…and….Here we are five years later. If you want to be a millionaire, start with a billion dollars and launch a cannabis production company in Canada? A new report by consultancy firm Deloitte, due for release on Wednesday, paints a similar picture.
The report looked at the impact of Canada’s cannabis excise tax and concluded the industry’s financial viability is in question because of high taxes.
The Cannabis Act of 2018 was a cornerstone piece of legislation for the Trudeau government, which pledged to “outflank” organized crime by undercutting the black market for pot.
But the new report suggests that illicit producers still control between one quarter and a half of the market, partly because a punitive excise tax regime raises costs for legal producers.
The Deloitte report, commissioned by the Cannabis Council of Canada, said that the excise tax paid to governments accounted for 31.5 per cent of gross production revenues last year, at a time when prices are falling.
It would, of course, be rare to find an industry that endorses the amount of tax it is paying.
However, the government’s own expert panel, which conducted a legislative review of the Cannabis Act last year, noted the industry’s “urgent concerns” about viability and said they were “well founded.”
Deloitte looked at the financial results of 36 licensed cannabis producers between 2019 and 2024 — nine of which filed for insolvency during the period under review.
Illicit producers still control between one quarter and a half of the market, partly because a punitive excise tax regime raises costs for legal producers
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The share of production revenues diverted to excise taxes doubled in that time, making it the largest single expense.
When the excise tax was set at $1 per gram or 10 per cent of the value of dried or fresh cannabis seeds (whichever was greater), prices were around $10 per gram. But the flood of new entrants to the market, and the stubborn illicit market, lowered the price to around $3-4 per gram, sending the effective tax rate over 30 per cent.
The industry has argued that the excise duty should be adjusted to a uniform 10 per cent of value and the flat rate of $1 per gram should be eliminated entirely.
The expert panel said Finance Canada should consider a review of the excise tax model, recognizing that it was originally designed when the average price of dried cannabis was significantly higher.
It is hard to argue otherwise after looking at the financial performance of the industry.
The report notes the wholesale price received for producers for one gram of flower fell from $5.68 per gram in the second quarter of 2019 to $3.17 in the third quarter of 2024.
As a result, the excise tax as a percentage of the wholesale price rose from 13.1 per cent to 33.8 per cent in the same period.
Needless to say, no one is making any money.
Canadian companies were not able to generate sufficient cash flows to cover their debts, the report said, in part because companies are required to pay tax within 30 days of sales but typically do not collect cash from sales until 60-90 days.
For comparative purposes, excise taxes for cannabis as a percentage of retail sales were 17.9 per cent, compared to 14.4 per cent for spirits, 6.3 per cent for beer and four per cent for wine. (The Deloitte report did not make a comparative analysis for cigarettes, which differ in price by province, but the federal excise duty of $38 on a $160 pack of 200 smokes in Ontario comes out at around 24 per cent of sales).
The expert panel that reviewed the Cannabis Act concluded that the licensing framework has created a legal industry that is providing consumers with a quality controlled supply of products and which is making “steady progress” in shifting Canadians to the legal market.
It expressed worries about the number of young people using cannabis, and was particularly concerned about the increased reports of poisonings among children consuming edibles.
The panel recommended that the consumption of “higher risk” cannabis with elevated levels of THC should be discouraged by higher excise taxes.
The Deloitte report called the conclusion “misguided,” saying concerns over public health should focus on minimizing the illicit market.
“Placing further restrictions and requirements on legal cannabis products would simply strengthen the illicit market and will only be effective in the absence of a strong illicit market,” the report said.
This makes sense. The panel said that any moves the government introduces to support the industry must consider public health.
But the legal market is highly controlled. Producers are obliged to pay regulatory and security clearance fees for staff — costs the illicit market simply does not have.
If it is taxed out of existence, the only winners are the black marketeers. Since one of the government’s current priorities is to tackle crime and drugs crossing the border, it is only logical to support one at the expense of the other.
“Canada likes to position itself as a global leader in legal cannabis — but since legalization in 2018, the federal government has failed this industry and the tens of thousands of hardworking Canadians it supports,” said Paul McCarthy, president of the Cannabis Council of Canada. “With a new government in office, it’s time for a fresh approach. The cannabis industry deserves the same attention and support as any sector of our economy.”
Federal and provincial governments earned $2.2 billion from cannabis taxes and licenses in 2024, as sales increased by 11.6 per cent.
There is a kind of wonder in treasuries across the land that this revenue appeared from nowhere, as if from a fairy tale featuring enchanted beans and stolen geese.
But there is not an unlimited supply of golden eggs.
When the federal budget finally appears later this year, it
should include a legislative change that only taxes legal cannabis producers on 10 per cent of the value of their product…but time will tell.
