Issue #20 February 2023
Perhaps hoping for some lingering love from Valentine’s Day, the beleaguered cannabis industry once again took its case to a public forum. In a February 15th presser, its latest appeal focuses on the inability of the industry to make a profit under the yoke of taxation and its frustration in competing with the illegal market. The industry blames government regulation. However, there is a larger story that places more accountability with the industry for its current conundrum.
First, alcohol and tobacco manufacturers pay their taxes – perhaps not happily, but like most of us, they pay them. Nobody is talking about a tax cut for them. To the contrary, while the cannabis lobbyists were asking for a tax dodge, Quebec increased tobacco taxes.
It is also noteworthy that many cannabis producers pay their taxes – in full, all the time.
The financial woes of the largest companies in the cannabis industry are not primarily due to oppressive taxes but to a sequence of bad business decisions. It began with an initial over-estimation of market demand. Big cannabis players seemed to believe that cannabis was going to be the new alcohol. This was a mistake that would have been avoided by most marketing or epidemiology students. Data from easily accessible drug use surveys indicated that demand for cannabis was nowhere near that for alcohol. Advertising restrictions in The Cannabis Act would ensure that this would not change quickly. The industry also assumed that legalization for recreational use in many nations was imminent and would create a massive foreign market for Canadian cannabis. That assumption was questionable at best.
The overestimation of demand was compounded by the financial incentivization of cannabis executives to create a super-sized capacity for company growth. That incentive led to the purchase and building of some of the largest greenhouses in the world. Some of those greenhouses sat empty and were eventually sold at substantial losses. Many of those that began operations, were eventually shut down with employee layoffs in their wake. Most of the same companies received millions of dollars in government covid subsidies intended to minimize layoffs.
Despite the greenhouse closures, the industry still amassed large surpluses of cannabis. An analysis by Marijuana Business Daily yielded the astounding finding that between 2018 and 2020, Canadian licensed producers destroyed more cannabis than they sold. MBD also reported that Canada’s largest cannabis producers have lost at least $16 billion dollars of investors’ money. Another report produced by a Toronto law firm provided a much larger estimate of $131 billion. I contacted the law firm to request a copy but was told that the report was not publicly available. However, from even using the smaller estimate, it is clear that the industry has not been successful at producing and selling cannabis as a profitable enterprise. It is only the enormous infusion of investment capital that has allowed it to survive this long.
While cannabis producers were bleeding investors’ savings and dreams, they were providing annual compensation packages in the millions of dollars to their executives. Many of them received salary increases year after year during a period of continued company losses. A report from the Canadian Centre for Policy Alternatives listed cannabis executives among the country’s top paid executives across many sectors. Marijuana Business Daily reported that Canadian cannabis executives‘ compensation compared favourably, and in some cases greatly exceeded, the compensation of their counterparts in the United States.
Somewhat metaphorically, we might consider that the priority of this industry has not been to process cannabis plants into products for consumers. That was secondary. The priority appears to have been to process misplaced investor ambition into corporate largesse for executives.
But the industry lobbyists find fault only with The Cannabis Act and the government. And they want the industry to dodge its taxes. This bold pitch comes in the wake of a report from Canadians for Tax Fairness that found that Canadian corporations avoided $30 billion in taxes in 2021 – during a pandemic when small businesses struggled, and many did not survive.
Cannabis industry woes are not a failure of misdirected taxation. They are a failure of basic business competence, accountability, and unbridled corporate greed. The cannabis industry should not be asking taxpayers for a bailout.
The second plea from the cannabis lobbyists is that licensed producers cannot compete with the unlicensed trade. Again, they blame government. However, many licensed companies have chosen a suboptimal production model that harbours an inherent competitive disadvantage. Big cannabis corporations have implemented an enormously scaled-up, unwieldy, mass production approach to growing cannabis. That approach has been fraught with production failures. Health Canada’s Compliance and Enforcement Reports have logged almost 2,000 regulatory violations by licensed cannabis producers, over 600 of which were considered “major” or “critical”. Some of the violations include the use of prohibited pesticides and involved products with mold or microbial contaminants. Some products were mislabelled in their thc:cbd ratio or the potency. There have been large seizures of product at the point of production and dozens of recalls of product already on the market. Some producers have engaged in various other kinds of regulatory misconduct ranging from securities fraud to product promotion violations – even corporate crime, collusion with the illegal trade, and apparently maintaining connections with organized crime figures. In several cases, production licenses have been suspended or permanently revoked.
These are the problems with the illegal trade that legalization was supposed to solve. Apparently, it didn’t. A major reason for cannabis legalization was that it would create a regulated industry that paid taxes. That is a defensible reason. But apparently these big cannabis corporations don’t want to follow regulations and now they don’t want to pay taxes either. In other words, they want to operate like the illegal trade. There is something seriously awry at the portly end of this industry.
The big corporate players in Canadian cannabis have been the architects of their own failure. Investors have been burned and have lost confidence. As a result, the industry is precariously short on capital and wants a tax bailout. It is always interesting to see the private sector champion libertarianism and free market forces – until it needs a taxpayer funded bailout. Then, it is bring on the socialism, comrade!
Corporate cannabis should look inward at its mistakes and excesses and take responsibility for its own recovery. Seasoned cannabis users, freelance master growers, laboratory testers, and retailers have all confidently assured me that the product from small craft growers is significantly superior to that of the mass production cannabis factories. Perhaps a major shift from large, unwieldy, profit-addicted cannabis corporations to smaller, sustainable craft growers would be a reasonable place to start.
Mike DeVillaer
Hamilton Ontario Canada
February 28, 2023
Many of the issues addressed in this issue of DPA are given in-depth coverage in my forthcoming book: “Buzz Kill: The Corporatization of Cannabis”, published by Black Rose Books (Montreal). Order at: https://blackrosebooks.com/products/buzz-kill-michael-r-devillaer