Life After a Cannabis Restructuring: Challenges and Opportunities Ahead

Insolvency Insider’s recent Distressed Cannabis Conference featured an impressive panel of industry experts and regulators who shared their insights on the realities of life after the restructuring. The discussion covered critical restructuring and post-restructuring pain points, including excise tax compliance, operational pitfalls, and strategies for rebuilding trust with key stakeholders. While the road ahead remains challenging, the panelists highlighted opportunities for companies that take a proactive approach to compliance, financial management, and governance.

Participating in the panel were:

• Shawn Dym, Managing Director, York Plains Investment Corp.

• Trevor Dayton, Vice President – Merchandising & Inventory Planning, Ontario Cannabis Store (“OSC”)

• Robert McKenzie-Kerr, Policy and Legislation Advisor, Insolvency, Canada Revenue Agency (“CRA”)

• Gwen Keating, Manager, Excise Duty Operations, Cannabis, CRA

• Kevin Dias, Counsel, Department of Justice (“DOJ”)

• Larry Ellis, Group Leader, Restructuring & Insolvency, Miller Thomson LLP (moderator)

Excise Tax Realities: Navigating CRA’s Shifting Approach

One of the most pressing issues for restructured cannabis companies is managing excise tax obligations. CRA and DOJ representatives provided clarity on the CRA’s current stance on tax enforcement.

CRA proactively paused certain enforcement actions against cannabis companies (including by extending significant credit) in response to the COVID-19 pandemic. This was a temporary measure and CRA has now resumed debt recovery activities, including by requiring cannabis companies to provide security (e.g., bond coverage, cash collateral) for outstanding excise duties. Public guidelines – in particular, the Guideline on Security for Debts: https://www.tbs-sct.canada.ca/pol/doc-eng.aspx?id=15796§ion=html (the “Guidelines”) are available to help businesses understand these security requirements.

The Guidelines set out when CRA will require security to be given, how much security will be required, as well as details on acceptable collateral, risk assessments and valuation criteria

Under the Guidelines, security will be sought from a cannabis company where, for example:

• the company’s future ability to discharge a debt owing to CRA is uncertain;

• the company is not paying a tax debt and is unable to borrow the amount from usual sources; or

• the company has temporary cash flow problems but has enough real property or other assets to discharge a debt owing to CRA.

As a general rule, security in an amount sufficient to fully discharge the debt will be taken, but less than full security may be allowed in certain prescribed cases.

CRA also has rules governing how assets that may be taken as security should be valued, which are set out at Appendix B to the Guidelines. Most forms of collateral are valued at less than 100% of their current market value to account for the risk of future devaluations.

CRA and DOJ representatives also stressed the critical importance of preserving excise licenses during the Companies’ Creditors Arrangement Act (“CCAA”) process. Companies that fail to maintain compliance with excise tax obligations risk losing their license, jeopardizing their ability to continue operations after restructuring.

For companies looking to emerge successfully, early engagement with CRA is crucial. Open and proactive communication can lead to better outcomes, including flexibility on security arrangements and structured repayment plans.

Operational Pitfalls: Common Mistakes During Restructuring

Panelists then turned to issues that can arise in a restructuring and urged cannabis companies to keep operations top of mind if they want to successfully emerge from insolvency protection.

Trevor Dayton of the OCS highlighted key challenges cannabis companies face when undergoing a restructuring. While the OCS does not penalize companies for filing for CCAA protection, it also does not offer leniency for operational missteps during the process.

Many companies make the mistake of becoming too focused on legal and governance issues, losing sight of their core business operations. This often results in:

• Lower fill rates for product orders

• Decreased sales activity on the OCS marketplace

• Loss of consumer confidence and shelf space

Trevor warned that even during financial distress, companies must prioritize inventory management and distribution to maintain relationships with retailers and consumers.

Shawn Dym noted that a common pitfall is waiting too long to engage restructuring professionals. Many cannabis businesses are reluctant to acknowledge financial distress, often allowing problems to escalate before seeking help. Setting aside ego and taking a forward-thinking approach can significantly improve outcomes.

Rebuilding Trust with Regulators and Stakeholders

Trust and credibility are critical for restructured cannabis companies. Whether dealing with regulators, lenders, investors or customers, one thing is clear: transparency is key. Panelists shared why this is so important and outlined key strategies for rebuilding relationships post-restructuring.

CRA and DOJ representatives emphasized that frequent, transparent communication with CRA is essential. CRA will work collaboratively with companies that demonstrate proactive communications and make good faith efforts to meet tax obligations.  Proper record-keeping and financial planning can prevent future tax issues.

Trevor expressed that OCS expects business as usual during CCAA proceedings—there is no penalty for filing, but no special treatment either. Companies must demonstrate strong operational performance to retain shelf space and market share. Proactive engagement with OCS, particularly regarding inventory and distribution strategies, can help businesses stabilize.

Shawn discussed how to rebuild stakeholder trust and market confidence. He stressed the importance of effective leadership with a forward-thinking approach, transparent communication with stakeholders, clear strategic planning, strengthened governance structures and improved operational efficiency post-restructuring. 

Key Takeaways: Advice from the Experts

The panel concluded with rapid-fire advice from each expert.

Shawn advised cannabis companies to proactively address potential issues with a forward-thinking approach to avoid larger problems down the line. Building the 13-week cash flow and working with the CCAA monitor is critical.

The CRA and DOJ representatives again emphasized having open and frequent communication with CRA to build trust and ensure compliance.

Trevor stated that filing for CCAA isn’t a death sentence, but the focus for OCS remains on sales metrics and operational performance in the marketplace.

Final Thoughts: Opportunities for Restructured Cannabis Companies

Despite the challenges, panelists agreed that the cannabis industry is maturing, creating opportunities for well-managed, financially disciplined businesses. Those that prioritize compliance, governance, and operational efficiency can successfully emerge from restructuring and rebuild stronger than before.