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HIGHLIGHTS
  1. Alberta removes indoor cannabis producers’ agricultural tax exemption starting in 2020
  2. Change in tax distinction for pot growers follows request by municipalities
  3. Taxation changes do not apply to greenhouses or hemp production

Alberta cannabis production facilities will be taxed as commercial businesses in 2020 rather than tax-exempt agricultural operations, raising costs for companies that have yet to turn profits and possibly increasing retail prices as the nascent industry already struggles to compete with the lower-priced illegal market.

“While cannabis is a burgeoning industry, it is important that cannabis-production facilities – which are heavy users of municipal services – pay their share for those services,” Alberta Municipal Affairs Minister Kaycee Madu said on Wednesday, speaking at the Rural Municipalities of Alberta convention in Edmonton.

This change is in response to requests from municipalities and does not apply to greenhouse operations or industrial hemp cultivation, the government said in a press release.

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There are 23 producers in Alberta licensed to grow cannabis, including Aurora Cannabis Enterprises Inc. and Sundial Growers Inc.

“Let’s not kid ourselves, this property tax will be paid for by the consumer,” said John Carle, executive director of the Alberta Cannabis Council, explaining that extra costs will be passed along the supply chain.

“We have to get the cost down in Alberta if we’re going to fight the illegal market.”

Alberta already has the highest average e-commerce cannabis prices out of five provinces at $11.66 a gram, according to data compiled by Cowen Equity Research.

“Definitely one (but not the only one) of the reasons cannabis companies would have set up operations in rural communities would have been to take advantage of lower property tax rates which can be significant compared to commercial rates,” said Glenn Fraser, leader of the cannabis team for MNP, a national tax consulting firm.

“This change will hurt their pocketbook for sure especially given the size of some of these operations and the land they occupy.”

This change in tax regulations, which came after the Alberta Urban Municipalities Association asked the provincial government to amend legislation to enable municipalities to assess and tax cannabis grow operations at fair market value, means licensed producers’ (LPs) in Alberta will pay taxes on their production facilities as commercial entities rather than fall under the tax-exempt agricultural category starting in the 2020 tax year.

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LPs currently pay industrial property taxes on buildings containing rooms such as offices and laboratories, while their indoor cultivation facilities have been categorized as agricultural. Michelle Lefler, vice-president of communications for Edmonton-based Aurora said the company created more than 2,000 jobs in Alberta, remains committed to its home province, and will continue to work closely with “our provincial and municipal partners.”

Municipalities told the Alberta government that industrial-scale cannabis facilities require servicing costs. It is now up to the individual municipalities to establish how much tax the LPs will pay.

Michael Muzychka, the mayor of Olds, Alta., said he supports the changes announced by the province but said it is too soon to know how much revenue this will generate for the town that is home to two LPs and another three under development.

“LPs do create jobs and have significant economic benefits to our town. They also use the infrastructure in the town, just like all industries,” Mr. Muzychka said.

The new tax categorization comes as many LPs expand their cultivation in order to ramp up production and lower their per-gram cost of production, and the industry is concerned that this move could cause some companies to halt expansion plans.

“We’re very concerned about the impact this is going to have on an industry sector that is in purely a growth phase right now. This will result in some of them having a second look at whether or not they build or expand a facility,” Mr. Carle said, adding that when LPs established businesses in the province, they did so knowing their production rooms were classified as agriculture in the taxation system.

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“To tax them more when they’re already not turning a profit as an industry is something the provincial government should have consulted the industry about. Their tax model has been changed, only one year into business.”

Recreational cannabis was legalized in October 2018.

The change in taxation categorization comes at a time that Alberta’s economy continues to struggle after the energy market was hurt by low oil prices, causing people to lose jobs and large companies to leave the province.

Alberta’s agriculture tax segment was established before the legalization of commercial cannabis and did not cover “the unique nature of these new industrial operations that do not fall under the traditional definition of agriculture,” the Alberta government said.

Prior to this tax regulation update, cannabis-growing facilities were treated as farm buildings and received a tax exemption as agricultural operations.

The amended regulation changes the definition of farming to clarify it does not include commercial cannabis production, which will now be assessed at market value and taxed at non-residential rates, the government said.

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