Canada’s cannabis fees contribute to profitability challenges, report says

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Fees charged to cannabis businesses by the Canadian government are contributing to challenges in achieving profitability and positive cash flow, according to a “cost recovery” analysis published by the federal regulator, and some of the fees disproportionally affect smaller businesses.

The report is intended to help inform Health Canada’s ongoing “independent” legislative review of the Cannabis Act.

The Health Canada report on fees shows that the government spent 430 million Canadian dollars ($317 million) on cannabis regulation between 2018-19 and 2021-22. The federal government’s fiscal year concludes at the end of March.

To transfer some of the costs related to cannabis regulation from taxpayers to the industry, the government collected CA$160.2 million from legal marijuana businesses through various fees in that time.

Those fees (and the amount collected) between 2018-19 and 2021-22 are:

  • An application screening fee of CA$2.5 million.
  • A security clearance fee: CA$11 million.
  • An import/export permit fee: CA$1.8 million.
  • An annual regulatory fee: CA$145 million.

The annual regulatory fee accounted for 91% of all cannabis fee revenue collected by Health Canada in that time period.

The report found that 37.5% of micro license holders reported that fees accounted for more than 10% of operating costs.

For standard license holders, 20.5% said fees accounted for more than 10% of operating costs.

“Fees collected (by the federal government) can impact smaller (cannabis) operations more than their larger competitors due to economies of scale,” the report acknowledges.

Canadian cannabis businesses have been lobbying the government to ease the fees or excise tax regime, so far to no effect.

Unpaid regulatory fees have grown every year since 2019, although they account for a small percentage of the overall fees collected.

For the 2022-23 fiscal year, the fees in arrears grew to CA$3.9 million, 225% more than the previous fiscal year’s CA$1.2 million, MJBizDaily has reported.

The Health Canada report on fees also touched on cannabis excise duty, which falls under the authority of the Ministry of Finance.

Almost one-third of standard license holders reported the excise duty represented more than 10% of their costs, according to the report.

The report acknowledged that cannabis prices have fallen substantially since legalization:

“Based on an estimated CA$4 per gram wholesale price, including the embedded cannabis excise duty, the excise rate would equate to 33% of cannabis sales revenue, whereas Health Canada’s maximum rate for the annual regulatory fee is 2.3% of net cannabis sales revenue over CA$1 million.

“The decline in cannabis prices, mostly due to oversupply, has meant that most license holders likely struggle to pass on any or all of these costs.”

The report also examined regulatory compliance costs, aside from cannabis fees and excise duties.

Some of those costs include:

  • Requirements related to packaging and labelling.
  • Physical security analytical testing.
  • Recordkeeping.
  • Reporting good production practices.

“Respondents to the survey reported that most regulatory requirements imposed a proportionally higher cost burden on micro (license) holders,” the report noted.

Other findings of the report include:

  • By the end of the 2021-22 fiscal year, approximately 66% of cannabis spending was made in the legal market, according to Statistics Canada.
  • As of March 31, 2022, there were 320 micro class licenses out of 816 active licenses.

The report is available here.

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