The Cannabis Council of Canada (C3) is marking the fifth cannabis legalization anniversary by calling on governments to make the changes needed to save the struggling cannabis sector.
Successes of Cannabis Legalization
C3 acknowledges the successes of cannabis legalization including that concerns in youth consumption of cannabis have failed to materialize and consumers have access to safer, tested, and quality-controlled products.
The industry has also shown that legal cannabis is good for governments and good for jobs. It has gone from $0 to $5+ billion in legal sales per year. C3 notes that governments are earning billions in revenue from legal cannabis through excise duties, provincial distribution profits, and income and sales taxes. Tens of thousands of jobs have also been created.
But after five years, legal cannabis sales still only account for 50% of all cannabis sold in Canada, meaning an estimated $4 billion or more in yearly sales continues to go the illicit market.
Financial Challenges Facing the Industry
While some consolidation is to be expected in a new sector, Canada is seeing cannabis companies closing facilities and scaling back production at a staggering rate. According to C3, cannabis companies are leading CCAA filings in the country and 70% of companies are in arrears on their excise duty payments.
A recent C3 survey of licensed producers (LPs) from across Canada underscored the urgent need for government reforms to rejuvenate the sector, ensuring its continued growth and contribution to the Cannabis Act’s public policy objectives.
The survey, compiling responses from 122 LPs, identified the major financial challenges facing the Canadian cannabis industry:
- 71% of respondents reported a surge in excise tax payments from 2021 to 2022 reflecting the adverse financial impact of escalating excise taxes due to price compression and burdensome regulatory fees.
- 83% of LPs reported negative net income in 2022 reflecting the strain that the significant increase in the excise tax has put on LPs impeding their capacity to invest in growth and innovation.
Policy Recommendations
With the right mix of policies and actions from federal and provincial governments, C3 believes the illicit market share can be driven down.
“After five years of legalization, the regulated cannabis industry is struggling due to high taxes, excessive regulation, and unbridled competition from the illicit market. To fulfill the potential of legalization, the sector needs reform urgently. We’ve identified the top areas the government can change today to allow us to collectively grow the pie,” says George Smitherman, President & CEO of the Cannabis Council of Canada. “Growing the pie means more revenue for the cannabis sector and governments and it means extending the protection of the regulated sector to more Canadian cannabis consumers.”
Mike Schilling, President & CEO of Community Savings, stressed the economic benefits that a thriving cannabis sector can bring to Canada. He states, “A revitalized cannabis industry can serve as a valuable source of tax revenue and employment opportunities, especially in challenging economic times. Between 2018 and 2021, the legal cannabis industry generated $11B in sales, $29B in investments, 98,000 jobs and added $43.5B to Canada’s GDP.”
C3 has made the following recommendations to ‘Grow the Pie’ for governments, Canadians, and the legal cannabis sector:
1. Reform the Excise Duty Framework
C3 advocates for a fairer taxation system, proposing the reduction of excise tax to a fixed rate of 10% of sales and structural changes to the operation of the program that are currently costly and inefficient. They say these changes would ensure that the diverse cannabis industry is sustainable and can compete with the illicit cannabis industry.
2. Eliminate Excessive Regulatory Fees
Overbearing regulatory fees, which do not exist in other sectors such as alcohol and tobacco, have hampered the growth and profitability of LPs. C3 urges the government to eliminate these unfair fees.
3. Reform the Edibles Product Category
C3 calls for an increase in the allowable THC limit in edibles to 100 mg, aligning regulations with consumer protection and winning this category back from the illicit market. They say the current 10mg THC limit on edibles is ceding $300+ million per year in sales to the illicit market.
Full details can be found in C3’s position paper.