Canada's federal government is taking a growing share of the outstanding debt accumulated by failed cannabis companies, confirming that the country's nascent adult-use industry is suffering from costly fees and heavy taxes.
A review of recent bankruptcy filings by MJBizDaily found that the Canada Revenue Agency, the federal tax agency, and Health Canada, the national department responsible for regulating cannabis production, are typically among the largest outstanding creditors of bankrupt cannabis producers.
In the 2021-22 fiscal year, governments at all levels collected more than C $100 million ($500 million) from the cannabis industry through excise taxes, other taxes (such as sales taxes) and various fees, including annual regulatory fees.
However, the amount of unpaid federal excise taxes and fees skyrocketed.
As of July 31, 192, licensed producers owed the Canada Revenue Agency (CRA) $202.34 billion, while unpaid regulatory fees jumped to nearly $<> million.
"It's becoming increasingly clear that for many cannabis companies, bankruptcy is the result of a formula where taxes and fees crowd out such a large percentage of the total price," George Smithman, CEO of the Canadian Cannabis Council, an industry group, told MJBizDaily.
Fierce competition, a glut of products and falling wholesale prices have also weighed on the industry.
The latest example of an outstanding debt owed to the federal government is cannabis producer Tantalus Labs in Vancouver, British Columbia.
In June, Tantaros filed a notice of intent to restructure in British Columbia Provincial Court.
A review of Tantalus Labs' creditor list shows that the Canadian government accounts for more than half of the licensed producer's unsecured debt.
Of the $40,000 that Tantalus owes to eight creditors, $920,000 is due to the Directorate General of Receivables of Canada, the agency responsible for accepting payments owed to the federal government.
The producer also owes Health Canada $388,490.
The two government agencies together account for 58 percent of Tantalus' debt, suggesting that fees and taxes contribute significantly to the costs of cannabis businesses.
The story is similar for other recently insolvent producers.
Last month, Aleafia Health, a cannabis company based in Concord, Ontario, entered creditor protection after a failed merger with multi-state US cannabis operator Red White&Bloom Brands.
The company's total unsecured debt is $290,000.
The Canadian government is by far the largest outstanding creditor, owing C $150,000, or more than half of the company's outstanding debt. Most of it is owed to the CRA.
When cannabis producer Phoena Group was granted creditor protection earlier this year, the Canadian government turned out to be the company's third largest outstanding creditor.
Based in Vaughan, Ontario, the Phoenix Company (formerly known as CannTrust) accumulated a total debt to the government of $10,000. The money is owed to the Minister of Canada, the CRA and Health Canada.
Why so much debt?
Michael Armstrong, an associate professor of business at Brock University in St. Catharines, Ontario, said one explanation for the increase in debt owed to the government is that companies can get away with it.
"If you're running a marijuana company and you realize you don't have enough money to pay all your debts," he said, "then you ask, 'Who can we defer?'"
"Companies seem to realize that they can hold off on excise taxes and other government fees.
Armstrong said the rising percentage of debt owed to the federal government partly reflects the high taxes levied specifically on marijuana businesses.
If the industry is firmly established, taxes and fees will not necessarily be higher than they should be.
But given the state and maturity of the industry, companies may not be able to withstand it, he said.
