Here Comes the Taxman
by Ted Smith
It was not a surprise when Special Enforcement Officers from the Canada Revenue Agency showed up at the Cannabis Buyers’ Club of Canada in early May to announce that I was under investigation. After over 16 years of being very public about selling cannabis products to sick people, and recently changing federal laws in Owen Smith’s trial, we have gained a lot of attention.
Anyone who read the court decision of Apr. 13, 2012 quickly saw why the CRA would come knocking. Here are the two paragraphs that they would be interested in: “ Mr Ted Smith estimates that the store generates revenue of about $6,000 to $6,500 per day. He estimates that between 5% and 10% of that volume represents edible and other products, not dried marijuana, and says this proportion is closer to the 5% lower end. Mr Ted Smith aims for a profit margin of between 20% and 25%  Neither the store nor the Club collects or remits HST, nor does the business pay income taxes.”
Apparently it was the police who informed the CRA about this decision. There is an interesting relationship between the police and the CRA. The CRA is not allowed to disclose information to the police but the police constantly give names and information to CRA agents in an attempt to squeeze money from people suspected of breaking the law.
Even if a person admits on their tax forms to being a thug for a living, the CRA would do nothing about their crimes. However, they could look at the thug’s list of clients to see how they make enough money to pay him to put people in the hospital. It does not matter to the CRA if the business is legal or not—they want their taxes.
Now before I go much further, I should clarify a few things from the quotes. First, we aim to sell our products at the lowest price possible and add about 20-25 percent on top of what we pay for raw herb to cover expenses like wages, rent, utilities, supplies, etc. When the judge states that I try to make between 20-25 percent profit, it does not mean I am taking that much home.
For the past few years I have declared $24,000 in earnings to the CRA. It is a rough but fair estimate. Without any deductions I have paid between $3,000 and $4,000 in taxes a year for a couple of years now. At the same time, I have encouraged those who work with me to also declare what they earn, or as close to it as they can figure out.
The apartment that the club ran out of for fivr years before getting a store was right across the street from the CRA, and I kept the apartment for a few years after moving down Johnson St. to a storefront. In fact, I was informed by the officer who told us to stop operating in the apartment that they had full-time surveillance at the CRA for a year before trying to get a warrant. So it really was no surprise when they finally walked through the door. In many ways, it was about time.
This development appears to be the perfect opportunity for me to help the club officially incorporate and allow a non-profit society to control its affairs. When I started the club 16 years ago, it was never my intention to own or control it forever. In fact, I said that when it became legitimate I would step back and focus on my work with Hempology 101. With the publishing of my textbook, now seems like a perfect time for me to step back a bit from the club and let it grow on its own.
The board of directors will consist of two members, two staff, and two growers, plus three directors-at-large. The members, staff, and growers will choose their representatives and the three directors-at-large will be chosen by the six constituent representatives. However, for a few reasons the original board will be hand-picked by me, which is how most non-profits are launched.
Meetings are being held in Victoria to work towards incorporating, and the minutes have been posted on our forums. So far two committees have formed, one focused on incorporating and the other on finances. We have drafted some by-laws and are preparing for this transformation on many levels. In the future we hope to form other committees including ones for membership issues, advocacy, policy and governance, research and development, alternative healthcare, and one focused on Health Canada.
Transferring power over to a non-profit society and paying taxes will have many benefits, but will not come without a cost. There is no doubt that the prices at the club must go up, at the very least to cover the taxes. It is hoped that the club can grow large enough that other costs can be paid for with increased sales. However, members with MMAR permits should be able to use the receipts we start producing as a deduction on their taxes. We will also make new membership cards with photo-id to help with security for both the members and the club. Hopefully high-tech cards will provide even more assistance to members without MMAR cards when they encounter police, especially when they can show them the club pays taxes on the receipts. While all old members of the club will be grandfathered into the new society, everyone will have to sign a new document to formally accept their membership into the society.
