(This is the second installment of a two-part series about licensed Canadian cannabis producers’ unpaid excise taxes. Part 1 is available here.)
A growing number of Canadian cannabis producers continue to rack up tax debt, which could lead to “a meaningful number” of companies going out of business if they’re unable to make those payments, according to the latest tax data and industry analysts.
Federally licensed cannabis producers owed the Canada Revenue Agency (CRA) 273.4 million Canadian dollars ($202 million) as of Dec. 29, 2023, marking a 72% increase compared to the figure from about one year earlier, MJBizDaily has learned.
The number of delinquent companies has grown sharply in recent years.
Roughly 259 licensees were behind on their tax commitments as of Dec. 29, the CRA told MJBizDaily.
The tax levies could be for excise duty, Canada’s Harmonized Sales Tax, payroll tax or corporate income tax.
According to CRA data, cannabis businesses behind on their tax commitments in other years were:
- 12 in March 2019.
- 33 as of March 2020.
- 68 in March 2021.
- 141 companies in March 2022.
- 213 as of March 2023.
The snowballing situation might have been what prompted the CRA to embark on an unprecedented crackdown.
Last week, citing provincial and industry sources, MJBizDaily reported that the CRA had ordered at least three government-owned wholesalers to garnish payments from licensed producers that were delinquent on their tax commitments.
The three wholesalers – in British Columbia, Ontario and Quebec – account for almost three-quarters of all legal cannabis sales in Canada.
The CRA wouldn’t confirm those garnishment orders, saying the disclosure of such information could compromise confidentiality provisions of Canada’s taxation laws.
The tax-collection agency also declined to say how many companies were affected.
Beena Goldenberg, CEO of Toronto-headquartered cannabis operator Organigram Holdings, said the excise tax rate needs to be lower.
But she also said the industry needs a level playing field to continue to mature.
“We all want players in this industry to succeed, and a level playing field is critical to the development of a successful and sustainable industry in the long term,” she said in an interview with MJBizDaily.
What’s next?
While some executives have said the Canadian government’s increased efforts to collect unpaid taxes are overly aggressive, others suggest the large number of marijuana cultivators and processors is unsustainable, given the industry’s current rate of fees and taxation.
Owen Bennett, a cannabis equity analyst for New York-based investment bank Jefferies Group, wrote in a note to clients that hypercompetition and pricing pressures are partially responsible for operational headwinds that have caused many licensed producers to fall behind on federal taxes.
“To date, lack of tax payment has largely not been enforced by the Canadian government,” the analyst wrote.
Citing MJBizDaily‘s report that the CRA is asking provincially owned cannabis wholesalers to garnish wholesale payments, Bennett wrote, “If this plays out like it is intended, i.e., the government securing payment one way or another, it could result in a meaningful number of the current LPs going out of business.”
“The implications of this could be, one: more market share up for grabs for the remaining players, and two: an easing of the pricing pressures we have seen the last couple of years.”
Regional breakdown
The CRA provided a geographic breakdown of unpaid cannabis industry tax.
The biggest increase in dollars owed was in Ontario, where the number of tax-delinquent cannabis companies increased from 65 on Jan. 27, 2023, to 80 as of Dec 29, 2023.
The amount owed by Ontario companies doubled from CA$50.2 million to CA$100.5 million during the same period.
In Western Canada, the number of businesses with tax debt rose from 93 in January 2023 to 127 almost one year later.
Tax debt in that region increased 45% from CA$90.6 million in January 2023 to CA$131.8 million as of December 2023.
In Atlantic Canada, 22 licensees owed CA$23.4 million at the end of 2023.
The debt figure is about double compared to the start of the same year, although the number of tax-indebted companies increased from 19 at the beginning of the year to 22 in December.
In Quebec, the number of cannabis companies with tax debt rose from 22 in January 2023 to 30 by the end of the same year.
Their tax debt tripled, however, rising from CA$5.9 million in January 2023 to CA$17.6 million in December.
Matt Lamers can be reached at matt.lamers@mjbizdaily.com.
