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OCS Earned $234 M But Taxpayers Got Nothing

The Ontario government must decide whether the Ontario Cannabis Store (OCS) should be a cash cow for the provincial treasury or an efficient competitor against illicit dealers.

The OCS is now the most lucrative provincial cannabis agency in Canada, thanks to four consecutively profitable years selling recreational cannabis. Yet throughout that time, it puzzlingly paid no dividends to Ontario’s government. OCS consequently ended the last fiscal year with $459 million of accumulated profits sitting in the bank. That makes no sense. The province should either spend the money on public services or stop extracting it from the industry’s pockets.

The strangeness of this situation has become increasingly apparent as finance ministers and government agencies across the country have slowly released their 2022-2023 financial results. Quebec’s cannabis agency published its annual report on June 5, for example, but Prince Edward Island didn’t post its statements until Nov. 6.

Taxes

Let’s start by talking taxes. With cannabis, governments collect excise taxes from producers and sales taxes from retailers.

For example, the federal government’s share of excise taxes and estimated sales tax from cannabis sales across the country totaled $455 million during 2022-2023. That equates to about $11.50 per capita, or 8% of every dollar that Canadians spent on recreational cannabis.

But the top tax collector in total dollar terms was Ontario. It hauled in $310 million of excise tax and an estimated $148 million of sales tax that fiscal year, for a total of $458 million. That’s roughly $29.80 per Ontario resident, or 22% of consumers’ spending.

Meanwhile, Alberta had the highest cannabis tax take on a per-capita basis at $37.40. The province garnered $172 million partly because it sold more cannabis per resident than any other province. And partly because its excise tax rate was higher than any other province’s.

Figure 1: Cannabis sales and excise taxes

Cannabis excise and sales taxes as percentages of recreational cannabis spending during 2022-2023 in each province. Manitoba repealed its sales tax and didn’t collect an excise tax.

SOURCE: Author’s calculations using government reports.

Agency profits

Many provinces get additional revenue from their cannabis agencies.

For example, in Quebec, New Brunswick, and Prince Edward Island, government-owned agencies sell cannabis through their own retail stores.

In Ontario, by contrast, OCS is mostly a wholesaler. It buys products from producers across the country and resells them to more than 1,700-plus private-sector stores around the province. OCS owns no physical stores itself but gets 97% of its revenue through its sales to these stores. It also sells some cannabis directly to consumers via its retail website but that accounts for only 3% of its revenue.

But even without stores, the OCS was the country’s highest-earning cannabis agency. Its $234-million profit last year easily topped the $95 million made by Quebec’s agency, the $18 million of New Brunswick’s, and the $2.9 million of Prince Edward Island’s.

Population sizes explain most of the earnings difference. On a per-resident basis, Ontario’s agency profit was $15.22, higher than Quebec’s $10.83 but lower than Prince Edward Island’s $17.12 or New Brunswick’s $22.32.

Figure 2: Cannabis agency profits and dividends

Note: In provinces with standalone cannabis agencies, 2022-2023.

Source: Author’s calculations using government reports.

Pricing also mattered. OCS retail prices for the products it sells online were 75% higher than what it paid producers. By comparison, the retail markups were only 37% in Prince Edward Island and 46% in Quebec. That left more money for industry and consumers. Meanwhile, New Brunswick’s markups were higher at 108%.

It’s good that OCS is profitable. But profitable firms should reward their owners.

Cannabis agencies in other provinces paid generous dividends to their governments. Quebec and Prince Edward Island got 100% of their agencies’ profit last year, while New Brunswick got 90%.

But Ontario’s government received no dividends from OCS. That must change. There’s little point in the OCS charging high prices to earn high profits if the provincial government isn’t using them. (If the agency were a commercial corporation, its shareholders would long ago have demanded dividends.)

So, the Ontario government should review its cannabis policy, as other jurisdictions are already doing. The federal government’s legislative review of the Cannabis Act is underway, having been delayed by the pandemic. The Yukon announced a cannabis policy review in October. And Manitoba cancelled its social-responsibility fee in July.

Use Them Or Lose Them

Ontario should follow suit.  It should either put its cannabis profits to work or stop taking them from struggling cannabis firms.

The first option means treating the OCS as a cash cow, as the province does with its liquor agency. In that case, the government should spend the earnings appropriately. It could, for example, fund addiction treatments for cannabis and other drugs. Or it could support social-justice programs to help the communities most affected by pre-legalization drug laws.

It could also support research and development for medical cannabis. Sponsoring drug trials or other studies could help convert folklore remedies into proven treatments. That could benefit patients, physicians, and producers all at once.

The second option means viewing the OCS as a service to industry. In that case, Ontario should minimize the financial burden it imposes.

Alberta does this already. Its agency sells cannabis wholesale to stores at prices only 6% higher than what it pays producers. That’s just enough to cover operating costs.

By contrast, the OCS recently lowered the average wholesale markup it charges retailers from 31% to 25%. But its financial statements imply OCS could slash the markups down to 11% and still break even.

The OCS should especially eliminate markups on farmgate sales, whereby cannabis is sold directly from producers’ greenhouses to visiting consumers. It doesn’t touch those products and shouldn’t profit from them.

So, Ontario’s governing Progressive Conservatives face a choice. They can be progressive by using OCS profits for public benefit or be conservative by minimizing the cost to industry.

Either way, they should stop leaving the OCS swimming in unused cash like a veritable Scrooge McDuck.

This article was originally published by Policy Options magazine and was reprinted with permission of the author. 

Tags: Canadian Cannabis (111), cannabis profit (2), cannabis tax (5), Michael Armstrong (2), OCS (44), Ontario Cannabis Store (78), taxpayers (1)