The Ontario-based company is appealing the $434,611 fine to the federal court, arguing that it had complied with all its obligations required by both Health Canada and the CRA

 Canadian cannabis company Canopy Growth was fined nearly half-a-million dollars in 2020 by the Canada Revenue Agency because it began growing plants on an outdoor farm before receiving its licence from the agency, National Post has learned.

Now, the Ontario-based company is appealing the $434,611 fine to the federal court, arguing that it had complied with all its obligations required by both Health Canada and the CRA contrary to the latter’s claims.

But one cannabis law expert says it will be an uphill battle for Canopy Growth because there are a number of “challenges” with their arguments against the tax agency.

“If I had to pick which side of the argument to argue on, I would be wanting to be on the federal government side of this one,” said Trina Fraser, partner at Brazeau Seller law firm in Ottawa.

In court documents consulted by National Post, the company says the penalty is tied to its “Outdoor Farm” project launched in the summer of 2019.

Under “significant pressure” to produce enough cannabis after legalization in late 2018, the company set up a corporate subsidiary in early 2019 that applied for a cultivation licence from Health Canada for an outdoor farm, according to the appeal.

Health Canada eventually gave them their licence in June, “which was well into the 2019 outdoor growing season.”

The company then applied for a separate cannabis licence from the CRA, which is mandatory under the Excise Act. Court documents say it received the licence roughly one month later.

But just over one year later, CRA sent Canopy Growth a letter informing them they were being fined $434,611 because it found the company had begun cultivating cannabis before it received its licence from the agency.

“The receipt and cultivation of vegetative cannabis plants prior to obtaining a cannabis licence under the (Excise Act) is a contravention of the (Excise Act),” reads an excerpt of a letter sent by CRA and quoted in court documents.

The amount of the fine was based on two-thirds of CRA’s estimated market value of the 2019 crop, the company said, meaning the total value was likely around $650,000.

“In reality, the fair market value of the 2019 Crop was nil, as evidenced by the fact that the crop was destroyed, and no viable cannabis product was ever produced from the crop,” the company argued in its appeal.

The company also argued that it never contravened the law because it had received its Health Canada cannabis licence and believed that nothing in the Excise Act prevented it from beginning cultivation while waiting for the CRA licence.

“The CRA Letter contained no conditions, limitations, or restrictions, with respect to the production of cannabis products,” the company argued.

“The Alleged Offence that the (CRA) has accused (the company) of committing is not an offence under the EA,” the documents read.

In the appeal, Canopy Growth also said that sections of the Excise Act only state that a “cannabis licence” is required for legal cultivation, which they argue is referring to the one emitted by Health Canada under the Cannabis Act, and not the one by CRA under the Excise Act.

“They’re going to have a hard time establishing that, when you see the phrase ‘cannabis licence’ in that section (of the Excise Act), that it could possibly mean a cannabis licence issued by Health Canada,” Fraser said.

“I think it’s clear, but it’s up to the court to decide.”

In its appeal, Canopy Growth is asking the Federal Court to either cancel the fine and order the agency to reimburse the money, or diminish the value of the fine if the court considers that the company did commit an illegal act.

Both the CRA and Canopy Growth declined to comment on the case because it is in front of the Court. A company spokesperson confirmed that it had paid the fine in full in 2019 “to avoid further financial penalties associated with late payment.”

Last year, Marijuana Business Daily revealed that CRA had levied 22 cannabis-related fines worth a total of $1.3 million in 2019 and 2020, though the agency refused to name the companies penalized.

According to their data, Canopy Growth’s $434,611 fine was by far the most significant in 2020, though the largest one dolled out by the agency at that point was worth $507,660 in 2019 to an unnamed firm.

Marijuana Business Daily also reported last February that Canopy Growth reported a $115 million net loss in the last quarter of 2021 as cannabis sales continue to fall in Canada.

Fraser said the CRA has even asked her to remind her cannabis company clients that they need to receive their licence under the Excise Act before beginning cultivation.

“CRA reached out to me at one point and said….‘We are seeing lots of situations where new licence holders are commencing production before they get their CRA cannabis licence. That is a problem. We will not hesitate we take that very seriously,’” she said.