The Canadian Government Cannabis Shot Heard Around the World In an unprecedented move, the Canadian Revenue Agency have demanded provincial wholesalers garnishee unpaid excise taxes from delinquent License Producers (LP). Thanks to @Matt Lamers for breaking this story today in MJBizDaily. Cue the (understandable) outrage in some industry circles First, some facts… > The federal govt is owed at least C$200M. Up to two-thirds of LPs are not current with their tax payments – which also means one-third are up to date. > Taxes and fees are high, with the latter even increasing for 2024. > Industry dynamics and high provincial govt wholesaler mark-ups exacerbate the corporate burden. > Barring any sudden influx of cheap capital, CRA policy reversal/lack of enforcement or change in economic fundamentals, the govt’s move will be the death knell for many firms. Some perspective is helpful- 1. The Rules are the Rules The Feds can no longer tolerate delinquency as it encourages non-compliance by others. Of note, 2023 delinquent amounts are up over 270% versus 2022. Companies like people have agency i.e. they are responsible for their decisions. Firms entering the industry should know the tax rates and rules. While govt’s haven’t helped the sector, they are ultimately not responsible for the outcomes from general price declines or poor LP decisions. It’s called capitalism. Yes, the Feds should be doing more to fix a broken regulatory framework and provide some relief, if for no other reason than to protect jobs, encourage exports etc. However, that doesn’t change fundamental business realities or the issue of fairness. 2. Fairness matters All LPs are accountable to the same rules and must be treated the same. The inability to pay taxes or a firm’s modest size should not exempt them from paying on time (unless they could secure a deferral). Conversely, it is unfair for compliant LPs to shoulder a financial burden that is not carried by all. Fact is, non or late payers are getting an unfair advantage. 3. Channeling Michael Porter Taxes are not THE fundamental issue. Applying this guru’s five forces analytical framework to the cannabis industry - low market differentiation, limited supplier power, high buyer (i.e. wholesaler) power, low barriers to entry etc – illuminates the brutal operating environment facing most LPs. 4. From Parliament Hill The Feds likely view the industry very differently than players - and in rosier terms. For one thing, Canadian retail sales topped C$5B in 2023, a healthy increase over 2022. Secondly, 2023 was a record year for active licenses, and more companies are in the queue. The lack of a coherent or effective industry position on some issues has skewed the govt’s understanding and appreciation of many constraints (e.g., capital availability). Hang on, a sector shakeout is coming.

Posted by Mitchell Osak at 2024-02-27 17:16:09 UTC