Canada says cannabis wholesalers must garnish payments over unpaid taxes

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Exterior image of the Canada Revenue Agency

The Canada Revenue Agency's national office is located in the Connaught Building in Ottawa. (Photo by Gilberto Mesquita/stock.adobe.com)

(This is the first installment of a two-part series about licensed Canadian cannabis producers’ unpaid excise taxes. Part 2 is available here.)

Canada’s tax collection agency is following through on a threat to garnish cash from licensed cannabis producers that are delinquent on their excise duty payments, MJBizDaily has learned.

The move is a major escalation in the Canada Revenue Agency’s efforts to collect money it’s owed by federally regulated cannabis companies with outstanding excise debt – a situation that has ballooned in recent years as the industry’s financial challenges mount.

The amount of unpaid federal excise tax owed by Canada’s cash-strapped marijuana companies had skyrocketed to almost 200 million Canadian dollars ($155 million) as of March 31, 2023 – a nearly threefold increase over the previous fiscal year’s outstanding tax obligation of CA$52.4 million.

That increase prompted the federal government’s revenue service to ramp up pressure on cannabis producers with outstanding excise debt, including potential garnishment, liens on plant property and equipment, and even the possibility of legal action.

Now, the Canada Revenue Agency (CRA) is involving provincially owned cannabis wholesalers by forcing them to garnish wholesale payments intended for licensed producers and instead redirecting that money to the federal government.

‘Unprecedented’ tax collections step

The CRA order could have significant consequences for cannabis companies that are delinquent on their taxes by effectively preventing those businesses from collecting money from wholesalers after making a sale.

“It’s a pretty unprecedented step and in a lot of ways speaks to how pervasive the issue is,” Rami Chalabi, an attorney with Toronto law firm McCarthy Tetrault, said in an interview.

“Moving directly to garnishment of payments is a significant step to take and will definitely put a lot of people on notice that you can’t continue being delinquent on your (tax) payments. Action is going to be taken, and action that is going to directly affect your bottom line.

“It speaks to the issue that there are a large number of LPs that are behind on their payments.

“The quickest way to seek an enforcement action is to go to their largest customers and get the money through them.”

Wholesalers confirm CRA order

The CRA would not say how many licensed producers’ wholesale payments were garnished, or the total amount involved, so the true extent of enforcement is still unclear.

Three provincial wholesalers contacted by MJBizDaily confirmed that the CRA told them to garnish payments originally intended for licensed producers over unpaid taxes.

“In its enforcement of the federal Excise Tax Act, the CRA has directed the (Ontario Cannabis Store) to remit payment to the CRA for licensed producers that are delinquent on their excise duty,” a spokesperson for the OCS confirmed to MJBizDaily via email.

The agency said it has “no choice” but to comply with the CRA order.

“The OCS, like any other agency in Canada receiving a directive from the CRA, is legally obligated to follow this order,” the spokesperson noted.

“As a result, the OCS has taken necessary steps to adhere to these obligations.”

British Columbia’s cannabis wholesaler, the BC Liquor Distribution Branch, also confirmed it has been ordered to garnish payments from some cannabis license holders because of unpaid taxes.

“The Canada Revenue Agency has sent the BC Liquor Distribution Branch (LDB) a number of ‘Requirement to Pay’ notices for amounts owing addressed to cannabis licensed producers,” a spokesperson confirmed.

The LDB also said it’s legally required to comply with the CRA’s order.

“As a payment processor, the LDB is legally required to act under the garnishee orders – a.k.a. Requirement to Pay – that are issued by the CRA and redirect payments – or a share of payments – for wholesale purchases to the CRA,” the spokesperson said.

“These amounts specified in the notices would otherwise be payable to the licensed producers.”

The LDB said there is no separate internal agency policy or process related to the garnishment situation, “other than to redirect payments – or a share of payments – for wholesale purchases to the CRA when required by the CRA.”

The Société québécoise du cannabis (SQDC), Quebec’s cannabis wholesaler, also told MJBizDaily that it was ordered to garnish payments.

“The SQDC has received instructions from the Canadian Revenue Agency to garnish payments for three licensed producers,” a spokesperson said.

“However, because this is commercial information that is confidential in nature, we cannot comment on specific cases.

“The SQDC will continue to comply with all applicable laws, including laws relating to cannabis excise taxes.”

Together, Ontario, British Columbia and Quebec account for approximately two-thirds of all legal cannabis sales in Canada.

It’s unclear if other provincial wholesalers are affected.

In 2023, Ontario accounted for 40% of Canada’s recreational marijuana market of CA$5.1 billion. Sales in British Columbia accounted for approximately 16% of the national total.

Deferring payments

The growing number of Canadian cannabis companies failing to pay their federal excise taxes on time is a sign that struggling businesses are deferring some bills to meet more pressing financial needs, such as paying employees, executives have told MJBizDaily.

Chalabi, the McCarthy Tétrault attorney, said struggling companies are managing competing financial priorities, and many are essentially operating month-to-month in terms of what expenses can be put off.

For many operators, it appears the federal tax bill has been deferred.

“When the cash is running out, and you’re trying to keep the business alive and trying to preserve as much cash as possible before going into that (bankruptcy) process, (licensed producers) ask what payments they can make to keep the business running – and those, typically, are to certain suppliers (and) employees, versus what payment can they push off and deal with later,” Chalabi said.

“I don’t think it’s a situation where companies are not paying; I think they’re late and doing the best they can to catch up.”

The CRA told MJBizDaily via email that delinquent cannabis companies are encouraged to contact and work with the tax agency “to develop a suitable payment (plan) based on their ability to pay.”

As of March 2023, of the 305 corporations required to pay excise duty to the government, 213 had failed to pay those bills in full, according to MJBizDaily research.

That means less than one-third of Canada’s licensed cannabis businesses were up to date on federal tax obligations.

Canada’s excise duty imposed on producers’ dried cannabis is either CA$1 per gram or 10% of the product’s value, whichever is greater.

Between 2019 and 2023, the levy debt stood at:

  • CA$147,425 in 2019.
  • CA$4.4 million in 2020.
  • CA$16 million in 2021.
  • CA$52.4 million in 2022.
  • CA$192.7 million in 2023.

Chalabi said the CRA has been balancing its own considerations when it comes to tax collection.

“Do you deal with a bit of late payment in exchange for having these LPs survive another day, or do you throw the book at them?” he asked.

“You could collect as much as you can that’s due, but then you’re left in a situation where they can’t keep the lights on and you’re no longer able to generate any revenue from them.

“It doesn’t set a good precedent for any industry if you have this level of delinquent payments.”

Good move?

Not everyone is complaining about the tax garnishments, however.

Some cannabis companies that are up to date with their excise payments welcomed the CRA’s apparent crackdown.

They argue that collecting on tax-delinquent businesses will be beneficial to companies that pay their taxes on time and in full.

James Black, chief operating officer at Edmonton, Alberta-based Space Race Cannabis, said large companies that defer or don’t pay their taxes have an unfair competitive advantage.

“You can imagine competing with a (rival) who doesn’t have to pay their tax on time – or never pays,” he said.

“In some cases, that is roughly half of their cost of goods; that puts them at a strategic advantage against us.”

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