Out of approximately 40 surveyed* craft cannabis cultivators, only 20% are confident their business will last more than 12 months as excise duties continue to rise. In addition, over 60% reported they did not see a monthly profit generated. It’s time the government listened to the industry and made some changes, but in the meantime, producers are looking for ways to get around the tax.
In May 2020, StandForCraft.com published a 41-page overview of Excise Duty providing the Canadian cannabis industry with the forthright statistics we’ve been waiting for— data-lead arguments indicating the current excise tax structure and continuous increase is not a feasible design for many cannabis businesses to succeed under.
Since 2018, the legal cannabis sector has raised more than $1.2 billion in excise taxes, of which more than half ($640 million) were collected in 2021.
At first glance, $1.2 billion comes off as an impressive number, however, it represents a minuscule portion of all relevant taxable revenue. This fact is made more obvious when you examine the outsized impact the current duty structure has on specific cannabis producers.
Variations in Tax Regimes Across Canada
The rise in excise duty and additional fees in provinces like Alberta, which includes the Cannabis Representative Registration, is a core factor for licensed producers (LPs) deciding where to sell their products and a lot of them are now avoiding Alberta. Provinces with lower excise duties also provide better ROI and larger margins for retailers. These preferred provinces receive an overload of product submissions in an already competitive atmosphere, when compared to provinces with higher rates. This makes it even more difficult for LPs to succeed.
Excise duty has recently reached upwards of 35%+ of gross revenue for LPs in their cost of goods sold. The 35% is added before any distribution markups from provinces and markups from private retailers. After adding these taxes, the average price of dried flower currently ranges from $7-$13.5/g MSRP in comparison to the legacy market, which has a norm of $4-7/g. The consistent climb in front-facing prices leaves many customers confused and frustrated, resulting in more sales of discounted products.
Combatting Excise Tax With Synthetic Cannabinoids
The pressure of the increased excise duty is sparking innovation as LPs interpret the regulations and look for new ways to circumvent the taxes. As of last week, Nextleaf Solutions Ltd has become the first company in Canada to legally produce D9-tetrahydrocannabinol acetate (THC-O). The team is operating through a Specialty Molecules division and has preemptively validated the manufacturing process through third-party analytical testing. Nextleaf noted that THC-O is not subject to a regulated cannabis extract excise tax in Canada and intends to market the ingredient as an excise tax-free alternative to delta-9-THC.
Nextleaf Solutions’ CEO Paul Pedersen shared his insights stating, “With Nextleaf’s reputation for manufacturing standardized cannabinoid-based ingredients…we are excited to lead the way globally on the development of excise tax-free THC-O products manufactured within Health Canada’s regulatory framework.”
It will be interesting to watch if other LPs will follow this trend of capitalizing on synthetic cannabinoid production.
* The survey was conducted by StandForCraft.com in association with Tantalus Labs and written by Dan Sutton, Lucas Jenkins, and Charlotte Bowyer.