Canada's cannabis industry struggling amid high excise taxes, competition from illicit market: experts

CTV National News: Pot industry in crisis mode Adrian Ghobrial reports on struggling cannabis industry leaders calling on the feds to change high tax rates and strict rules.

On Thursday, Canopy Growth Corp., one of Canada's largest cannabis producers, announced that it would be laying off 800 workers, impacting 35 per cent of its workforce, and closing one of its facilities in Smiths Falls, Ont.

It's the latest round of layoffs for an industry that has shown signs of struggling in recent months, four-and-a-half years after legalization. In the backdrop of all this, experts say high excise taxes and stiff competition from unlicensed sellers have made it difficult for legal growers to do business.

George Smitherman, president of the Cannabis Council of Canada (C3), says he wants to see Ottawa level the playing field for legal growers while ramping up enforcement actions against the illicit market.

"If you're willing to be regulated and put up your hand, fill out all the forms and pay all the fees, everybody's got time attention and more fees and taxes for you. And just on the other side of the line, if you care not to do any of that, almost nobody cares," Smitherman told CTVNews.ca in a phone interview on Thursday.

For example, legal sellers have to adhere to strict THC limits when it comes to edibles, but Smitherman says they're too stringent, which allows the illicit market to dominate the category.

"We have a amazing array of offerings there, but it doesn't match up with where the cannabis consumer is in that category. So they're all in the illicit market," he said.

It's unclear exactly how much of the cannabis market share is taken up by illicit sellers nationwide, but according to last year's annual report from the Ontario Cannabis Store, illicit cannabis made up 43 per cent of the market in the province. In addition, Health Canada's 2022 Canadian Cannabis Survey found that 33 per cent of cannabis users still buy from illicit sources, at least occasionally.

On an earnings call on Thursday, Canopy Growth CEO David Klein also placed the blame for the company's struggles on the illicit market.

"The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect the sector challenges to remain for years to come. And as a result, the sustainability of this legal sector is in question," Klein told investors.

Smitherman has also taken aim at the federal government's excise taxes on cannabis. In 2017, prior to legalization, Ottawa had signalled that the taxes would be $1 a gram for a $10 a gram cannabis product.

"You can see the proportion of this whole excise tax, and it's way out of whack," he said. "Our preference would be to go back … 10 per cent excise on products across the board,"

Cannabis industry expert and Toronto Metropolitan University lecturer Brad Poulos agrees.

"This is not the time to be taxing cannabis into oblivion. Get greedy later. Don't do it now," he told CTVNews.ca in a phone interview on Thursday. "Let's let the legal industry thrive before you start to tax it into oblivion."

But while Poulos also wants to see reforms that ease the tax burden for legal growers and make it easier for them to compete against the illicit market, he believes Canopy Growth's struggles are largely due to them expanding their production facilities too quickly.

"I don't buy (Klein's) argument because, like it or not, the industry has grown in the past year and they shrunk," he said. "It's disingenuous for them to just throw this on the government and just say it's all the government's fault.

Back in September, the federal government announced that it would undertake a review of the country's Cannabis Act. Smitherman hopes the review can give his industry more exposure around these issues, but notes that it could take years before any reforms come out of it, given the slow pace of Parliament

"We'll try to use it for all that we can to help to emphasize some of these urgent actions and hopefully, you know, maybe proactively develop some consensus around them," he said.

Meanwhile, Poulos believes the excise tax isn't going anywhere anytime soon, even after the federal review.

"I don't think the government will be able to wean themselves off the tax as much as everybody in the industry is pushing and screaming about it. They have not done anything to indicate that they're going to make a change," he said.

With files from CTV News' Adrian Ghobrial and The Canadian Press