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Federal Fees Contribute to Challenges

A new review of Health Canada’s cost recovery program for cannabis license holders found the organization recovered less than 40% of administration fees for the cannabis licensing program in the first four years of legalization. License holders also said Canada’s cannabis fees are contributing to profitability challenges.

The review was carried out between August 2021 and March 2022 and is intended to help provide information for Health Canada’s ongoing review of the Cannabis Act.

Background

In 2016, the Task Force on Cannabis Legalization and Regulation recommended that the federal government implement a fee structure to recover the administrative program costs of establishing a legal cannabis industry.

The goal of achieving full cost recovery was introduced in July 2018. It was projected that the proposed fees would allow Health Canada to recover as much as 100% of the annual regulatory costs as early as 2020-2021.

Impact of Fees

Under the Cannabis Fees Order, license holders are subject to transactional, application screening, security clearance, import and export permit, and annual regulatory fees.

Health Canada’s review found that while fees do not represent a large proportion of license holder operating costs, they do contribute to challenges achieving profitability and positive cash flow, which are already under significant pressure.

Twenty-two license holders, comprised of 10 micro license holders and 12 standard license holders, reported that the minimum annual regulatory fee is prohibitive, particularly for license holders with no sales revenue.

In July 2023, it was found that unpaid regulatory fees owed by cannabis companies to the federal government jumped more than 200% from the year prior to almost $4 million as of the end of March.

Cannabis Excise Duty

Respondents consistently said that the excise duty negatively affects profitability. License holders also reported that the duty impedes their capacity to compete and is a physical, logistical, and financial burden on their operations due to the multiple excise stamp requirements.

Other Findings

License holders reported that service delays increased indirect costs on industry while waiting for approvals. This included time waiting for security clearance reviews and delays in receiving export permits.

License holders also cited challenges navigating the various provincial and territorial supply networks and contracting obligations and difficulties in accessing capital from financial institutions or government grants. Liquidity is also reduced due to the lag between seeding crops to selling product.

Cost Recovery Progress

In the last four years, Health Canada has recovered 37.2% of administration fees, a far cry from the projected 100%.

Actual Revenues Collected and Costs Incurred

Fee 2018-2019 2019-2020 2020-2021 2021-2022 Total
Application screening fee Revenues $383,406 $908,576 $664,184 $498,125 $2,454,291
Security screening fee Revenues $322,530 $4,012,191 $3,210,875 $3,466,560 $11,012,156
Import-Export permit fee Revenues $156,160 $492,511 $546,214 $597,340 $1,792,225
Annual regulatory fee Revenues $3,323,652 $45,033,278 $25,493,217 $71,121,867 $144,972,014
Total Revenues $4,185,748 $50,446,556 $29,914,490 $75,683,891 $160,230,685
Costs $92,268,533 $110,242,063 $112,728,368 $114,949,669 $430,188,633
Recovered 4.5% 45.8% 26.5% 65.8% 37.2%

Source: Health Canada

In 2021-2022, Health Canada reached a cost recovery rate of 65.8%, in part due to deferred payments from 2020-2021 being collected in 2021-2022.

In 2020-2021, Health Canada provided short-term economic relief to the cannabis industry due to the COVID-19 pandemic. As a result, annual regulatory fee revenues decreased in 2020-2021 by approximately $18.5 million and those deferred payments were later collected and reported in 2021-2022.

Over the first four fiscal years of cannabis legalization (2018-2022), Health Canada collected $160.2 million in cannabis fees or recovered 37.2% of total cannabis regulatory program costs. Excluding 2018-2019, which was only a partial fiscal year for the legal cannabis market, the Government’s cost recovery rate from 2019-2022 was 46.2% of total cannabis regulatory program costs.

Displacing Illicit Market

The report also explores the impact of the cannabis cost recovery framework on displacing the illicit market, supporting a diverse industry, and ensuring individuals continue to have access to cannabis for medical purposes.

By the end of the 2021-2022, Statistics Canada estimated that around 66% of household expenditures on cannabis were made in the legal market.

For more information, please read the report.

Tags: Canadian Cannabis (109), Cannabis Act (40), Cannabis Industry (183), Cannabis Regulations (101), Government of Canada (5), Health Canada (64), Health Canada regulations (12), regulatory burden (7)