Canada’s cannabis industry has a tax problem. 

While the industry may have been happy to accept an onerous excise tax regime in exchange for Canada’s legalizing recreational cannabis sales back in 2018, fast forward to today and those fees have become an anchor that has dragged down the country’s producers, both large and small, which have struggled to become profitable.

Canadian and provincial governments typically receive as much as 40 cents of every dollar spent on a cannabis product, with the producer themselves netting the remaining 60 cents, according to data provided by the Cannabis Council of Canada. That contrasts with figures from July 2019 when governments only received 25 cents of every dollar spent on cannabis, with producers getting the remaining 75 cents.

That combination of taxation and the mark-ups made by provincial distributors have created a challenging regulatory environment that threatens the stability of Canada’s legal cannabis industry, said George Smitherman, the president of the Cannabis Council of Canada and former Ontario health minister, in an interview on BNN Bloomberg Friday.  

“There’s been a lot of price compression, particularly in the dried flower categories which are the dominant [products in the market],” he said.

“If you look over the trend over the past two or three years, cannabis producers have been, in a certain sense, subsidizing the price of that dried flower for the consumer. While those prices have compressed, the government taxation has not and therefore become a larger share of the pie.”

“That’s impossible to compete with the legacy markets. In this environment, pretty much nobody, regardless of their size or focus or what province they’re operating in, is able to stick profitability. It’s so elusive.”

That taxation pressure, alongside other issues like edible potency limits and packaging restrictions, are among the top points that Smitherman is looking to address when he hosts a gaggle of Ottawa parliamentarians next week. The country’s biggest cannabis industry trade group will be hosting a two-day event called “Grass on the Hill” in Ottawa this Monday where Smitherman will try to bend the ear of decision-makers to help kick start a formal review of the industry by Health Canada.

In doing so, Smitherman will be armed with fresh data from industry consultants EY Parthenon and polling information from Abacus Research to demonstrate just how challenging the legal market remains. And the industry itself has been no slouch – a recent report by Deloitte found that the cannabis industry has generated more than $15 billion in direct and indirect tax revenue for Canadian and provincial governments, while creating more than 151,000 jobs since Canada legalized recreational use of the drug in Oct. 2018.

“The legacy markets are thriving and in certain categories because of regulatory challenges, they’re crushing it,” he said.

While Ottawa recently announced plans to establish a strategic panel led by the Department of Innovation, Science and Economic Development to help spur growth in the sector, the Cannabis Act itself mandates that the legislation will be reviewed three years after it was passed into law. That review, scheduled to last 18 months, has yet to happen and some industry participants privately told BNN Bloomberg that the longer the review takes, the harder it will be to remain operational.

Smitherman notes that the risk in maintaining the status quo could wind up accelerating the steady stream of cannabis companies that have either closed their doors, declared bankruptcy

“We’re going to lose out on the opportunity to grow the market and to achieve the objectives of the Cannabis Act, which includes getting more consumers interested in getting products that are more tested and therefore, much safer [than legacy products],” Smitherman said.