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Mar 24, 2022

Canopy appeals CRA penalty for growing pot before being licensed

Canopy's steep drop in pot sales leads to Q3 revenue decline

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A defunct subsidiary of Canopy Growth Corp. is fighting a court battle against the Canada Revenue Agency, which fined the pot company almost half-a-million dollars in 2020 for allegedly growing cannabis on a Saskatchewan farm before it was licensed to do so.

A statement of claim filed in a Federal Court last month by a numbered company owned by the Smiths Falls, Ont. business argues that the tax agency erred in issuing a $434,611 charge, because the company was producing pot in accordance with its licence.

"The plaintiff is not and was not at any time a producer of illicit cannabis products," the subsidiary said in the document.

Canopy's subsidiary, 11239490 Canada Inc., asked the court to waive or reduce the penalty issued by the CRA.

Canopy confirmed the appeal in an email to The Canadian Press, but refused to provide further comment because the matter is before the court. 

The Federal Court said the CRA has yet to file a defence.

"The confidentiality provisions of the laws we administer prevent the CRA from disclosing taxpayer information and as a result, we do not comment on the specific details of court cases," said CRA spokesperson Hayley Hanks in an email to The Canadian Press.

The fine in dispute was levied in November 2020, more than a year after Canopy's subsidiary was incorporated under the Canada Business Corporations Act in February 2019.

The subsidiary said it was incorporated as a cultivator — a company that would only grow, transfer and sell cannabis in bulk to other Canopy enterprises — and had one outdoor growing facility, a quarter section of leased farmland near St. Louis, Sask.

The company said it received a cannabis license effective June 21, 2019, and another licence under the Excise Act from the CRA that July.

The subsidiary noted the cannabis licence arrived "well into" the growing season that year and placed the company under pressure to "produce sufficient cannabis products to meet the demand of the Canadian market" because recreational marijuana just been legalized in October 2018.

The subsidiary said cannabis plants take between 16 and 18 weeks to grow because they spend between eight and ten weeks in a vegetative state, but once they flower, take another eight weeks to produce a mature bud. 

The crop the subsidiary grew in 2019 was transferred to KeyLeaf, another Canopy subsidiary, which was unable to process or extract any pot from the plants, so they were destroyed. 

The 2020 crop was grown for research purposes and the balance was destroyed. No money was made on either crop.

The subsidiary said on Nov. 12, 2020, that the Canada Revenue Agency sent it a letter imposing a penalty for contraventions of cannabis provisions within the Excise Act that occurred through "the receipt and cultivation of vegetative cannabis plants before obtaining a cannabis licence."

The subsidiary claims the $434,611 fine was the single largest penalty imposed by the CRA in 2020 and amounts to about two thirds of the estimated fair market value of the 2019 crop, if it was salvageable.

The subsidiary maintains it has never contravened the Excise Act and argues it has "not only co-operated but consulted and worked in conjunction with" the government. 

"Notwithstanding this context, the CRA chose to impose the same penalty under the (Excise Act) that would have been imposed upon a criminal enterprise operating an illegal cannabis operation," the subsidiary wrote in its statement of claim.