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Canadian government among top unpaid creditors of failed cannabis businesses

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Canada’s federal government accounts for a growing share of the unpaid debts racked up by failed cannabis companies, lending credence to claims the nation’s nascent adult-use industry is suffering from pricey fees and heavy taxation.

A review of recent insolvency filings by MJBizDaily found that the Canada Revenue Agency, the federal tax collection body, and Health Canada, the national department in charge of regulating cannabis production, are commonly among the biggest unpaid creditors for insolvent marijuana producers.

In the 2021-22 fiscal year, various levels of government collected more than 1.5 billion Canadian dollars ($1.2 billion) from the cannabis industry via excise tax, other taxes (such as sales taxes) and various fees, including the annual regulatory fee.

However, the amount of unpaid federal excise tax and fees has skyrocketed.

Licensed producers owed the Canada Revenue Agency (CRA) CA$192.7 million as of March 31, 2023, while unpaid regulatory fees jumped to almost CA$4 million.

“It’s increasingly clear that, for many cannabis companies, insolvency is the result of a formula where taxes and fees squeeze out such a big proportion of the overall price,” George Smitherman, CEO of the industry group Cannabis Council of Canada, told MJBizDaily.

Fierce competition, a glut of product and falling wholesale prices are also weighing on the industry.

The latest example of outstanding debts owed to the federal government is Vancouver, British Columbia-based cannabis producer Tantalus Labs.

In June, Tantalus filed a Notice of Intent for Restructuring in a British Columbia court.

A review of Tantalus Labs’ creditors list shows that the Canadian government accounts for more than half the licensed producer’s unsecured debts.

Of the CA$8.4 million that Tantalus owed to 92 creditors, CA$4.5 million was due to the Receiver General for Canada, the body responsible for accepting payments owed to the federal government.

The producer also owed Health Canada CA$388,490.

Together, the two government bodies make up 58% of Tantalus’ debt, an indication that fees and taxes contribute a significant amount to cannabis businesses’ costs.

It’s a similar story for other recent insolvent producers.

Last month, Concord, Ontario-based cannabis company Aleafia Health entered creditor protection after the failure of its attempt to merge with U.S. multistate marijuana operator Red White & Bloom Brands.

The company had racked up unsecured obligations totaling CA$29.7 million.

The Canadian government was by far the biggest unpaid creditor, being owed CA$15.8 million, or well more than half the company’s outstanding debt. Most of that was owed to the CRA.

When cannabis producer Phoena Group was granted creditor protection earlier this year, the Canadian government was shown to be the company’s third-largest unpaid creditor.

Vaughan, Ontario-based Phoena – formerly called CannTrust – had amassed a debt owed to the government totaling CA$1.8 million. The money was owed to the Receiver General for Canada, the CRA and Health Canada.

Why so much debt?

Michael Armstrong, an associate business professor at Brock University in St. Catharines, Ontario, said one explanation for the increase in debts owed to the government is that businesses can get away with it.

“If you are running a cannabis company and you realize you don’t have enough money to pay all your debts,” he said, “then you’re going to ask, ‘Who can we put off?’

“It seems that companies are realizing they can procrastinate on the excise taxes and other government fees.”

Armstrong suggested the growing proportion of debt owed to the federal government partly reflects high taxes and fees charged specifically to cannabis businesses.

If the industry were already firmly established, the taxes and fees wouldn’t necessarily be higher than they should be.

But he said they might be too much for businesses to bear given the current state and maturity of the industry.

October will mark the fifth anniversary of Canada’s adult-use cannabis industry.

“It’s a brand-new industry that’s still trying to figure out how many stores (and cultivators) we need to compete against each other and against the (illicit) market,” he said.

Armstrong noted that prices have come down substantially in the regulated market, where significant margin has been taken off the table since 2018, when the cannabis excise tax was rolled out. 

“So the margins they’re taking the mostly fixed taxes and fees out of doesn’t leave much for the industry, whereas back in 2018 the margin was much bigger,” he said.

“Someday, perhaps in the future when the margins aren’t so pressed, maybe those tax takes will turn out to be appropriate.”

‘Unleash the hounds’

The number of licensed cannabis producers unable or unwilling to pay their excise duty to the Canadian government has soared in recent years.

Almost three-quarters of the 305 LPs required to pay the duty had an outstanding debt with the CRA as of March 2023.

The number of LPs with outstanding excise debt was:

  • 12 in 2019.
  • 33 in 2020.
  • 68 in 2021.
  • 141 in 2022.
  • 213 in 2023.

Facing a tidal wave of delinquent payees, the CRA earlier this year began stepping up pressure on cannabis producers with outstanding excise payments.

The pressure included “legal warning” letters.

Smitherman, of the Cannabis Council of Canada, suggested the government ought to adapt its excise tax to the reality facing the industry.

“The government’s response to the growing evidence of unpaid taxes and fees has been to unleash the CRA hounds rather than pay any concern to the formula that caused a lot of the problem in the first place,” he said.

Focus on fees

Not all cannabis executives believe the excise tax applied to sales is unreasonable.

Norton Singhavon, CEO of Kelowna, British Columbia-based Avant Brands, said the excise is fine and the industry should instead be targeting various fees levied by Health Canada, such as the annual regulatory fee.

“All the fees Health Canada scrapes along the way are where the (potential) savings are for businesses,” Singhavon said in a phone interview.

Singhavon doesn’t believe the excise tax is the cause for so many business failures.

“I think most of these companies have bigger problems,” he said.

“For the vast majority, (the excise tax) doesn’t change their financial situation.

Singhavon noted that some cannabis companies are succeeding in the face of high fees and taxes.

He noted the third-quarter results of Cannara Biotech, a Montreal-headquartered cannabis producer, which reported positive free cash flow and net income for its third quarter.

He also said his company, Avant Brands, reported positive free cash flow and a small loss for the recent quarter.

“It’s still an early stage industry. It’s meant to be challenging,” Singhavon said.

“It’s meant to be hard. It’s not a gimme.”

Source: https://mjbizdaily.com/canadian-government-among-top-unpaid-creditors-of-failed-cannabis-businesses/

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New Mexico cannabis operator fined, loses license for alleged BioTrack fraud

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New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.

The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.

Golden Roots operates the The Cannabis Revolution Dispensary.

The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.

The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.

Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.

After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.

In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.

The company requested a hearing, which the regulator scheduled for Sept. 1.

At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.

Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.

Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.

The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:

Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.

Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/

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Marijuana companies suing US attorney general in federal prohibition challenge

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Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.

According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”

Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.

The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”

The companies want the case to go before the U.S. Supreme Court.

They hired prominent law firm Boies Schiller Flexner to represent them.

The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.

Similar challenges to the federal Controlled Substances Act (CSA) have failed.

One such challenge led to a landmark Supreme Court decision in 2005.

In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.

In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.

Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.

“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.

“Moreover, the facts on which those precedents are based are no longer true.”

Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”

While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.

“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”

Source: https://mjbizdaily.com/marijuana-companies-suing-us-attorney-general-to-overturn-federal-prohibition/

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Alabama to make another attempt Dec. 1 to award medical cannabis licenses

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Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.

The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).

Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.

Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.

That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.

Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.

Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.

A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.

Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/

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