These are big steps towards getting the club
a licence to operate, but it does not matter if
we pay our taxes and make our books public
to Health Canada. As far as they are concerned,
compassion clubs are illegal and they
are not part of any future plans. This absurd
situation means that the club is almost literally
paying for both the defence and prosecution
in Owen’s trial.
Though none of the compassion clubs
have a licence or an Exemption #56 from
the Controlled Drugs and Substances Act,
there may be a way for the club to fight for
it. First, the new society would have to put
together a proposal for Health Canada that
would include research, quality controls, and
full financial transparency. Hopefully we can
gain the support of multiple partners before
submitting this proposal, including the University
of Victoria, City of Victoria, Capital
Health Regional District, Chamber of Commerce,
and other non-profit societies.
If the federal government turns down our
request for an Exemption #56, we can then
take them to federal court. While this has
not been tried with a medical cannabis club,
it is basically how InSite was able to fight
the Conservatives when they tried to shut
down the safe injection facility in Vancouver.
Taking a case like this to the Supreme
Court of Canada is a complex and expensive
endeavour, but it appears to be the only way
to force the federal government’s hand, especially
given how hostile the Conservatives
are towards so-called drug users.
Before we get that far though, we have to
deal with Revenue Canada. Right now, the
CRA is still in the early stages of their investigation.
Since I have not done any bookkeeping,
we are starting from scratch. We have
made some preparations to put all of the sales
into a computer program and start accurately
keeping the books but there are no dates set
for that yet. To help give the CRA an idea
of the financial activities of the club, we have
started to keep a basic ledger of expenses. This
will help them estimate how much I should
be currently paying and will help figure out
how much I owe for back taxes.
One of the issues to be determined is
whether HST applies. Another is whether
we have to disclose the names of the growers.
Fortunately we hired, George Jones, a
very experienced lawyer in Victoria. George
will help to make sure we do not pay any
more taxes than we have to. Hopefully we
can withhold the names of our growers, as
some may be reluctant to expose themselves
without getting a license in return.
After the majority in the province voted to
scrap the HST, it is clear that no one is happy
with how it became applicable to almost
everything. If it is determined that HST or
GST should be applied to medical cannabis,
then the prices will go up much more.
The growers are also expected to charge
HST when they sell their product to the club
and they will do their best not to raise prices
to cover that. However, with the mandatory
minimum sentences in place, prices are
creeping up on the general market, and other
expenses like gas and hydro continue to rise.
We have paid the same prices for herb for a
long time now, but that may change, too.
The big tax bill that I will have no chance
to avoid are the employee deductions. I had
hoped to argue that the people who worked at
the club had banded together in an unincorporated
cooperative and that everyone worked
by contract. That, apparently, is not what the
law says. Even though the business is not registered
at all, the people who work at the club
are my employees and I am responsible for
collecting and paying employee deductions.
Another interesting part of the CRA investigation
will be their estimated fair market
value of the club. I own nothing that
does not belong to the club, I have no money
stashed aside, no toys. The most expensive
thing I own is the gold tooth in my head. In
order to assess me, they have to determine
what the club is worth. When I sell the club
to the non-profit, the fair market value of the
club will be very important because if I try to
sell it for less I will get nailed for tax evasion.
There is no timeline for these events to happen,
as the CRA seems to work at their own
pace and this is not an ordinary situation for
them. Normally, when they come into a business
that is not in compliance they seize bank
accounts and cause a lot of headaches. In this
case, they have actually been quite reasonable
and have not interfered with our activities. It
is our intention to fully cooperate with the
authorities on this matter, but we are in no
rush to increase the prices our members pay.
This situation is much better than I had
expected. I knew for years I was avoiding
the CRA and assumed I would end up in
jail for it, much like the notorious Al Capone.
Needless to say, I was very happy to
find out that while I was not in compliance, I
had done nothing criminal and was not facing
any possible jail time. While I realize this
was a great personal risk to take, I also realize
how incredibly expensive this medicine
is to most people. My conscience could not
allow me to charge sick people more money
than they are already forced to pay. And so
the saga continues.