Canada hits 5 years since adult‑use legalization as producers struggle to turn a profit
The Cannabis Council of Canada found that 83 per cent of licensed producers had negative net income last year
Rowan Dunne
Oct. 17 marked five years since cannabis was federally legalized in Canada and despite leaving the dark days of prohibition long in the past the industry is facing a series of challenges, such as a thriving illicit market and struggle among licensed producers trying to turn a profit.
A recent study conducted by the Cannabis Council of Canada (C3) found that a staggering 83 per cent of licensed producers in the country reported negative net income last year, largely attributable to the burden of excise tax and regulatory fees that are only applicable in the cannabis industry. The council is recommending that excise tax should be reduced and that the regulatory fees should be relinquished.
“While we’ve made great strides to establish a newly legalized industry over the past five years, we find many parts of cannabis regulations unnecessarily burdensome, adding significant costs and administration to our business,” said Pure Sunfarms’ President Orville Bovenschen in a statement provided to Mugglehead.
“The rate of excise tax we pay represents the largest impact on our operations and needs to be changed. We also believe that the annual regulatory fee is extremely high compared to the service we receive,” he added. The Village Farms subsidiary says that reporting requirements for Canada’s Cannabis Tracking and Licensing System should be simplified as well.
Steep competition and inflation are other significant factors contributing to financial stress among smaller licensed operators in particular.
On the date of Canada’s five-year anniversary, C3 released a position paper titled “Grow the Pie for Canadians,” which discusses how legalization brought vast employment opportunities to the country’s citizens while generating billions of dollars in taxable income. However, half a decade later and despite over $5 billion generated from legal sales annually, more cannabis companies in Canada are filing for creditor protection than in any other industry — according to the council.
“Between 2018 and 2021, the legal cannabis industry generated $11 billion in sales, $29 billion in investments, 98,000 jobs and added $43.5 billion to Canada’s gross domestic product (GDP). It’s time for the government to support the economic potential of Canada’s nascent cannabis industry,” said Mike Schilling, CEO of Community Savings.
Schilling’s credit union created a type of bank account specifically to aid struggling cannabis producers in British Columbia on April 20 this year.
After 5 years of legalization, I'm proud to live in one of the few countries where people aren't arrested for consuming #cannabis! As an industry let's remember to celebrate the positive aspects along with working collectively to resolve challenges. Happy #Cannaversary 🇨🇦!
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The THC limit on edibles is a major concern
The ever-persistent issue of the country’s illicit market, which accounts for approximately 50 per cent of cannabis sales in Canada (around $4 billion per year on average), is still a prevalent concern as well. Lower prices are the primary reason for consumers choosing to obtain their cannabis from illicit sources, according to C3.
In Ontario, approximately 57 per cent of citizens reported buying cannabis from a legal source — according to data from Statistics Canada.
The council says one of the Canadian industry’s foremost contemporary problems is the 10 milligram limit on edibles, which only account for 5 per cent of sales in the country. Raising the limit would diminish the amount of cash going into the hands of criminals by over $300 million per year, says the council.
“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,” said C3’s President and CEO George Smitherman.
The council is now holding a Cannabis Leaders Summit in Ottawa for two days with representatives from major industry players like High Tide Inc. (NASDAQ: HITI) (TSX-V: HITI), Village Farms International, Inc. (NASDAQ: VFF) and Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON).
Other companies like the major Ontario-based cannabis operator Canopy Growth Corporation (TSX: WEED) have seen a tremendous drop in their share prices since legalization. In October of 2018 Canopy’s stock was trading for over $61, and today, those shares are worth a mere $0.87. Similarly, shares of Edmonton’s Aurora Cannabis Inc (TSX: ACB) were valued at over $156 in the fall of 2018 and are now trading for a measly $0.67.
Ready to kick off 2 days of meetings in Ottawa as we get set to usher in the 5th anniversary of cannabis legalization in Canada! Thanks to @G_Smitherman and @Cannabis_Canada for organizing! #GrassOnTheHill
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The anniversary has inspired mixed feelings
In Alberta last year, 68 cannabis retailers cancelled their license or decided not to renew it — a 257 per cent increase from the 19 that chose not to continue in 2021. Similar to the high percentage of licensed producers with negative net income last year, the Alberta Gaming, Liquor and Cannabis Commission reported $4.3 million in losses from cannabis operations in 2022.
“A lot of licensed producers are going bankrupt because the regulations we thought were going to loosen have not,” said Ashley Newman, a struggling Alberta dispensary owner — in an interview with the Calgary Herald.
On a more positive note in New Brunswick, the president of the government venture Cannabis NB, responsible for legal cannabis distribution in the province, expressed her enthusiasm for the five-year milestone.
“Cannabis NB’s five-year milestone is a huge accomplishment, and I am so proud of the people who have been a part of this journey. Here’s to the next five years!” said Cannabis NB’s President and CEO Lori Stickles.
🍁5 Years Strong! Canada's legalization of cannabis has brought freedom and progress. At Freedom Cannabis, we're honored to be a part of this historic movement. Here's to a brighter and greener future ahead! 🌞🌿 #FreedomCannabis #CannabisAnniversary #CanadaLegalization
Despite challenges in the industry, a June report from the market intelligence company Headset revealed that there had been a 157 per cent rise in cannabis sales throughout the country over the past three years. During the month of June, adult use sales in the country shot up by 12.9 per cent year-over-year.
The number of Canadians using cannabis increased by 5 per cent between 2017-2022, according to a recent assessment from the Canadian Medical Association Journal.
rowan@mugglehead.com
