Accounting and Bookkeeping for Cannabis and Marijuana Companies
Cannabis is the talk of the town these days if you’re in Canada. In fact, it’s a hot topic in various areas around the world as governments seek new revenue sources. For example, although cannabis is legal in Canada, it is also legal in some states in the USA (although not federally) and in many jurisdictions for medical purposes. Cannabis has also been decriminalized in many parts of the world too.
We are sure that many other countries worldwide are studying legalization closely to better understand the implications from a societal and financial point of view.
With many individuals and companies jumping on the bandwagon to take part of a once in a generation opportunity, it is important to understand some of the accounting and bookkeeping implications that exist in this space.
This post is meant to highlight some items that individuals and companies should think about as they get involved in a Cannabis business. For a more exhaustive list, please speak to an accountant.
PRE-REVENUE COMPANIES
As you start your journey, you’ll quickly notice that it may take some time before your company starts earning revenue. For the first little while, your company will probably be incurring quite a number of expenses:
Operational expenses (payroll, rent, travel, etc.)
Capital expenses (equipment purchases, building out of a facility or facilities, furniture etc.)
Don’t confuse ‘pre-revenue’ with ‘nothing to do for accounting or bookkeeping purposes’. It would be extremely prudent of you to touch base with an accountant or accounting firm, get set up in an accounting system and start tracking and organizing your expenses. Far too many times we see companies reach out months and months after beginning their operations, requiring a ‘catch-up’ of their bookkeeping that can span months or even years. It’s understandable that business owners are extremely busy early on in their venture, but the moment will come where you need your books in order: whether a company requires financial statements in order to show investors or stakeholders (if they are looking to raise funds or have already raised funds), or to just have a better understanding of where their money is being spent
Bookkeeping catch-ups can take time and can be costly if they are required within a short time frame. It’s best practice to get set up and organized as soon as you start incurring expenses. We suggest getting set up on an online accounting system with integrated apps for receipts and expenses - this ensures that you’re maximizing automation - and enables you to obtain the most up-to-date information about your business.
RAISING MONEY
If you’re raising money to fund your operations, your investors/stakeholders will be adamant that they can see up-to-date financial statements on a recurring cadence (monthly, quarterly, annually). As mentioned above, to put your best foot forward and ensure that your investors are comfortable with their investment and your operations, providing them with an organized set of books is advantageous in many ways. Firstly, it sets the expectation that you take their investment seriously and are trying to be as efficient as possible with their capital. And secondly, it can set your company up for a future capital raise.
JUST LIKE ANY OTHER BUSINESS
A cannabis company is just like any other company for tax purposes. Your revenue (income you are generating for the service you are providing or products you are selling) minus your expenses equals your net income. If ‘net income’ is positive, you’ll pay tax in accordance with the province you reside in.
If your expenses are larger than your revenue (i.e. your net income is in a negative position), then there is no taxes owing and you are able to carry forward a loss in the current year to subsequent years to reduce taxes.
To ensure that your accounting firm can prepare your corporate tax return and have a strategic conversation about your performance and operations, it is important to provide your accounting team with an organized set of accounting records (or at least as organized as possible). The more accurate these records are, the better you, your own team, your accounting team and your investors can understand the business and its direction. This is important to ensure that the right decisions are made when it comes time to scale.
SALES TAXES and EXCISE DUTIES
If growing (no pun intended) a cannabis company isn’t hard enough (with all the regulations that need to be adhered to), business owners must remember that there are other tax requirements to be aware of as well:
GST/HST and Provincial Sales Tax
The federal and provincial governments are looking to profit off of marijuana, otherwise it wouldn’t have been legalized. Common with many other business (other than zero-rated or exempt industries) is the requirement to charge sales tax on services or product sales and remit them to the applicable sales tax authorities (for example, the CRA for GST/HST sales tax).
Product sales will be taxed as they flow through the sales cycle (this is just one example of many that may exist):
A producer who grows cannabis (Company A) will sell the marijuana to a licensed producer who will in turn add their process to it and package it (Company B).
The sale from Company A to Company B is taxable. The producer that is growing the cannabis (Company A) will collect GST/HST and will have to remit it to the CRA in accordance with their filing requirements. The producer that is packaging the product (Company B) will have to indicate the GST/HST they incurred when it’s time to file their GST/HST sales tax return.
After Company B packages the product, they will sell the cannabis directly to a consumer (which would be subject to GST/HST and provincial taxes, depending on the location of the customer) OR if they are an operation not dealing directly with consumers, they will sell the packaged product to a distributor first (resulting in a taxable GST/HST transaction), with the distributor selling the packaged product to the consumer (another sales tax transaction).
This is no different than a typical business that needs to stay on top of their GST/HST requirements - but since cannabis is uncharted territory - many companies are still unaware of their sales tax requirements.
Things can move fast and companies collecting sales tax may find themselves in arrears quickly if they are using their collected sales tax to fund operations. This is where an organized accounting system with the proper setup and accurate bookkeeping comes into play. Companies can track the sales tax they’ve collected and/or incurred to ensure they are planning ahead (either for funds owing to the CRA or for expected refunds).
Excise Duties
In addition to sales tax, companies in the cannabis industry will also be required to pay excise duties. The duty comes into effect at the time the marijuana is delivered to a purchaser. The excise duty framework has quite a bit of rules and regulations associated with it, so we urge you to read the framework’s guidelines HERE.
In summary, a cannabis licensee who packages cannabis products must pay the excise duties. If you’re importing cannabis products, then the importer or the person/company liable for the product must pay the excise duty.
Duties are calculated in several ways and companies must keep track of the duty and report the higher duty payable on a transaction by transaction basis. This is another reason to engage an accounting firm early on with the capability to set up an accounting system infrastructure to keep your finances on track.
To file excise duties, you’ll need to follow the instructions HERE and HERE.
FINAL THOUGHTS
The cannabis phenomenon is upon us. For companies that are looking to capitalize on a unique business opportunity, the world is your oyster. The cannabis space provides a variety of ways to grow a business - from traditional growth operations to packaging of goods to retail operations and distribution to consulting. One thing is clear though, whichever route you choose, you’ll need to ensure that you’re set up to track your operations on a granular level. As mentioned above, the regulations require that certain tax rules are adhered to and tracked on a transaction by transaction basis. It’s best to start thinking about the financial component of your business early on so that you’re one step ahead at all times.
