A new report calls Canada’s excise tax regime “the greatest systemic threat” to cannabis producers, and builds on three years of market data to illustrate that under the current structure, craft cultivators that have put it all on the line to go legal may not be able to survive.

In Canada, excise duties or “sin taxes” on cannabis are paid by producers, who remit either $1 per gram or 10 percent of their sale price on dried cannabis; whichever is higher. (In most legal U.S. jurisdictions, cannabis taxation tends to happen at the point of sale.)

While 10 percent might seem reasonable, the authors of the report, Tantalus Labs CEO Dan Sutton, CFO Lucas Jenkins, and Hanway Associates head of advisory Charlotte Bowyer argue that factors including market price compression and a static tax floor have raised the effective excise duty rates to as much as 20 to 35 percent for smaller cultivators, threatening the viability of their businesses.

‘A financial state of emergency’

While large publicly traded companies might dominate the narrative in the media, most of the over 850 licensed cultivators, processers, and sellers in the Canadian cannabis market are smaller, privately owned companies. And while these companies are capturing more and more market share, without massive investor subsidy, they cannot compete like the pub-cos do.

Sutton, Jenkins, and Bowyer write that the “current policy… centraliz[es] economic benefit to a small number of large beneficiaries,” companies that can wait out price compression while their smaller counterparts compete for limited SKUs and struggle to pay their employees. Even among larger companies, success is hard to come by, according to the report.

“Unfortunately, it is no exaggeration to say that less than five percent of firms of any size have generated consistent and survivable income since the outset of legalization, and that 60 percent or more of Canadian cannabis production square footage could be on the path to insolvency in the next 12 months,” they continue in the 41-page report. “We are here to declare nothing short of a financial state of emergency for Canadian cannabis.”

‘Pockets emptied by the government’

In the eight months since the Stand For Craft campaign kicked off, craft cultivators from across the country have reached out to Sutton to express their frustration, with many communicating that they had to make profound sacrifices in order to transition to the legal system, “only to realize there is no way to build a self-sustaining business,” he says.

“We are in a position where our sales are well over $1 million per month, and we still have difficulty breaking even, primarily due to the excise burden,” says one craft grower quoted in the report. “We run as lean as we can and are driving efficiencies quite well, but the productivity that is required for every labor hour to offset the excise burden, even at the volume of product that we're moving, is barely achievable.”

“If the government does not make dramatic and systemic changes to the excise regime, every family business and non-public entity in the cannabis space will have their pockets emptied by the government, and their savings as well,” says another grower.

Report calls for tax moratorium, reform

In addition to providing a financial analysis of market data, the report looks to other Canadian industries such as craft alcohol, and to other legal cannabis jurisdictions that have enacted tax reforms, for solutions.

To save smaller cultivators, it calls for a moratorium on cannabis excise taxes while a new structure is established—one that takes stakeholder feedback into account.

“A 24-month tax moratorium would take the timeline pressure off of government to act quickly or rashly in adapting currently dysfunctional regulations,” says Sutton.

“This is policy worth taking the time to get right, and removing tax obligations in the interim will enable the survival of craft cultivators while the important and methodical work gets done at the justifiably slow pace of Canadian democracy.”

Following a moratorium, the team at Stand For Craft propose reforming the $1 per gram minimum threshold and moving to a graduated excise duty based on sales per month, a model that would mimic alcohol taxation in Canada. It also recommends the implementation of a tax credit based on aggregated volume of production.