Canadian government among top unpaid creditors of failed cannabis businesses

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/