s already clear the nation’s exorbitant taxation on cannabis cultivators is not only unsustainable; it’s killing craft growers that are paying more in tax than they earn in margins.
Earlier this month, Tantalus Labs CEO Dan Sutton outlined exactly how problematic Canada’s cannabis excise tax is, with small businesses paying as much as 30 percent of their top line revenues to it, in a Twitter thread. “We are milking a calf to death,” he wrote. The industry emphatically agreed, and since then, the conversation has evolved into a campaign to raise the issue with lawmakers.
Craft Cultivators ‘Marching Rapidly Towards Insolvency’
“No other nation or state taxes cannabis so substantially, and we do not tax any other product in Canada to this extreme,” says Sutton, the CEO of the B.C.-based licensed producer.
According to Sutton, excise tax often exceeds craft team salaries, and consistently makes the difference between would-be cashflow and material losses. With average wholesale prices at less than $4.50 per gram, and $1 of that going to excise tax, he says it’s not an environment the average craft grower can survive in—“let alone continue to compete with the still dominant illicit market.”
Sutton makes it clear: “It is no exaggeration that under the current excise regime, craft cultivators and processors across the country are marching rapidly towards insolvency in a systemic way.”
Excise Tax Could Be ‘A Recipe For The End’
Gord Nichol is the owner and master grower at North 40 Cannabis, a Saskatchewan-based microcultivator who says that the excise tax is taking an unfair portion of the “already measly returns” afforded to craft growers.
“If it was truly the goal of the government to bring growers from the legacy market over to the legal side, this might be one of the biggest issues preventing it,” says Nichol, who notes that between Health Canada and the Canada Revenue Agency, the tax reporting requirements alone are “a massive drain on scant resources available for the average Mom and Pop operators.”
This, along with the added challenges presented by large shareholder-subsidized corporations who sell their products below cost, “is a recipe for the end of small producers.”
When the first iteration of The Cannabis Act was on the table, no framework existed for small growers. Nichol says that when the government eventually introduced a separate class of license for microcultivators, many small operators mortgaged and pledged what they could to help create an industry that would support small communities and create jobs.
Today, after paying labour and tax, he says his company struggles to survive a lost crop or a broken HVAC unit. He says it feels like the rug has been pulled out from under craft growers.
“We’re not in this industry to get rich, we’re here to make a living doing something we enjoy,” he says. “Why should our industry be so different than any other agricultural industry and bear this extra cost?”
Why Now Is the Time For Tax Reform
Trina Fraser is lawyer and partner at Brazeau Seller Law, where she specializes in cannabis law and business transfers and acquisitions. She says that as the government prepares for its three-year review of cannabis legislation in October, the time for tax reform is now.
“One of the stated objectives of the [Cannabis] Act, in order to advance public health, is displacing the illicit market. Industry has been clear that the heavy tax burden on cannabis is affecting product prices, which affects industry’s ability to shift consumers to regulated sources,” says Fraser. “The heavy tax burden is also threatening the very existence of producers without large cash reserves to carry them forward. This tends to be smaller producers.”
Sutton echoes this, pointing out that without access to growing working capital resources, even successful brands are constrained from listing new SKUs, investing in growth, and keeping their employees.
“The promise of future profits has been compelling enough for pubcos to build treasuries in the hundreds of millions, affording them a long runway to figure out how and if they can generate profits,” says Sutton.
“In pursuit of shelf space, many of their products sell at gross margin losses, a strategy that is untenable for an independently owned business. Craft farmers have to make margins on the products they sell today if they want to survive, and this is difficult in the face of large, well-funded competitors who are funded to lower market price expectations to levels that will never be profitable.”
Fraser says it’s not a stretch to presume that when a legacy market producer migrates to the legal one, they’re more likely to do so as a microcultivator, another thing to consider when it comes to moving the needle on the government’s stated public health goals.
“I have always said that the easiest way to displace the illicit market is to embrace it within the regulated framework,” she says. “Tax is one of many things that are still seen as barriers to such a migration.”
How Tax Reform Could Benefit Consumers
If you’re a cannabis consumer, you might be wondering how corporate tax reform could affect you. If changes are made to the excise tax, Fraser says some of that savings should be passed onto the consumer. But more than savings, tax reform could lead to a more diverse market with a much larger number of craft products, a category consumers are eager to see expand.
It’s why the team behind the Stand For Craft campaign—a collection of microcultivators, craft growers, processors, and small-to-medium enterprises—is recommending the removal of the $1 minimum per-gram excise tax in exchange for a floating percentage, as well as a new four-tiered framework that would tax businesses based on scale, the same way Canadian beer brewers are taxed.
“Supporting local, innovative, and passionate teams means a lot to me and the broader Canadian consumer today,” says Sutton. “If craft farmers cannot make a living, we will see the sharp transition of market share to large conglomerates, and an increasing oligopolization of the industry. Oligopolies limit consumer choice.”