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Cannabis sector rails against unfair taxes, fees

Lower than expected wholesale prices have effect of raising the federal excise tax rate
Vancouver-based Tantalus Labs CEO Dan Sutton said excise taxes on cannabis are much higher than the government originally intended

Cannabis executives, entrepreneurs and advocates took aim at unfair and high taxes as well as government fees and mark-ups at the Lift cannabis business conference today in Vancouver.

Some taxes came under fire because they are targeted to the cannabis sector, and not to the alcohol or tobacco industries, while others were criticized for being much higher than the government originally intended or for working against various governments' stated goals. 

Cannabis Council of Canada CEO George Smitherman showed a slide indicating that Health Canada collected $75,683,891 from its 2.3-per-cent regulatory fee from cannabis companies in the 2020-2021 fiscal year. That same year it collected no money at all in regulatory fees from tobacco or alcohol ventures. 

The intent of the fee is to help the government administer licensing and other expenses.

He said cannabis sector regulatory fees are likely closing in on $100 million in the current fiscal year.

His message to Ottawa is: "We want you to stop that. We want you to treat us as you treat others, and we want you to give us the money back, and credit our overdue CRA (Canada Revenue Agency) accounts," said Smitherman, who is a former deputy premier of Ontario. 

Tantalus Labs CEO Dan Sutton agreed. He told BIV that his Vancouver-based licensed cannabis producer is teetering on the bring of profitability, with some months turning a profit while other ones rack up losses. He considers that financial performance to be among the best in the industry. Only a small fraction of cannabis companies are turning a profit because of high government taxes, he said.

Sutton's biggest irritant is Ottawa's excise tax that was put in place to be either $1 per gram, or 10 per cent of the price of the cannabis sold, whichever is more. The federal government created that taxation system based on an expected $10 wholesale price for one gram of cannabis. 

Licensed producers have swamped the market with cannabis leading to the wholesale price for a gram of marijuana falling to less than $4 per gram. With $1 needing to be paid as an excise tax, that has lifted the excise tax rate to around 25 per cent, Sutton said. 

He worked out a scenario in B.C. where the cost to the wholesaler before the excise tax was $3.78 per gram. One dollar is then added as the excise tax and $0.09 is added to account for the 2.3 per cent Health Canada regulatory fee. The B.C. government would then add $0.73 as part of its 15-per-cent wholesale mark-up. The retailer would then add a likely $2.40 mark-up to make the product $8 per gram before the provincial sales tax is levied at the till. 

"B.C. isn't the worst for taxation, Alberta and Ontario would be," he said.

Sutton said unlike B.C., Alberta has an additional 16.8-per-cent excise tax while Ontario has an additional $3.9-per-cent excise tax. 

Black market operators do not need to pay any of these taxes, putting them at an advantage, Village Bloomery principal Jeremy Jacob told BIV.

He pointed to an area where he said the B.C. government appears to be oblivious to how its tax policies impact business owners and can be contrary to government objectives.

B.C. has a new system that allows small craft growers to sell directly to customers. Those craft growers, however, must still pay the government's 15-per cent mark-up. The mark-up, Jacob said, is there because the British Columbia Liquor Distribution Branch (BCLDB) insures, warehouses and helps facilitate orders for the products.

"They organize shipping – all the logistics are taken care of," Jacob said of the BCLDB.

"If you're a small grower, and you're given direct delivery, which is supposed to improve your competitiveness, and give you access to the market, the government is charging you the same 15 per cent. But you have to now store it yourself, insure it yourself, do your order fulfillment, and all of that has a cost that is in addition to the 15-per-cent mark-up."

The point of the program, Jacob said, was to improve the competitiveness of the small craft producers. 

"This is actually hurting their competitiveness," he said. "They say, 'We're going to do this to achieve these goals," and then the way they structure it, it does the opposite. And they just turn a blind eye."

One of the biggest beefs for Deepak Anand, head of international consulting at Gateway Proven Strategies, is that Canada taxes medical marijuana. 

Even though cannabis is legal in Canada for any adult to buy, the country still has a medical cannabis regime. Patients get authorizations to purchase specific products, or amounts of products, and they either buy the cannabis directly from licensed producers, or they grow their own. The products come with the same taxes as does cannabis purchased for non-medical purposes, said Anand who sits on the board of Medical Cannabis Canada. 

Some discussion at the conference centred on how to get governments to change its laws and tax regime. Anand said that much of his job in dealing with governments is to educate them about the regulations. 

"They don't fully understand the Cannabis Act regulations, or all the different implications," he said. "I think it's incumbent on us, really, as an industry, that when we start to have these conversations, first and foremost that we start to educate them on the regulations."

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